Signatures: When not to Get Them

The new Regulation B commentary intensifies the signature rules in Regulation B. Several provisions in the commentary update drive home the point that it is prohibited to collect signatures from parties other than the applicant (such as the applicant's spouse) unless the signature is necessary to support the credit or to perfect the creditor's security interest in property. The new commentary provisions directly outlaw several practices used by creditors in an attempt to justify collecting spousal signatures.

Comment 7(d)-1 deals with jointly owned property. The practical effect of this paragraph is to ban the practice of using co-ownership of property as a rationale for obtaining the spouse's or co-owner's signature. The creditor must evaluate the applicant's ownership interest in the property to determine whether the applicant's interest is sufficient to support the credit. Only if the applicant's ownership interest in the property is not sufficient to support the credit may the creditor obtain other signatures.

In valuing the applicant's interest in the property, the creditor may not make any assumptions about what might happen to the property later. The creditor may only consider the form of ownership at the time of consummation. Assumptions about changes in marital status and their impact on the form of property ownership are prohibited. These assumptions are no more legal in the context of considering property ownership than in the context of considering the applicant himself or herself. In effect, everything the creditor considers when making a credit decision is a "snapshot" of the applicant's status and qualifications at the time the application is processed.

Co-signer Trap. If the applicant's interest in the property does not support the loan requested, the creditor has several options. The creditor may request an additional party, following the co-signer rules in section 202.7(d)(5), or the creditor may offer to extend secured credit.

Be careful about co-signers. The fact that an applicant has listed or offered property that is co-owned with another person, such as the applicant's spouse, does not mean that the applicant has chosen that co-owner as the co-signer. It is easy to fall into the trap of assuming that the co-owner will be the co-signer. A co-signer discussion must always begin at the beginning.

If the applicant offers the co-owned property as security, the creditor could obtain the co-owners signature on the security instrument but not on the note.

Guarantees. Commentary to 202.7(d)(6) has been expanded and clarified. Regulation B signature rules prohibit the collection of extra signatures when the applicant is qualified. The regulation provides detailed rules for signatures requirements relating to married applicants and their spouses.

The regulation's prohibitions against collecting the signatures of spouses carry into the commercial lending arena. Spouses of business owners may not be required to sign or guarantee a loan simply because of their relationship to the owner/borrower.

Because many small companies are family owned, it is not always easy to determine when it is permissible to obtain guarantees from officers who are spouses and when the signature of spouses are being illegally required. The revisions to the commentary provide additional clarification on this point.

When the lender's policy is to require all officers of a corporation to guarantee a loan, it is permissible to require all officers to guarantee even when one of the officers is a spouse of the business applicant. However, this signature requirement must be imposed uniformly on all business loan applicants. It should not be imposed only on borrowers who are married or on family owned corporations. Comment 202.7(d)(6)-2 clarifies that the signature rules and their restrictions based on the applicant's marital status apply to guarantees in the same way that they apply to signatures. Thus, the regulation prohibits requiring the guarantor's spouse to sign simply because of marital status. Should the commercial borrower's guarantee be insufficient to support the credit, the lender must go back to the beginning and decide what is needed, property, co-signers, or additional guarantees, to support the credit. This support must be approached in full compliance with Regulation B's signature rules.

ACTION STEPS

Train loan officers on the signature rules for guarantees and jointly-owned property. Use anything at hand from memos and staff meetings to notes from "Santa".
Review the signature guarantee policy with your commercial lenders. Be sure that they understand the ?202.9 rules for both guarantors and spouses of guarantors.
Test knowledge with a pop quiz. Each week, send a fact situation to every loan officer and ask them to list, in writing, what signatures can go on the note and/or security agreement. Give something (small, your budget is limited) to everyone who returned the quizzes on time with the correct answers.
Review signatures obtained in commercial loan files. Send a stocking with coal (charcoal will do nicely) to anyone who obtained an illegal signature.
Make sure you have a clear policy for guarantees of officers and shareholders of commercial borrowers. Then make sure every commercial loan officer is aware of and knows how to implement this policy.