In "Best Practices: Limited Guarantees" my colleague, Katie O'Brien discussed circumstances in which SBA lenders may be required to take spousal guarantees in connection with SBA loans.  Many lenders often worry that requiring spousal signatures or guarantees could give rise to violations of the Equal Credit Opportunity Act, 15 U.S.C. § 1691 et seq., ("ECOA").  The ECOA prohibits discrimination by lenders on the basis of race, color, religion, national origin, sex, marital status, age, or because an applicant has exercised in good faith any right under the Consumer Protection Act or receives income from any public assistance program.  The ECOA is implemented through the Federal Reserve Board's Regulation B, 12 C.F.R. Part 202 ("Regulation B").  Regulation B, § 202.7(d)(1) prohibits lenders from requiring an applicant's spouse to co-sign or guaranty any credit instrument if the applicant's qualifications alone would satisfy the lender's credit standards.  Because of this prohibition, SBA lenders are often confused when determining whether or not to require the spouse of an applicant or applicant's principal to guaranty an SBA loan, even if the spousal guaranty may otherwise be required under SBA regulations.  However, a careful reading of the applicable exceptions in Regulation B and the SOP 50 10 5(C) reveals that the SBA's lending programs qualify as "special-purpose credit programs" under ECOA.  While it does not necessarily follow that an SBA lender may require a spousal guaranty (unless otherwise required by SBA regulations), an examination of the rules regarding special-purpose credit programs suggests that if spousal property is available and the applicant's spouse is unwilling to pledge that property as collateral for the loan, the applicant may be found ineligible under the personal resources test.   

                The SOP 50 10 5(C) provides, at page 102, that "SBA's lending programs qualify as Special-Purpose Credit Programs under the Equal Credit Opportunity Act (ECOA)."  Regulation B, § 202.8 provides that if participants in a special purpose loan program are required to possess certain common characteristics, a lender may request information otherwise prohibited by the ECOA to ascertain the participants' eligibility for the program.  The SOP SOP 50 10 5(C)  also provides that an SBA lender "has the right to obtain the signature of an applicant's spouse (whether an owner of the business or not) or other person on an application."  Furthermore, the SOP 50 10 5(C) also states that "[u]nless there is a legal impediment to access the personal resources of the spouse, such as those held by an independent trustee of an irrevocable trust, the applicant is presumed to have access to the personal resources of his/her spouse and minor children."  Finally, the SOP 50 10 5(C) provides that "SBA or the lender cannot require the injection of the spouse's personal resources, but can determine that the applicant is ineligible because of access to personal resources [emphasis added]."  SOP 50 10 5(C) at page 103.  What does this mean?  

                  These provisions seem to perform a very delicate tap-dance around the prohibitions contained in Regulation B.  As discussed in Katie's article, SBA lenders must take a full personal guarantee of a spouse who owns 5% or more of the borrowing entity if the combined ownership interests in the borrowing entity of the spouses together is 20% or more.  Furthermore, depending upon state law, SBA lenders must often take an unconditional limited guaranty on SBA Form 148L with one of two limitations (the collateral/recourse limitation or the community property/spousal interest limitation) from a spouse if required to perfect the lender's lien on collateral.  Therefore, while neither the SBA nor an SBA lender may "require the injection of the spouse's personal resources", a lender may determine that an applicant is ineligible for an SBA loan because of access to the spouse's personal resources if the borrower is unwilling to pledge those personal resources as security for the SBA loan.  Therefore, lenders should be aware of the subtle difference between requiring the injection of a spouse's resources and a finding of ineligibility if those resources are available and the lender is unable to take a security interest in them. 

                For more information on this issue or other SBA eligibility issues, contact Chris by email at cevans@starfieldsmith.com, or by phone at (215) 542-7070.

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