Business Line of Credit – Spousal Signature Violation
When Banks Break the Law – Lender Liability.
In the late 1980's, banks and lending institutions grew in size and become less friendly, less responsive, and more predatory. Deregulation of the banking industry led to major Goliath-sized banks which cared little or not at all for the small business customer who brought them little profit. Ignored was the fact that these small companies were and continue to be the major employer and creator of new jobs in this country.
Small businesses create 95% of the jobs in the United States
In the late 1990's, banks began canceling, calling in, and refusing to renew lines of credit. Small businesses suddenly found themselves in the unenviable position of being without operating capital or credit. Most of these companies drastically culled their work force, others simply closed their doors. Of course, unemployed workers do not purchase the same amount of products (or pay taxes) which led to more national debt, more business closures, and a real estate market collapse. The bank actions taken in these two decades set into motion a chilling, chain reaction that wreaked serious havoc on the economy, helping lead to the financial crisis of 2007 and thereafter.
According to the Small Business Administration, 95% percent of U.S. employers are small businesses. It is not hard to understand why cutting off the supply of money to this vital segment of the economy could initiate such a crippling reaction.
Conventional wisdom that banks are not obligated to lend money is dead wrong.
Banks exist to receive and lend money. Banks act as a conduit of money from the Federal Reserve into the local economy. Banks are required to invest in local businesses and communities. As noted, gone are the days when your bank was your ally and would stand by a troubled business and try to help it through hard times. Sadly, nowadays the bank is probably the first to cut and run. The "friendly" bank of the last 40+ years that routinely renewed a line of credit for a business may suddenly decide to call the entire note as being due, refuse to renew the credit line, and then will hand the small business a 90-day Forbearance Agreement.
Unfortunately, most businesses think they have no choice but to to sign the forbearance agreement — this is wrong thinking. Usually, the bank's 90-day forbearance agreement is pitched as a way for you to "obtain credit elsewhere." However, this suggestion is completely illusory. You will find that other banks will also refuse to lend you money. Think about it, if your bank of 15+ years refuses to renew you credit, do you really think another bank will? The answer of course is no. In our experience, the small business will be unable to convince another bank to lend it money. Signing a forbearance agreement is the first step down a fast track to business closure or bankruptcy.
We strongly encourage any person or business faced with this situation to NOT sign a forbearance agreement (or anything else the bank "graciously" offers) until you have first talked to a knowledgeable lawyer. Why? It's simple. Forbearance agreements are completely one-sided in favor of the bank. The Bank might graciously give you a miserly 90 days to find alternate credit, but this is time you would have had anyway. By signing a forbearance agreement, you immediately waive and give up all rights to challenge the bank’s actions of wrongfully refusing to renew your line of credit, including the right to sue the bank for what is called "bad faith and unfair dealings." In our experience, those businesses who refuse to sign a forbearance agreement remain open. Every time, no exceptions.
Lender Liability, Good Faith and Fair Dealings.
It's a little known secret that banks and lending institutions can be sued for failing to act in good faith, failing to treat its loan customers fairly, and for misdeeds. It is not impossible to go up against a big bank. An old adage comes to mind: "the bigger they are – the harder they fall." Likely, the bank has violated one or more of the numerous federal and state banking laws and regulations. Banks are subject to the same contract rules and common law principles as any other business.
Common law and contractual rules require that all parties to a contract (i.e. a loan agreement) act in good faith and with fair dealings. This means that both sides MUST act in a commercially reasonable manner, act in good faith, and fairly deal with and treat the other party. Too often banks, especially big banks, think these basic contract principles do not apply to them, and think they can ignore them. This is wrong. If a bank fails to act in good faith, if it fails to treat you fairly, if it fails to act in a commercially reasonable manner, it can be sued under a legal theory known as Lender Liability.
Equal Credit Opportunity Act – Spousal Signature – Regulation B.
In the 1970's Congress passed the Equal Credit Opportunity Act which mandated certain criteria that banks can and cannot use when making loans. The Equal Credit Opportunity Act prohibits a bank from requiring a spouse co-sign for a business loan. The ECOA and Regulation B, forbid banks from asking or requiring a non-involved wife to sign a personal guaranty for a loan being made to her husband's business. For example, a bank may say that it will not make a loan or extend credit unless a wife signs a personal guaranty. This is against federal law. If the husband and business are otherwise credit worthy and the wife is not involved in the business, a bank cannot lawfully ask nor require that a spouse personally guaranty company debt (except in very limited circumstances).
This prohibition does not apply where the spouse is actively involved in the business, or where the applicant spouse and business are not credit worthy. However, in our experience most spousal signatures for business loans and lines of credit have been obtained in violation of ECOA federal law.
Unfortunately, many businessmen and women are unaware of this federal prohibition. We have seen cases where banks have ignored the spousal signature prohibition and have required that a non-involved spouse sign a personal guaranty. Why? Banks do this for a simple reason: if there is a default, the bank can attach ALL of the couple's assets, including the family home (homestead) which is normally out of reach of business creditors. The personal guaranty from the spouse makes all family assets conveniently available for seizure and sale.
We have handled more than one case where a family home was foreclosed and sold by a calloused bank whose sole focus was the "almighty dollar." The bank was completely indifferent to the path of destruction caused to the family and its family life. We have seen cases where banks have garnished the wages of an innocent spouse who didn't borrow the money, didn't personally benefit from the business loan, and had zero involvement with the business. A violation of the ECOA and spousal signature rule can result in the Promissory Note being declared null and void, collection actions terminated, and the offending bank required to pay actual attorney fees, actual damages, and even punitive damages.
Ignorance of Federal Banking Laws.
Sadly few in the civil litigation arena truly understand the ECOA prohibition or know how to use it as a defense. We do. We have handled lender liability, ECOA, and spousal signature cases. We know how to force a bank to release the innocent spouse from its clutched talons. It's not easy — but it can be done.
There are many state and federal laws that regulate the extension of credit and the termination of a line of credit. Our civil litigation and business line of credit attorney is experienced in handling cases where a line of credit has been arbitrarily canceled or terminated. Banks cannot arbitrarily deny you access to credit.
banks have lawyers advising them – shouldn’t you?
If your line of credit or equity line or loan was canceled by your bank or lending institution, or if you were asked to guaranty a business loan for your spouse, you should talk with us. We can evaluate the documents and let you know your options.
Contact our Grand Rapids business lawyer for a consultation. Call (616) 676-8770.
Bruce Alan Block, PLC
Attorney and Counselor at Law
1155 East Paris Ave SE, Suite 300 Grand Rapids, MI 49546
Phone: (616) 676-8770
Serving Clients throughout Western Michigan, in Grand Rapids, Ada, East Grand Rapids, Kentwood, Cascade, Wyoming, Byron Center, Wyoming, Caledonia, Cascade, Rockford, Holland, Grand Haven, Grandville, Kent, Barry, Ottawa, Muskegon, Newaygo, Montcalm, and Ionia County.