Court Deadlocks on Lending Lawsuit
I think it was Vince Lombardi who once said that a tie is as exciting as kissing your sister and George Brett who added that losing is like kissing your grandmother with her teeth out.
Vince Lombardi was wrong. Yesterday, the Supreme Court of the United States issued its first 4-4 decision since the death of Justice Scalia. Although the ruling basically resolves nothing, it underscores two important issues that credit unions should be paying attention to (Hawkins v. Community Bank of Raymore):
- Does the Equal Credit Opportunity Act apply to guarantors? This is an unresolved issue with real practical significance for your compliance. The ECOA bans discrimination against loan applicants. For the last 30 years, federal regulation has defined an applicant to include guarantors. See 12 CFR Section 202.2(e); 12 CFR 1002.2.
In the case in which the Court deadlocked yesterday, the wives of two businessmen claimed that the bank violated the Act’s prohibition against discriminating on the basis of marital status by requiring them to personally guarantee their husbands’ loans.
The bank denied the allegation and argued that notwithstanding federal regulation, Congress never intended the ECOA to extend to guarantors. The 4-4 tie means that two federal appeals courts have come to opposite conclusions on this narrow but important issue.
- It may not be one of the high profile issues that gets partisans riled up into a foamed-mouth frenzy, but one of the key questions that will be decided by the newest Supreme Court justice will be how much deference courts should have towards federal regulation interpreting federal law. This case is fascinating to me in part because it involves a 30 year-old regulation.
Bernanke Endorses Going Negative as a Last Resort
In a recent blog I talked about the increasing willingness of central bankers to impose negative interest rates – i.e. to charge banks for holding money in central bank accounts – as a means of spurring lending. In this recent blog, former Fed Chairman Ben Bernanke endorses its possible use if and when the economy goes South.
“Overall, as a tool of monetary policy, negative interest rates appear to have both modest benefits and manageable costs; and I assess the probability that this tool will be used in the U.S. as quite low for the foreseeable future. Nevertheless, it would probably be worthwhile for the Fed to conduct further analysis of this option. We can imagine a hypothetical future situation in which the Fed has cut the fed funds rate to zero and used forward guidance to try to talk down longer-term interest rates. Suppose some additional accommodation is desired, but not enough to justify a new round of quantitative easing, with all its difficulties of calibration and communication. In that scenario, a policy of modestly negative interest rates might be a reasonable compromise between no action and rolling out the big QE gun.”