We have a lender who occasionally makes a loans which are actually to a minor child of a customer of the bank. The underwriting is based solely on the income of the parent. But the signer on the note is the minor and the parent.

On the particular loan I am looking at right now I'm thinking this a problem because neither person indicated if they were applying for joint or separate credit. Neither completed an application in this case. The lender is telling me that the loan is technically to the parent but they just put the minor on the note so it seems that they are establishing credit.

I'm looking for arguments NOT why this is not a wise practice.

IMHO, unless the child is emancipated (depending on state law), there is no legal obligation for them to repay the debt.

What does your loan policy say about this? Does your Board authorize the loan oficer to make a loan to someone who is not under any legal obligation to repay?

You may want to run the scenario by bank consel.

I also hope you are giving the father the co-signer notice because it sounds like he fits the definition. If you are not giving him the notice, his obligation/liability could possibly be negated.

We will not allow a minor to sign on any loan account, period.

What is the purpose of having the minor sign on the note in the first place? They can't build any credit. If it's for the purpose of teaching responsible borrowing habits, I would be all for it. However, your lenders should consider a "kiddie" account program similar to the ones that some banks sponser in schools. I'm not too sure how happy examiners would be seeing a minor signing on a note...

May I ask why it would not help a minor build credit? Don't you have to report BOTH parties on a loan to the credit bureau? Has something changed that minors don't get reported? There are a lot of 16 year olds out there buying a car or making some other major purchase who have a job and a parent willing to co-sign the loan. A good friend of mine bought her piano by obtaining a loan co-signed by her father when we were in high school. She earned good money on the weekends playing for church services and for funerals. She had an established credit record of good payment by the time she graduated from high school. As long as there is an adult on the note who has good credit, can make the payments, and be responsible for the debt - what extra risk is there?

Sorry, guess it just is a practice where I am not to place them on a note.

Regulation AA

Sec. 227.12 Definitions.

For the purposes of this subpart, the following definitions apply:
(a) Consumer means a natural person who seeks or acquires goods, services, or money for personal, family, or household use other than for the purchase of real property.
(b)(1) Cosigner means a natural person who assumes liability for the obligation of a consumer without receiving goods, services, or money in return for the obligation, or, in the case of an open-end credit obligation, without receiving the contractual right to obtain extensions of credit under the account.
(2) Cosigner includes any person whose signature is requested as a condition to granting credit to a consumer, or as a condition for forbearance on collection of a consumer's obligation that is in default. The term does not include a spouse whose signature is required on a credit obligation to perfect a security interest pursuant to state law.
(3) A person who meets the definition in this paragraph is a cosigner , whether or not the person is designated as such on the credit obligation .

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The lender is telling me that the loan is technically to the parent but they just put the minor on the note so it seems that they are establishing credit.

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Sounds like a duck, walks like a duck, then it must be a . . . . .!

State law will help determine if some lenders will allow minors to sign on a loan. I've been told (I haven't confirmed this myself) that in Maine if a minor signs a contract while still a minor, he/she automatically becomes obligated once he/she obtains legal age.

You're right to consult your state laws. In Washington the minor is bound by the terms of the contract "unless he disaffirms them within a reasonable time after he attains his majority, and restores to the other party all money and property received by him by virtue of the contract, and remaining within his control at any time after his attaining his majority."

In addition to the enforcement question, the issue of building credit can cut both ways. If the child doesn't manage the account well, they could be building BAD credit.