Checking Applicants and Signatures

Under revised Regulation B, lenders must be able to demonstrate that multiple signers to credit - especially a husband and wife on a business loan - intended to be applicants and become obligated on the note. The word of a lender will not be sufficient. The fact that the application is joint - or multiple - will have to be documented in the loan file itself. Examiners will be looking for evidence. Your audit should look for it first.

The primary question is what evidence will be considered sufficient to make the case. Sometimes it is easier to know what is wrong than when something is ok. For example, a commercial loan file showing correspondence between the loan officer and Mr. John Doe but none to Mrs. Mary Doe, should be questioned if Mary Doe's signature appears on the note or a guarantee. Not only does this file not contain any information indicating that Mary Doe is an applicant, there is documentation in the file that indicates that John Doe is the primary and only person involved in the business. In this context, the presence of Mary Doe's signature on the note and nowhere else actually indicates that her signature was illegally required. In fact, her signature appears only in the places where Regulation B looks first - for violations.

The documentation supporting the willingness of the co-applicant should come from the co-applicant, not from the initial borrower. For example, the fact that the primary borrower submitted a joint financial statement does not indicate the co-borrower's intent. Arguably, it only indicates the primary borrower's intent. The question for purposes of Regulation B is the intent and willingness of the co-borrower or co-applicant.

What should be in the file is information - preferably directly from the co-borrower that demonstrates the co-borrower's intent. The first step would be an application form that is completed and signed by both or all applicants. There should be several indicators on the application form. First, the little box (the one that is usually tucked away in an inconspicuous place at the top of the form) indicating joint credit should be checked. Don't leave those boxes blank.

Second, the application form - or if no form, the application material submitted - should include information from all applicants. Absence of information about a co-applicant raises questions - such as why wasn't it there from the beginning?

Third, information about the applicants, the property securing the loan, and/or the business should explain the role of anyone signing the note. If the loan is a personal loan, the application information should indicate the willingness of each applicant to sign by the presence of their information in the application form, by indicating that the request is for joint credit, and by signatures on the application form.

If the loan is a business purpose loan, documents about the business organization and ownership should explain the role of the borrowers. For example, if Mary Doe is documented as a shareholder and the Vice President of the company, her signature is supported by this role in the company.

Finally, at a minimum, there should be signatures from all applicants. When the application is not taken in person, loan officers should be consistent about documenting how the application was taken (especially if monitoring data is involved) and clearly indicate the status as joint or individual.

Is the box indicating joint credit checked on the application form?
Is information about the co-applicant provided on the application?
Did all applicants sign the application? Note: applications taken by mail, telephone or Internet should include documentation by the loan officer at the time of application to indicate joint or individual credit.
Look at the dates of all application documents. Are they consistent with a single application or do they indicate that information on the co-applicant was provided later?
Review the charter and by-laws of the business. Is there documentation that all signers are actively involved in the business as officers or owners?
For consumer loans, is the co-signer an owner or does the co-signer actively benefit from the loan?
Were the income and assets of all signers verified and considered? If not, why not?
If the file contains a joint financial statement, did the loan officer ask the applicant to identify which property is under sole control?