Reg B Application Requirements
Question: We are hearing many contradictory things about the new application requirements in Regulation B. Some people state that we need signed letters of intent from co-borrowers that state their intent and willingness to be a co-borrower and that without this evidence, we may have a signature violation. Others say that all our application forms must have a box or line indicating that the applicants are co-borrowers. That would mean that the fact that a customer completes and signs FNMA form is not enough to document their intent to be a co-borrower. Others say that all we need is some documentation to show that the co-borrowers all chose to be applicants but that specific formats for this are not required. Who is right?
Answer: There is a lot of confusion about this rule - and a great deal of over-reaction to it. To understand what the rule means, let's look at the history. Since it's inception, Regulation B has prohibited lenders from requiring the signature of a spouse simply because he or she was there. Several protections - gender and marital status - are designed to put a stop to this practice.
Lenders have produced all sorts of reasons why the spouse's signature was necessary. However, with the exception of commercial lending, most lenders have complied with the rule which is now more than 25 years old. If there had been truth to the dire predictions of lenders who argued that the spouse's signature was necessary, we would have been in credit chaos long ago. That hasn't happened.
But some lenders have persisted in obtaining spousal signatures, whether on the note or on a guarantee. Commercial lenders have been the biggest problem. For a variety of reasons, almost all of which are illegal under Regulation B, they still want that signature. In short, for more than 25 years, they haven't gotten the message.
The FRB has used several opportunities to make the signature rule more clear to those who persist in violating it. This latest step is just that - making the existing rule clear. In fact, the message is directed at commercial lending more than any other type of lending.
Unfortunately, when a rule or an interpretation changes, those affected by the rule - especially those who want to comply - ask questions. Those questions lead to answers and sometimes those answers make the rule tougher than it was meant to be.
That's exactly what happened here. The rule made a fairly simple statement: only collect signatures and guarantees from applicants and those participating in the application. As soon as they saw the rule, people started asking how to do this. How should a lender show that a co-applicant was a bona fide applicant and not illegally required to participate in the credit transaction?
The FRB, trying to be helpful, answered the questions with several suggestions. They even included some illustrations in the model application forms. These were offered as suggestions and illustrations - not as requirements.
Unfortunately, there are a lot of people interpreting these suggestions as requirements. That's where the problem comes from - the people asking the questions and seeking certainty.
The real answer to your question is that your file should have evidence in it that any co-borrowers are willing and active co-borrowers. This may be evidenced by a completed and signed application form or even a note to the file by the loan officer that, having been asked whether requesting individual or joint credit, the applicants responded that the request was joint. That's really all the new rule requires.
Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 3, 4/04
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