Limitations on Creditors' Rights to Require Spouses' Signatures Under the Ecoa and Washington Community Property Law

• Jurisdiction: United States,Federal,Washington
• Citation: Vol. 4 No. 03
• Publication year: 1981

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 4, No.2SPRING 1981

Limitations on Creditors' Rights to Require Spouses' Signatures Under the ECOA and Washington Community Property Law

Todd M. Johnson(fn*)

The Federal Trade Commission regulations accompanying the Equal Credit Opportunity Act (ECOA)(fn1) limit the circumstances a creditor can require the signature of both spouses on a loan instrument or an accompanying security agreement.(fn2) These regulations are designed to insure spouses nondiscriminate access to credit while protecting the creditor's ability to maintain reliable and stable credit transactions. While these are laudable goals, the federal regulations and Washington community property laws are sufficiently vague as to hinder the creditor's ability to determine what signatures he can lawfully require from individual spouses seeking credit. The final resolution of these difficulties must await judicial clarification. Analysis of the interaction between federal credit regulations and Washington community property law, however, reveals some practical considerations which should give interim aid to creditors extending secured or unsecured credit to married individuals.

This article examines the federal regulations' interaction with Washington community property law to determine when a creditor can require the signature of a Washington applicant's spouse on either a loan instrument or security agreement in five common situations: (1) a married applicant's request for credit secured by community property, (2) a married applicant's request for credit secured by separate property, (3) a married applicant's request for general unsecured credit, (4) a married applicant's request for unsecured credit in specific reliance upon his or her income flow, and (5) a married applicant's request for unsecured credit in specific reliance upon the income flow of his or her spouse. Further, the article will consider the impact of the ECOA regulations upon each of these fact situations and possible variations, including the effect of the applicant's separation or divorce on the unsecured creditor's ability to reach the non-applicant's spouse's income flow. Finally, this article summarizes the signature policies a creditor should consider applying in light of the Equal Credit Opportunity Act regulations.

II. Credit Secured by Community Property

In Washington, spouses have equal power to unilaterally encumber community property,(fn3) except in three major situations. Because creditors do not need the nonapplicant spouse's signature to perfect an encumbrance on most forms of community property, the ECOA regulations prohibit a creditor from requiring that signature in most credit or loan transactions.(fn4) Three exceptions to this general rule, however, are real property, household goods, and certain types of community businesses, none of which can be encumbered without both spouses' signatures.

A. The Real Property Exception

Washington statutes prohibit one spouse from encumbering community real property without the other's consent.(fn5) Unless the nonapplicant spouse signs the "instrument by which the real estate is encumbered,"(fn6) an attempted encumbrance of real property is void.(fn7) Therefore, federal regulations permit a creditor to require the signature of the nonapplicant spouse on the security instrument when entering a real property security agreement with a Washington applicant.

Notably, the nonapplicant spouse's signature is apparently unnecessary on the "debt instrument" itself to perfect the encumbrance. The Washington statute specifically states that real property may be encumbered if both spouses join in the execution of the security instrument by which the real property is encumbered.(fn8) The instrument of encumbrance, or security instrument, presumably refers to the mortgage, deed of trust or other document which evidences a lien upon the property. This document must be differentiated from the note, loan agreement or other instrument which embodies the debt. The ECOA, therefore, prohibits the creditor from requiring either spouse's signature on the "debt instrument" because the "security instrument" is enforceable without such signatures.

B. The Household Goods Exception

The second exception to the general "one signature" rule applies when the applicant offers community household goods, furnishings, or appliances as security for a loan. One spouse acting alone cannot encumber such property unless the encumbrance is a purchase money security interest.(fn9) Therefore, the ECOA permits a creditor to require the nonapplicant spouse's signature on the security agreement if the applicant offers this type of property as security for a loan.(fn10)

Although the legislature enacted the community household goods exception in 1972, the courts have not yet defined the parameters of the statutory language, "household goods." Professor Harry M. Cross suggested that a good general rule is that a household good includes any permanent article, purchased or acquired for use in and about the house, which is not an article of consumption.(fn11) Regardless of the precise definition eventually adopted, in most instances, creditors should be able to make accurate, common sense determinations whether the property offered as security falls within the statute's meaning. If a proper determination is difficult, the creditor might require the applicant to specify whether the offered collateral is a "household good, furnishing or appliance." If the applicant identifies the collateral as a household good, the creditor can proceed to require the nonapplicant spouse's signature. The applicant's admission will probably estop him from claiming sex or marital discrimination in violation of the ECOA. If the applicant states that the collateral is not a household good, the creditor can ask for the nonapplicant spouse's written concurrence before accepting the offered property as security. That concurrence will probably estop the nonapplicant spouse from thereafter asserting that the encumbrance is ineffective for failure to obtain both spouses' signatures on the security agreement.(fn12)

C. The Community Business Exception

A third exception to the general rule is the community business exception. Both spouses must consent to the encumbrance of community business assets if (1) both participate in management of the business or (2) the encumbrance is outside the ordinary course of business.(fn13) A definition of the scope of the "community business" provision must await judicial clarification and interpretation. A creditor wishing to be certain of a Washington loan applicant's unilateral right to encumber community business property should, therefore, view the applicant's offer of such property in light of the following three general rules.

First, if both spouses participate in the management of a business, their joint action is necessary to encumber the community business' personal and real property. The statutory term "participate" probably refers to the situation where both spouses manage a "sole" proprietorship or partnership(fn14) but does not include incorporated businesses, unless both spouses own most of the corporation's shares and essentially ignore the corporate form.(fn15) Absent judicial clarification, however, it is difficult for creditors to ascertain whether there is sufficient participation by both spouses in a community sole proprietorship or partnership such that the creditor can lawfully require both spouses' signatures on the security agreement encumbering business property. According to the FTC regulations, a creditor may require a nonapplicant spouse's signature merely upon a reasonable belief that, under state law, the signature is necessary to ensure the subsequent availability of the offered collateral.(fn16) Because of the indefinite boundaries of the community business exception, a creditor could successfully demonstrate such a reasonable belief whenever an applicant offers community business property as security, and the nonapplicant spouse minimally participates in policy-making business decisions. However, if the credit applicant insists that the nonapplicant spouse's activity in a community business does not constitute the requisite managerial participation, the creditor's safest course is to require an affidavit of "nonparticipation" from the nonapplicant spouse.(fn17)

Second, if only one spouse participates in the business, that spouse may encumber the community business personalty and realty without the other spouse's consent.(fn18) Once again, if the creditor is uncertain whether the nonapplicant spouse is sufficiently active in managing the community business to be considered "participating," the creditor may require the nonapplicant spouse to execute an affidavit of nonparticipation.(fn19) However, if the nonapplicant spouse is clearly not a managing participant in the business, the creditor, under the ECOA, cannot require the nonapplicant spouse's signature on a security agreement created in "the ordinary course of the community business operations.

Third, if only one spouse participates in the business, that spouse may unilaterally encumber the community business property only in the "ordinary course of business."(fn20) In Pixton v. Silva, a Washington appellate court held that the purchase of an entire business was not in "the ordinary course of business" as that phrase is used in...