I. INTRODUCTION
Bank regulators have emphasized a thorough examination of financial institution policies, procedures, standards and practices related to fair lending compliance. Federal law prohibits lending policies and practices that discriminate on the basis of marital status.
The Federal Deposit Insurance Corporation (FDIC) issued a guidance (FIL-9-2002), dated February 4, 2002, to help financial institutions comply with the spousal signature provisions of the Equal Credit Opportunity Act (ECOA), as implemented by Regulation B, 12 C.F.R. Part 202. This guidance summarizes Regulation B rules, exceptions to rules and other related requirements regarding spousal signatures as they relate to extensions of credit, including business loans. The guidance also outlines steps that financial institutions, as “creditors,” should take to ensure compliance with spousal signature requirements. On January 13, 2004, the FDIC issued an additional guidance (FIL-6-2004) to “augment” FIL-9-2002 and to further assist financial institutions in complying with the spousal signature provisions of Regulation B. This latest guidance reflects the Federal Reserve Board’s amendments to Regulation B that became effective April 15, 2003. Although both guidances relate to the “spousal signature” requirements, the same rules apply to obtaining signatures of other persons in addition to that of the credit applicant.
Previously, the FDIC’s Regional Office issued a memorandum to its examiners regarding marital status discrimination under the ECOA. The memorandum clarifies § 202.7(d) of Regulation B as such pertains to the spousal signature rule and gives guidance for the treatment of alleged violations of this section found during a bank examination.
Regulation B limits when a creditor may seek an applicant’s spouse as a cosigner or guarantor, but the rules may vary depending on certain circumstances, e.g.,
II. THE GENERAL RULE
The general rule on spousal signatures under § 202.7(d)(1) of Regulation B provides as follows:
Except as provided in this paragraph, a creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested (Emphasis supplied).
Section 202.7(d)(1) is cited most frequently in the context of married couples; however it is not limited to spousal signatures. A creditor may not ask for or require the signature of any other person if the applicant is creditworthy under the creditor’s standards for the credit requested. Note that this section does not apply to joint applicants. For joint credit applications, signatures of both applicants may be required on credit instruments, even if one of the applicants would qualify on his or her own merit. The bank may not circumvent the prohibition of this section by requiring that an individual’s spouse (or any other person) be a co-applicant. FIL-6-2004 specifically states that “if a creditor routinely requires spousal guarantees . . . without first ascertaining whether an applicant is creditworthy, the conditioning of the loan of spousal guarantee violates § 202.7(d)(1).” Therefore, when an applicant does not meet the creditor’s credit standards, the creditor can require a co-signor or guarantor, but it cannot require that the cosigner or guarantor be the applicant’s spouse. Conversely, Regulation B does not prohibit spouses or other parties from signing voluntarily.
III. EXCEPTION TO THE RULE
When an individual applicant qualifies for the credit requested, a spouse’s signature on certain credit instruments may be required by the bank under certain circumstances.
A. Secured Credit
If an individual applicant requests secured credit, the bank may require the signature of any other party, including the spouse, on any document reasonably believed necessary by the bank to create a valid security interest in the property to be used as security. Typically, this may require a spouse to sign a security agreement, mortgage, trust deed or other lien instrument. If a creditor believes that the co-owner’s signature is needed on an instrument that imposes personal liability to assure access to jointly owned property securing the debt, the creditor’s “reasonable belief” must be supported by law.
B. Unsecured Credit – Non-Community Property States (e.g., Nebraska)
If an applicant requests unsecured credit and qualifies under the bank’s creditworthiness standards for the credit requested, the bank may not require the signature of the spouse (or any other person) on any credit instrument. A bank may extend unsecured credit based upon an applicant’s income, assets or a combination of income and assets. Should a bank rely on assets to extend unsecured credit and the borrower defaults, the bank may only attach such assets after obtaining a judgment subject to any security interests. If the assets are jointly owned, a bank lending on an unsecured basis may only reach the individual borrower’s interest in jointly held assets.
If an applicant has insufficient individually owned assets to meet the bank’s credit standards for unsecured credit, the application of the Regulation B signature rule becomes more complex. The bank may not automatically require the nonapplicant joint owner to sign the credit instruments. If the applicant’s separate interest in the property is insufficient to support the credit requested, the bank may give the applicant the option of providing additional support which may be in the form of: (1) providing an additional party, e.g., a guarantor or cosigner; (2) offering to make the loan on a secured credit basis; or (3) obtaining the signature of any nonapplicant joint owner on any document necessary to make the nonapplicant’s interest in the jointly owned property available in the event of the individual applicant’s default.
If an additional party is required to satisfy the bank’s creditworthiness standards, the bank may not require that it be the applicant’s spouse. If the bank makes the loan on an unsecured basis but needs the support of the jointly owned property, it may require the signature of the nonapplicant joint owner even if the joint owner is a spouse, but only on those documents necessary to make the nonapplicant’s interest in the property available in the event of the applicant’s death or default.
C. Unsecured Credit – Community Property States
“If a married applicant requests unsecured credit and resides in a community property state, or if the property upon which the applicant is relying is located in such a 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:
1. 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
2. the applicant does not have sufficient separate property to qualify for the amount of credit requested without regard to community property.”
Community property laws determine, among other things, which spouse has management and control over the marital property, and thus, who has the legal power to commit the property to support a credit or secure a loan. A creditor making a loan (a) to married borrowers who live in a community property state or (b) that are supported or secured by collateral located in a community property state should understand the management and control provisions of the community property law in such state in order to assure that signatures on security documents or credit instruments are limited to those necessary to perfect its interest in the underlying collateral in the event of the borrower’s death or default.
At this time, Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have forms of community property laws. State laws are often amended or repealed and therefore, a creditor should confirm the law with counsel.
IV. POTENTIAL VIOLATIONS OF § 202.7(d)
Although a bank may require the spouse’s signature on all credit instruments where the spouse is a joint applicant, regulators are concerned over any attempt to circumvent the § 202.7(d)(1) restrictions by requiring married couples to apply for credit jointly.
Since written applications are not always required and because married couples frequently apply for joint credit voluntarily, it is difficult for examiners to determine whether a bank is illegally requiring married couples to submit joint applications.
Examiners have been advised that a violation of § 202.7(d)(1) may be indicated in one or more of the following scenarios:
A. The bank’s written lending policies unambiguously require a spouse’s signature on credit instruments under circumstances not permitted by § 202.7(d);
B. The bank’s lending policies, oral or written, require or encourage spousal signatures, and discussions with bank personnel indicate that spouses are required to sign credit instruments under circumstances that are not permitted by § 202.7(d);
C. Answers to the officer’s questionnaire indicate that the bank is requiring spousal signatures, and discussions with bank personnel indicate that spouses are required to sign credit instruments under circumstances that are not permitted by § 202.7(d);
D. The application in the credit file of a loan that was made to a married couple on a joint basis is signed by only one spouse, or other documentation in the credit file (e.g., file notes, financial statements, letters, correspondence, etc.) indicates that the loan was not applied for as a joint loan;
E. A review of the credit files indicates that all or nearly all loans to married couples are joint loans and there is no documentation in the credit files indicating whether or not the loans were applied for jointly; and
F. A review of the credit files shows that there are individual loans to married men, no individual loans to married women, and documentation in at least one of the joint loan files indicates or suggests that one or more of the married women intended to apply for credit in an individual capacity.
Although some of the cases outlined above may be “close calls”, FDIC counsel has concluded that it would be appropriate for an examiner to cite an apparent violation of § 202.7(d)(1) under each scenario. Note that the facts in scenario 5 above, do not establish a violation without more evidence. Although neither the ECOA nor Regulation B requires a creditor to document its compliance with § 202.7(d)(1), FDIC counsel notes that there is nothing to prevent the agency from strongly recommending the bank to maintain such documentation. In fact, the FDIC’s Compliance Manual of Examination Policies (§ 11-A, pp. 5) indicates that a bank’s reasons for obtaining joint signatures should be clearly documented in the file as evidence of compliance.
V. THE GUARANTOR ISSUE
Occasions arise in which the bank is considering an individual’s loan application and determines that the bank cannot extend the loan without either a cosigner or guarantor in that the applicant alone is not creditworthy enough to meet the bank’s underwriting requirements. The bank may certainly require the borrower to obtain either a cosigner or a guarantor. The bank cannot however, require that the applicant’s spouse be that cosigner or guarantor.
Similarly, a creditor may require that all partners, directors, officers or shareholders of a closely held corporation personally guarantee a loan, but it cannot automatically require their spouses to also sign the guarantee, even if the guarantee is supported or secured by jointly owned property. Obtaining the signature of a guarantor’s spouse is subject to the same restrictions as obtaining the signature of an applicant’s spouse.
In cases where an individual has applied for a business loan, a creditor may require the guarantee of another partner, director, officer or shareholder, but this requirement must be based on the guarantor’s relationship with the business (e.g., a creditor may require all partners, directors, officers or shareholders of a closely held corporation to guarantee a loan, or an additional partner, director, officer or shareholder to provide a guarantee, but it cannot single out a partner, director, officer or shareholder because he or she is the spouse of the applicant). See, § 202.7(d).
A creditor must comply with the Regulation B requirement of asking each individual loan applicant or corporate shareholder if there is anyone who may cosign or be a guarantor. If the applicant’s response suggests that the cosigner or guarantor be a spouse, then the use of the spouse may be acceptable.
When a loan is renewed, a creditor may be obligated to reevaluate the necessity of maintaining a third party’s guaranty. The Official Staff Commentary to Regulation B, § 7(d)(5)(3) states:
If the borrower’s creditworthiness is reevaluated when a credit obligation is renewed, the creditor must determine whether an additional party is still warranted and, if not, release the additional party.
In other words, the creditor has an affirmative obligation to reevaluate the need for another party when a credit obligation is renewed and to do so without discriminating on the basis of marital status or any other bases listed in the ECOA. Note that the Commentary says “if” a creditor reassesses a borrower’s creditworthiness, then it must also reevaluate the need of an additional party.
VI. INTEGRATED NOTE AND SECURITY AGREEMENT
If a creditor uses an integrated instrument that combines the note and the security agreement, a spouse can be asked to sign the instrument if it is clear that signing the instrument does not impose personal liability on the spouse (e.g., use of language next to the spouse’s signature that such signature is for the purpose only of granting a security interest and nothing more).
VII. VALUE OF APPLICANT'S INTEREST IN JOINT PROPERTY
Although a creditor, in determining creditworthiness, may look to real or personal property for security (as opposed to income), the creditor’s preference of real or personal property must be made in a nondiscriminatory manner. In determining the value of an applicant’s interest in jointly owned property, a creditor must look to the actual form of ownership of the property before or at consummation of the transaction. The financial institution may not require the spouse’s signature on any instrument as a condition of credit approval unless the credit applicant’s property interest does not support the amounts and terms of the credit requested or one of the three exceptions discussed in Paragraph III. apply. Although subsequent changes in the form of ownership are possible (e.g., transfer or divorce), such changes cannot be considered.
In individual credit applications, when considering asset valuations, the financial institution may ascertain whether the applicant’s interests in the assets offered as security are of sufficient value to afford creditor protection in the case of death or default, as follows:
VIII. BUSINESS LENDING CONSIDERATIONS
Written credit applications are required for the purchase or the refinancing of a dwelling as a principal residence under Regulation B. For business credit, written applications are not required by the regulation. Consequently, such “applications” are often the result of conversations and negotiations, the submission of a financial statement(s) and a business plan(s). It is not always clear who the applicants are, what signatures are actually voluntarily offered by the applicant, and what signatures are needed by the creditor. Revisions to Regulation B clarify that a creditor is prohibited from presuming that the submission of joint financial information constitutes an application for joint credit. Thus, where the financial statement lists jointly held property of a husband and wife and is signed by both spouses (attesting to the accuracy of the data), there would be ECOA and Regulation B problems if a creditor treats the financial statement as an indication that the husband and wife are making a joint application for credit. By doing so, a creditor may find itself requiring both property owners (husband and wife) to sign the promissory note when, in fact, only the property owner who is involved with the business intends to be obligated on the extension of credit.
A person’s intent to be a joint applicant must be evidenced at the time of application. Although the mere presence of two signatures on a promissory note may not be used to show an intent to apply for joint credit, signatures or initials on a written application that affirm the applicant’s intent to apply for joint credit, as opposed to merely affirming the veracity of data may be used to establish an intent to apply for joint credit. Where there is no written application, the applicant’s intent to apply for joint credit may be evidenced, for example, by the presence in a file of a written statement by the applicants that expresses such an intent.
Set forth below is additional information to assist with your compliance in “documenting” evidence relating to applications for joint credit.
Question: In business or agricultural lending, doesn’t the fact that the financial statement is signed by both parties and the note and any security agreements are signed by two individuals indicate their intent to apply for joint credit?
Answer: Not necessarily. A “co-applicant” is deemed to be someone who applies contemporaneously with the applicant for shared or joint credit. Typically, when individuals sign a joint financial statement they are attesting to the accuracy of the information contained on the report, not affirming their intent to apply for joint credit. Further, the revised Commentary to this section of Regulation B states: “The method used to establish intent must be distinct from the means used by individuals to affirm the accuracy of information. For example, signatures on a joint financial statement affirming the veracity of information.” Thus, the method used to establish intent must be distinct from the means used by individuals to affirm accuracy of information provided on a financial statement.
Question: How do you suggest intent to apply for joint credit be evidenced if the bank does not take an application in connection with a credit request?
Answer: A simple way to address this issue is to have a separate affirmation statement included with the loan documentation. An example of the separate affirmation statement is set forth below:
We intend to apply for joint credit in the amount of $ ____________________ for the purpose of
________________________________________________
____________________ ____________________ ____________________
Applicant Joint Applicant Date
Question: How should the requirement to evidence intent to apply for joint credit be handled when updating annual financial statements for agricultural and commercial borrowers for whom the bank approves an annual operating line of credit?
Answer: Compliance can easily be obtained by either incorporating an affirmation statement into your current financial statement or utilizing one similar to the statement set forth below. By detailing the amount of credit applied for and the purpose, it leaves no doubt in an examiner’s, creditor’s or borrower’s mind as to who is intending to be legally obligated for the debt. If the borrower(s) later requests credit in excess of the amount detailed on the affirmation statement, the creditor should have the applicant affirm their new request in the same manner.
Date: ____________ Submission of this financial statement and information
contained herein constitutes a request for credit in the amount of $________________________
for the purpose of ________________________________
I intend to apply for individual credit.
We intend to apply for joint credit.
_____________________ ________________________
Applicant Joint Applicant
Requiring the personal guarantee of partners, directors or officers of a business entity, such as a corporation, or the shareholders of a closely held corporation is subject to the same rules as requiring signatures, i.e., a lender cannot require the signature of a guarantor’s spouse on a guarantee just as a lender cannot require the signature of an applicant’s spouse on a promissory note for individual credit. Therefore, although a lender may require a guarantor, the lender may not require a spouse to personally guarantee the loan; however the lender may require the guarantor’s spouse to sign only on the document necessary or “reasonably believed” necessary to provide adequate protection in the event of the guarantor’s death or default.
IX. COMPLAINCE NOTES
When financial institutions expand their lending reach due to interstate mergers, acquisitions or by Internet lending, they need to ensure that loan officers know the requirements of various state laws regarding joint and marital property, not only in the states in which they operate, but where their borrowers reside or where jointly owned assets securing such loans are located.
The FDIC Guidance (FIL-9-2001) suggests that creditors consider three approaches to ensure compliance with spousal signature rules:
A. Review and Revise Loan Policies and Procedures Regarding Spousal Signatures
1. Eliminate loan policies or procedures inconsistent with Regulation B spousal signature provision, such as those that require:
2. Expand loan policies and procedures to provide loan officers with guidance on state law regarding necessary signatures, such as by training loan officers to:
3. Use checklists to address when spousal signatures may be obtained in connection with an individual application for credit. E.g., A creditor should:
B. Provide Periodic Training to Consumer and Commercial Loan Staff
Regulation B requirements regarding spousal signatures apply to all loans, consumer and commercial. Education on the spousal signature rules should be part of any training program for new loan staff. Creditors also should provide periodic refresher training, particularly in the event of any expansion of market reach (e.g., the taking of credit applications over the Internet, or a change in product base, such as the introduction of a streamlined small business loan program).
C. Monitoring and Audits
Creditors should incorporate in their compliance program a check for spousal signature violations. Monitoring and audits should include reviews of all documents in a representative sample of loan files, particularly the application, financial statements, documents relating to collateral, as well as the credit instrument and any security documents. Special attention should be taken with respect to loans to closely held corporations and business loans supported by jointly owned residential or personal property or other personal assets, like stock or savings.
X. CONCLUSION
In view of the banking agencies’ emphasis of fair lending issues, financial institutions are advised to review credit application procedures, policies on cosigners and guarantors and policies on credit renewals in an effort to confirm compliance with the rules regarding spousal signatures. The FDIC guidance (FIL-6-2004) included a flowchart entitled “Regulation B Signature Requirements” whcih can be found at the following link: REGULATION B: SIGNATURE REQUIREMENTS CHART-FIL-6-2004.