Lending: Loan guarantor vs. Co-borrower
Answer by Lucy Griffin, BOL Guru
QUESTION: We have a customer who has applied for a home loan but does not qualify because of
her credit history. Her brother has offered to help her by guaranteeing her loan. the loan officer
would feel better if he was co-borrower. What are the legal differences between a guarantor and
co-borrower when it comes to trying to collect on a debt? and will there be a fair lending problem
if we deny this loan because we insist on a co-borrower?
ANSWER: The difference between a co-borrower and a guarantor is that the co-borrower, of course, is primarily liable on the loan, period, and whether his or her fellow debtor defaults or has defenses is not pertinent to his or her obligation to repay. A guarantor, on the other hand, is not liable at all, unless the underlying borrower defaults and, depending on the terms of the guarantee, the creditor has taken steps to collect. To collect on the guarantee, the lender would have to prove the default by the underlying borrower, which, of course, would not be the case with the co-borrower arrangement. Obviously, having a co-borrower would appear to be better, from a lender's point-of-view, than having a guarantor. However, it is also conceivable that the guaranty form waives all defenses, in which case, the lender might actually be better off getting a guarantee signed by the brother than asking that he co-sign the note in that as a co-signer he might retain defenses he would not have as a guarantor.
At the risk of sounding naive or pollyannish I do not see a fair lending issue if, as the facts assert, the applicant does not qualify for the loan because of her credit history (which, of course, it would be wise to document). The law prohibits discrimination on the basis of sex, among other things, but,
where the applicant has a documented poor credit history, the loan denial would not be on a prohibited basis and that would be demonstrable. (Of course, it would be ideal if the bank had other loan denials for male applicants with similar credit histories and no experience of loan approvals for males with
worse credit histories and if that also could be documented in the file.) In one sense, making the loan by requiring additional credit support is arguably a positive act from a fair lending standpoint, indicating a willingness on the part of the lender to "go the extra mile", if you will, for the female
applicant. (One aspect of fair lending analysis is consideration of the "thick file syndrome"; supposedly, in a bank that has fair lending problems, the credit files for loan applications by minorities will be thinner than those for non-minorities because lenders who are not fair lenders give non-minorities more help in trying to find ways to make the loan, resulting in a thicker file for
non-minorities; thus, to the extent that the lender here does not simply deny the loan because of the applicant's credit history, but comes up with a way to make the loan, albeit with a co-borrower rather than a guarantor, the bank would appear to be giving extra help to the applicant that a lender intent on unlawful discrimination would give.
First published on BankersOnline.com 2/5/01