By William J. Showalter, CRCM; senior consultant, Young & Associates

You would think after nearly 50 years, we could get this one right. The law passed in the mid-1970s and the rules for additional signatures have not really changed since. But, joint signature issues 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.

Regulation B explained

Regulation B prohibits a lender from requiring an additional signer, especially a spouse, if an applicant qualifies for individual credit on his or her own merits. State law may require a joint owner of collateral to sign documents the lender reasonably believes are necessary to perfect its security interest. Generally, the co-owner must sign some form of security agreement or mortgage deed. However, check with your legal counsel to verify what signatures you need to perfect a security interest.

We have heard of many financial institutions having gender and marital discrimination issues cited in examinations. Your examiners clearly are looking at these issues and are finding problems.

Sex and 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, regardless of creditworthiness.
• Aggregating incomes and financial resources for married joint applicants but not for unmarried joint applicants.
• Refusing to allow an applicant to choose to obtain 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 a 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 noted above, a lender cannot require an applicant’s spouse or any other additional party to sign a debt instrument if the applicant meets creditworthiness standards without the extra signature.

Yet examiners still hear of senior bank managers and lenders who try to ‘tie up’ borrowers by requiring as many signatures as possible, often including spouses’ signatures on the note or guarantee. Bank and thrift examiners continue to find spousal signatures on notes or guarantees without any explanation in the file.

This practice—requiring a signature simply because the applicant is married—constitutes substantive discrimination and disparate treatment based on marital status. It harms the applicant, who cannot obtain individual credit, and the spouse, who must incur personal liability for a loan never sought and never required their signature.

In 2018, only one Federal Financial Institution Examinations Council (FFIEC) agency, the National Credit Union Administration (NCUA), referred a case of ECOA discrimination to the Department of Justice. That single referral followed 89 referrals from other agencies over the previous five years.

Significantly, the NCUA made its referral on the basis of marital status discrimination.

Regulatory response to Regulation B

In March 2003, the Federal Reserve Board (FRB) revised its Regulation B, which implements the ECOA to really just say, “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 requires applicants to show their intent to apply for joint credit at the time of application. A promissory note signature does not prove intent to apply for joint credit. Applicants can establish intent with signatures or initials on a credit application, or on a separate form affirming their intent to apply for joint credit. The FRB (and now the Consumer Financial Protection Bureau, CFPB) requires a method of establishing intent that is distinct from the process of affirming the accuracy of information. Joint signatures at the end of an application are usually not enough.

The Commentary also states that lenders may not assume a borrower will transfer property title to remove it from collectors’ reach. The message—seemingly aimed at commercial lenders—is clear: using spousal guarantees to shore up a loan is not an acceptable way to underwrite business credit. Prudent, safe, and sound credit underwriting requires taking a security interest in property that supports the loan, rather than relying on guarantees that amount to little more than a moral commitment in bankruptcy court.

Other regulatory help for Regulation B

The Federal Deposit Insurance Corporation (FDIC) issued two Financial Institution Letters (FIL) with guidance on Regulation B’s spousal signature requirements to assist lenders in complying with their obligation to treat applicants fairly. Both are now classified as inactive – apparently as part of an effort to lessen regulatory burden several years ago – but still contain relevant and current guidance.

The earlier FIL (FIL-9-2002) includes steps financial institutions can take to avoid problems with the signature rules. Lenders should review and revise loan policies and procedures to eliminate those that are inconsistent with the spousal signature rules.

Specifically, those that require the:

• Guarantee of a loan to a closely held corporation by the spouses of the partners, officers, directors or shareholders of the corporation.
• Signature of the spouse on the note when the applicant submits a joint financial statement.
• Signature of the spouse on the note when jointly owned assets are offered as collateral.

This FIL also advises lenders to add guidance on state law regarding what signatures are necessary in particular situations. Loan staff should be trained periodically on these rules to ensure they remain aware of what is expected and how to avoid compliance trouble. The FIL also recommends that compliance reviews include checks for spousal signature violations, particularly in loans to closely held corporations and in business loans supported by jointly owned property.

The later FIL (FIL-6-2004) includes a flowchart that guides lenders through the process of deciding when an additional signature may be required and when it is not.

Both issuances are available on the FDIC’s website under Inactive Financial Institution Letters. They can help all financial institutions — not just those directly supervised by the FDIC — avoid problems in this important area.

If we can help, please feel free to contact us.