Co-applicant vs. Co-signer
Question: Could you clear up something for us? Our lenders are confused about the difference between a co-applicant and a co-signer. When the loan is for consumer purposes, when do we give the co-signer notice?
Answer: This is a confusing area. Various laws and regulations, both federal and state, use terms such as co-applicant and co-signer without really distinguishing between them. There are three areas where there may be a difference. The first is state law. You should know, for each state in which you do business, whether the state law uses special definitions and/or creates special rules for co-applicants and for co-signers.
A second area is Regulation B. For purposes of deciding whether or not discrimination has occurred, it is important to know whether the applicant requested individual credit, failed to qualify, and needed a co-signer, or whether two or more people jointly applied for credit. Regulation B doesn't contain any specific definitions but instead looks to the process of how the second individual came into the transaction.
The third area is the Credit Practices Rule, or Regulation AA. This rule actually contains a definition of co-signer. A co-signer, for purposes of Regulation AA, is a person who will be liable on the credit contract but does not receive the benefit of the loan. The Co-signer is one who enables the primary applicant to obtain the loan but does not receive or use the loan proceeds or goods purchased with the loan.
The definition exists to trigger the Co-signer Notice which warns co-signers that they are about to become liable on the debt instrument they are signing and may be called upon to repay the debt. The purpose of the notice is to make sure that the co-signer understands their risks and obligations in signing the contract.
Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 7, No. 11, 8/02
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