Pub. 1 2020 Issue 2

www.cbak.com 16 In Touch Community Bankers Association of Kansas Associate Member “JUST SIGN IT, DEAR”OR WHEN ARE GUARANTORS NOT A PLUS? BY WILLIAM J. SHOWALTER, CRCM, CRP SENIOR CONSULTANT; YOUNG & ASSOCIATES, INC. .; KENT, OHIO Y ou would think after more than 40 years we could get this one right. The rules for additional signatures have not really changed – just some fine tuning over the years. But, it comes up regularly at banks, thrifts, and other lenders to this day. Regulation B, which implements the Equal Credit Opportunity Act (ECOA), is pretty straightforward on this point – if an applicant qualifies for individual credit on his or her own merits, the lender is prohibited from requiring an additional signer, especially not a spouse. A joint owner of any collateral may be required to sign whatever documents the lender reasonably believes are needed under its state law to allow it to perfect its security interest. Generally, this means that the co-owner may be required to sign some form of security agreement or mortgage deed – though you should check with your legal counsel to verify what needs signing to perfect a security interest We have heard of a number of financial institutions having gender and marital discrimination issues cited in examinations. Your examiners clearly are looking at these issues and are finding problems. Sex & marital status discrimination The ECOA prohibits discrimination against loan applicants and customers on any of nine “prohibited bases,” including the original pair – sex and marital status. These aspects of applicants have nothing to do with creditworthiness. There are a number of ways to discriminate along gender or marital status lines, including: • Refusing to grant credit, or extending it on less favorable terms, to female applicants • Requiring cosigners for female applicants • Aggregating incomes and financial resources for married joint applicants, but not for unmarried joint applicants • Refusing to allow an applicant to choose to hold credit using a birth- given surname, a married surname, or a combined surname • Terminating or changing an open- end account, without any evidence of inability or unwillingness to repay the debt, when a customer’s marital status changes • Requiring a spouse as co-borrower for a married applicant • Requiring spouses of married officers of a company to sign loan guarantees with the officers Blind spot The spousal signature issue seems to challenge lenders, particularly commercial lenders, the most in the sex/marital status discrimination area. As we noted above, a lender cannot ask for or require the signature of an applicant’s spouse or any other additional party on a debt instrument if the additional signature is not needed to meet creditworthiness standards. And, yet, we still hear of senior bank managers and lenders who want to securely “tie up” borrowers by requiring as many signatures as they can get, on as many instruments as possible, and including spouses’ signatures on the note or guarantee. Bank and thrift examiners continue to report finding spousal signatures on the note or on guarantees when there is no explanation in the file of how or why the signature is there. This action – requiring a signature simply because the individual is married to the applicant – amounts to substantive discrimination, disparate treatment on the basis of marital status. There is harm done both to the applicant, who cannot obtain individual credit, and the spouse who was required to sign and incur personal liability for the loan – a debt the spouse never sought, and for which his or her signature was not really needed. In 2018, only one Federal Financial Institution Examinations Council agency, the National Credit Union Administration (NCUA), made a referral to the Department of Justice involving discrimination in violation of ECOA – after 89 referrals from various agencies over the previous five years. Significantly, the NCUA made its referral on the basis of marital status discrimination. Regulatory response In March 2003, the Federal Reserve Board revised its Regulation B, which implements the ECOA that really just said, “We mean business. We mean what we have said for years and years.” The Official Staff Commentary on Regulation B already stated that the fact that an applicant submits a joint financial statement may not be used to presume the application is for joint credit. With the 2003 amendments, the FRB revised Regulation B itself to say the same thing – since the FRB stated that commercial lenders in particular had not seemed to get the point. To further make this point, the FRB added a requirement that a lender have some form of documentation for any additional signatures. The Commentary states that a person’s intent to be a joint applicant must be evidenced at the time of application. Signatures on a promissory note may not be used to show intent to apply for joint credit. However, signatures or initials on a credit application or some separate form affirming the applicants’ intent to apply for joint credit may be used to establish intent to apply for joint credit. The FRB requires that the method used to establish intent must be distinct from