After the real estate market crash, creative plaintiff’s attorneys in eastern North Carolina were quick to turn to the Equal Credit Opportunity Act (ECOA), 15 U.S.C. § 1691 et seq., and its implementing regulations, 12 C.F.R. §202.1 et seq. (commonly known as Reg B), to release guarantors of their obligations for failed real estate investments. Litigation focused heavily on spousal guarantees, because while there is not a blanket prohibition against spousal guarantees under ECOA, determinations of when a spousal guaranty is permissible are confusing at best and a potential minefield for lenders.

In RL Regi North Carolina v. Lighthouse Cove (Lighthouse), the North Carolina Court of Appeals, in a unanimous affirmation of the trial court, found the lender violated ECOA by requiring a spousal guaranty. In Lighthouse, a wife guaranteed the debt of her husband’s real estate development business even though she was not a member of the borrowing entity, nor an owner of the collateral securing the loan. Based on these facts, the court determined the act of obtaining the guaranty was a “requirement” in violation of ECOA. Although the wife executed a forbearance agreement after the borrower’s initial default, inclusive of a provision waiving all defenses, the court found the waiver did not include the defense that the guaranty was acquired in violation of ECOA.

On further appeal, the Supreme Court of North Carolina, in its review of Lighthouse, found it unnecessary to wade into the ECOA quagmire determining instead the forbearance agreement and resulting waiver was enforceable. The court highlighted that parties routinely forego claims in the course of settlement; and, in Lighthouse, the waiver of claims was a negotiated benefit of the agreement with the lender to forbear. Therefore, while the state of spousal guarantees remains confusing, creditors conducting business in North Carolina gained an important take-away: carefully draft forbearance agreements, modifications, and renewals. Ensuring documentation includes waivers may be the difference between recovery of indebtedness or loss.

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