ECOA Signature Rules Protect Against Discrimination

By James T. Bork, J.D., LL.M., editor, CCH BANKING COMPLIANCE LIBRARY.  Bork has practiced banking law and served as in-house bank counsel. He also has written articles and spoken on bank regulatory and compliance issues. 

An often confusing aspect of 12 CFR 202 (Regulation B), which implements ECOA, concerns when a lender may ask for or require the signature of an individual applicant’s spouse as a cosigner or guarantor. Where loan applicants request credit in their individual capacity and meet the lender’s standards of creditworthiness for the amount and terms of credit requested, lenders may not require the signature of spouses—or anyone else. Violations of this rule are more common when women apply for individual credit than when men apply.

EXCEPTIONS TO THE RULE

There are two major exceptions to this general rule. One occurs when an individual applies for a loan that will be secured by property owned by the applicant and another person. The other occurs when an individual applies for an unsecured loan and, in granting approval, the lender relies on the availability of property owned by the applicant and another person.

Secured Credit

When a lender approves a secured loan, it may require the signature of an applicant’s spouse or other person if that is necessary (or the lender believes it to be necessary) to perfect a lien against collateral pledged as security or otherwise make it available to satisfy the repayment obligation. The additional signature may be needed to create a valid lien, pass clear title, waive inchoate rights, or assign earnings. Even then, however, the lender generally may require the additional signature on only the mortgage or other lien agreement. The lender should look to applicable state law to determine what is necessary to perfect its lien or otherwise make the property available to satisfy the repayment obligation.

If the lender uses a single instrument that combines the note and lien agreement, the lender may not require the spouse or other person to sign the instrument and thereby become obligated for repayment of the loan. The lender may, however, require the additional signature on an integrated instrument if it is clear—for example by a notation next to that signature—that it is made only to grant a security interest and that signing the instrument does not impose personal liability.

Unsecured Credit

When a lender approves an unsecured loan but relies upon property that the applicant owns jointly with another, it must evaluate the nature and value of the applicant’s interest in the property as part of its decision to approve or deny the application. Though the lender will not take a lien against the jointly owned property, it can require the signature of the joint owner if that is necessary (or believed to be necessary) to enable the lender to reach property relied upon in the event of the borrower’s default. The lender may not, however, routinely require the additional signature on an instrument that obligates the joint owner to repay the loan or that results in the forfeiture of the joint owner’s interest in the property. As in the case of secured credit, the lender should look to applicable state law to determine what is necessary to enable the lender to reach property relied upon in the event of the borrower’s default. This rule for unsecured credit is modified somewhat in community property states.

WHAT DOES ALL THIS MEAN?

These rules may seem rather abstract. In practice, however, they imply certain guides to action:

• If an applicant qualifies for the amount and terms of credit requested, a lender generally should not require the signature of the applicant’s spouse or any other person as cosigner or guarantor.
• If a lender determines that an individual applicant does not meet relevant standards of creditworthiness, it may inform the applicant that a cosigner or guarantor is needed. The lender, however, should never suggest who that person or persons might be.
• If a lender takes a security interest in or otherwise relies upon property owned by the applicant and another person, it may require the signature of the other joint owner on any instrument to enable the lender to make that property available in the event of default.