Whose Signature Are You Requiring?

by Mary Beth Guard

The Equal Credit Opportunity Act prohibits discrimination in any aspect of credit on the basis of nine specific factors, ranging from age to marital status. It's easy to rattle off the nine prohibited bases, but getting your employees to understand how the prohibitions actually impact transactions can be much more difficult. A prime example is spousal signature requirements. The FDIC's FIL-9-2002 provides a much-needed reminder about what you can and cannot do.

The natural inclination of most loan officers is to make a loan as bullet-proof as possible, grabbing all the collateral they can get and obligating as many parties to repay as they can get away with. It's great that they want to protect the bank, but there are boundaries that cannot be crossed in doing so.

Boundary #1. If the application is for individual credit and the applicant is individually creditworthy, you cannot require the spouse's signature on the promissory note, nor can you require anyone else's signature on the note. So, look at your application. Who is the applicant? Is it a joint request, or is it a request for individual credit? Process the application. If it is for individual credit and the applicant qualifies for individual credit, the applicant's signature will be the sole signature on the promissory note unless one of the exceptions described below applies.

If there are co-applicants, both/all co-applicants should be asked to sign the note. Beware of situations where one spouse fills out the application and includes information about the other spouse on the application form. Don't assume you have a joint application without confirming that fact with the other spouse. We've all heard too many tales of errant spouses who incur joint debt without the knowledge of their mate, even going so far as to take the note out of the bank to get the second signature and returning with the signature forged on the document. Before you even pull a credit report on a supposed co-applicant, verify their intent to apply for credit with you.

Just because the applicant gives you a joint financial statement does not mean the spouse should be considered a co-applicant.

Boundary #2. If you process the application for credit and determine the applicant does not meet your credit standards, you may request a cosignor or guarantor. However, you may not require that the applicant's spouse be the cosignor or guarantor. You must let the applicant select the cosignor or guarantor. Of course, you have the say-so over whether the person they select is sufficiently creditworthy to allow you to make the loan.

Exceptions
Yes, there are some exceptions to the boundaries described above. But don't go get all excited about them. In most instances, they will, at best, simply permit you to require the spouse's signature on the documents which give you a security interest in jointly owned collateral, such as a real estate mortgage on property owned by both husband and wife.

There are three narrow circumstances under which a creditor may require the signature of the applicant's spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law. Those three circumstances are set below, but first, an important caveat:

Just because you don't know what instruments are necessary under state law doesn't mean you have a reasonable belief that you can require a spouse to sign a particular document. Your belief should be supported by either a thorough review of pertinent statutory authority, or caselaw, or a state attorney general opinion. Talk to your bank's attorney and obtain a written opinion about what documents you can require a signature on. In most states (other than those that follow community property principles, the co-owner does not have to sign the promissory note to grant the creditor access to the property. Instead, the co-owner only needs to sign the security documents, such as a mortgage or lien.

Exception for Certain Unsecured Credit

Where the applicant requests unsecured credit but relies on jointly owned property to establish creditworthiness, the creditor may require the signature of the applicant's spouse or other person "on any instrument necessary or reasonably believed by the creditor to be necessary, under applicable state law to make the property being offered as security available to satisfy the debt in the event of the death or default of the applicant. Once again, you should have an opinion of counsel in your file to document what signatures you may require on what documents.

The Staff Commentary to Reg B says that if an applicant who requests unsecured credit does not own sufficient separate property, and relies on joint property to establish creditworthiness, the creditor must value the applicant's interest in the jointly owned property. A creditor may not request that a nonapplicant joint owner sign any instrument as a condition of the credit extension unless the applicant's interest does not support the amount and terms of the credit sought.

In determining the value of an applicant's interest in jointly owned property, a creditor may consider factors such as:

the form of ownership and the property's susceptibility to attachment, execution, severance, or partition;
the value of the applicant's interest after such action; and
the cost associated with the action.

The creditor must base the determination on the form of ownership prior to or at consummation, and not on the possibility of a subsequent change. You cannot take into consideration the fact the parties may divorce or that the applicant's separate party may be conveyed into tenancy by the entirety between the two parties after consummation of the loan transaction. Look only at what the ownership is prior to consummation or at consummation.

If the applicant's interest in jointly owned property does not support the amount and terms of credit sought, there are several options available to you:

You could request a cosignor or guarantor. (Remember, however, that you cannot require the spouse to be the cosignor or guarantor.);
You could offer to grant the applicant's request on a secured basis; or
You could ask for the signature of the joint owner on an instrument that ensures access to the property in the event of the applicant's death or default, but does not impose personal liability unless necessary under state law (e.g., a limited guarantee).

You cannot routinely require, however, that a joint owner sign an instrument (such as a quitclaim deed) that would result in the forfeiture of the joint owner's interest in the property.

Exception relating to community property
At the current time, there are ten states that have been identified by the federal regulators as using some form of community property system. Those states are:
Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Where the applicant is married and resides in a community property state, or is relying upon property located in a community property state, a creditor may require the signature of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the community property available to satisfy the debt in the event of default if two conditions are met:

applicable state law denies the applicant power to manage or control sufficient community property to qualify for the amount of credit requested under the creditor's standards of creditworthiness; and
the applicant does not have sufficient separate property to qualify for the amount of credit requested without regard to community property.

The FDIC recommends developing a checklist to provide guidance to loan personnel on when spousal signatures may be obtained. Here's our stab at such a checklist:

Spousal Signature Checklist Type of application Can you require the spouse to cosign or guarantee? Can you require the signature of the spouse on security interest document(s)? Individual application for secured credit. Borrower is independently creditworthy. No. If the borrower individually qualifies for credit, you cannot request them to obtain any cosignor or guarantor. Yes, if property is jointly owned.

You cannot require the non-applicant spouse to quit-claim the property to the applicant. Individual application for secured credit. Borrower does not qualify alone for the credit. No. You can, however, request the applicant procure a cosignor or guarantor. You cannot require that the cosignor or guarantor be the applicant's spouse. Yes, if property is jointly owned.

You cannot require the non-applicant spouse to quit-claim the property to the applicant. Individual application for unsecured credit. Applicant owns sufficient separate property to meet your creditworthiness guidelines. No. No. This is unsecured credit. Individual application for unsecured credit. The applicant is relying upon jointly owned property to establish creditworthiness.

After you value the applicant's interest in the jointly owned property, you determine the applicant's interest does not support the amount and terms of the credit sought. If the applicant's interest in the jointly owned property is not sufficient to establish creditworthiness, your options are to:

request a cosignor or guarantor;
offer to grant the applicant's request on a secured basis; or (see the next column over)You may not request that a nonapplicant joint owner sign any instrument as a condition of the credit extension unless the applicant's interest does not support the amount and terms of the credit sought.

If the value of the applicant's interest in the jointly owned property does not support the amount and terms of the credit sought, you can ask for the signature of the joint owner on an instrument that ensures access to the property in the event of the applicant's death or default, but does not impose personal liability unless necessary under state law (e.g., a limited guarantee). Married applicant who resides in a community property state applies for unsecured credit. Check the state law in the community property state where the applicant resides. Check the state law in the community property state where the applicant resides. Married applicant applies for unsecured credit and is relying upon property in a community property state to establish creditworthiness. Check the state law in the community property state where the property is located. Check the state law in the community property state where the property is located. Keep in mind, Regulation B is not just a consumer protection statute. It applies to all credit, regardless of who the applicant is and regardless of what the purpose of the loan is. If, for example, you refuse to extend credit to a minority-owned business because of the race of the owners or employees, you are violating the Equal Credit Opportunity Act and Regulation B. All credit decisions, credit advertisements, and treatment of borrowers should be color-blind, gender neutral, and made without regard to religion, marital status and all the other prohibited bases.

The original version appeared in the January/February 2002 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 5/27/02