Question & Answer

Question: In my review of files in the commercial lending department, I identified several loans that have the signature of the applicant's spouse. The loan officer explained that the signature was to ensure access to the borrowers residence. If we need the additional security of the borrower's residence, is this legal under Regulation B?

Answer: NO! First, Regulation B applies to all credit, including commercial credit. Don't ever let your commercial lenders tell you that ECOA is a "consumer" law that doesn't apply to commercial transactions. In fact, the issues of small business lending are one of the active areas developing in Regulation B.

Second, Regulation B places strict limitations on the creditor's ability to obtain signatures in addition to those of the applicant. The rule's purpose is to prevent married individuals from becoming obligated simply because they are married to the borrower. With this purpose in mind, it is easier to understand how to handle this situation correctly.

Let's assume that the loan officer has evaluated the application and correctly concluded that additional support for the loan is needed. The applicant's best asset for this purpose is the residence which she jointly owns with her husband. The correct way to obtain access to this security is to execute a security agreement or mortgage with the applicant and her husband. This places the bank as a secured creditor, giving the bank access to the residence if it is needed. It also means that the applicant's husband is liable only for the possible loss of the residence but not liable on the note.

In contrast, let's look at what happens if the loan officer fails to follow the Regulation B rule. If the loan officer takes the shortcut and requires the husband's signature on the note, the husband is now obligated on the entire instrument. He stands to lose much more than the house - or something other than the house such as a stock portfolio - if the loan is not paid. The law is designed to prevent this consequence. The spouse whose signature was obtained in violation of Regulation B has standing to sue the bank. The remedy is to remove the spouse's signature from the note leaving the bank with no way to reach any additional assets. Thus, by obtaining the signature in a way that regulation B prohibits, the bank ends up with nothing. Worse yet the bank may have to pay damages to the non-applicant spouse.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 8, 5/96