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There are many areas in which consumer laws and rules are crossing over into commercial credit transactions. However, there are some rules which have been in existence for some time and it is important for the trade credit grantor to be mindful of them. This article will address some of the more common areas where doubt or confusion still exists.
Personal Guaranties and Spouses
For years, trade credit grantors who deal with small businesses have required personal guaranties from the business owner and their spouse. With the enactment of the Equal Credit Opportunity Act (ECOA), originally passed in 1974, obtaining a signature of a spouse merely because that person was the spouse of a business owner is not permitted. Section 202.7(d) states: "...a creditor shall not require the signature of an applicant's spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor's standards of creditworthiness for the amount and terms of the credit requested." Creditors are also cautioned that the "submission of a joint financial statement or other evidence of jointly held assets" does not automatically mean that the application is a joint application.
Trade credit grantors are provided some flexibility by the use of the words "standards of creditworthiness" in the statute. If, based on that creditor's standards for granting the amount and term of the credit requested, the business is not deemed to be creditworthy, the credit grantor is permitted to ask for the signature of the spouse. Despite that failsafe allowance, it is recommended that the word "spouse" be removed from all credit applications and/or personal guaranties. If a business is not deemed creditworthy, either deny credit to it outright or tell the business that you require a personal guaranty. If the business owner offers you his/her personal guaranty, be sure to obtain permission to and run a credit report on that person. If that person does not prove to be any more creditworthy than the business, then ask for a coguarantor. You will note that the same result is accomplished while the word "spouse" is never used.
First, Section 202.7(d)(5) permits an additional party may be asked to sign as a cosignor or a guarantor if necessary to support the...