Cosigner Notice to a Business?

Cosigner Notice to a Business
by Jack Holzknecht, BOL Guru

In a recent post on Bankers Threads, an anonymous poster inquired whether a notice to cosigner (NTC) was needed when a business was cosigning or guarantying a loan to a consumer. The simple answer to the question is "No".

The answer comes from the Federal Reserve Board's (the Fed) Staff Guidelines to Regulation AA. The Fed's answer was wrong when it was published in 1986 and it is still wrong today; but I like their wrong answer. I like it because it eliminates a disclosure that is clearly required by the regulation.

Who Is A Cosigner?
Following are excerpts from the definition section of Regulation AA (12CFR227.12):
(b)(1) Cosigner means a natural person who assumes liability for the obligation of a consumer without receiving goods, services, or money in return for the obligation, or, in the case of an open-end credit obligation, without receiving the contractual right to obtain extensions of credit under the account.
(2) Cosigner includes any person whose signature is requested as a condition to granting credit to a consumer, or as a condition for forbearance on collection of a consumer's obligation that is in default. The term does not include a spouse whose signature is required on a credit obligation to perfect a security interest pursuant to state law.
(3) A person who meets the definition in this paragraph is a cosigner, whether or not the person is designated as such on the credit obligation.

(f) Person means an individual, corporation, or other business organization.

Notice that the first paragraph of the definition of "cosigner" indicates that a cosigner must be a natural person. The second and third paragraphs clearly state that "cosigner" includes a "person". The definition of "person" clearly includes businesses.

Delivering the NTC
Section 227.14 of regulation AA states:
(b) Disclosure requirement. (1) A clear and conspicuous disclosure statement shall be given in writing to the cosigner prior to becoming obligated.

So, the disclosure must be delivered to a cosigner. The term "cosigner" includes a person. The term "person" includes a business. Therefore the notice must be delivered to a business. Obviously. But hold on a minute.

The following excerpt from the Fed's staff guidelines reaches a different conclusion:
Q12(b)-1a: Business entities as cosigners. If a partnership or a corporation cosigns a consumer credit obligation, is such an entity a cosigner for purposes of the rule? Must the bank provide a cosigner notice?

A: No, the rule applies only to natural persons who are cosigners. Consequently, the rule does not require a bank to provide a cosigner notice when a partnership, corporation, or other business entity serves as a cosigner on a consumer credit obligation.

Conclusion
It looks like the Fed never read its own regulation before it issued the interpretation. The real problem is that Regulation AA is not really the Fed's regulation. Regulation AA is based on the Federal Trade Commission's (FTC) Trade Rule on Deceptive Acts and Practices. Congress required the Fed to adopt a substantially similar rule within 60 days after the FTC adopted its Rule. The Fed adopted the FTC Rule as written, with only minor changes. The question is - did they read what they adopted?

The Fed's staff guidelines clearly conflict with Regulation AA, but this is one conflict that will generate few complaints. It voids a disclosure that no one wants to give anyway.

Note from author: My interest in this specific issue stems from my involvement in drafting and submitting the question that the Fed misinterpreted. In 1985, attorney David C. Pottinger and I were working on forms and training materials for the newly adopted Regulation AA. We submitted several questions to the Fed for clarification. They published their answers in the Staff Guidelines. They were wrong then and?

Jack Holzknecht is a principal with Pegasus Educational Services, LLC, a training firm headquartered in Louisville, Kentucky. He is an experienced consultant who has provided training to thousands of bankers and examiners for twenty-two years. He has the ability to identify the key compliance issues from each regulation. Jack's career began in 1976 as a federal bank examiner. He later headed the form and software and education divisions of a regional consulting company. In that capacity he developed loan and deposit form systems and software. He also developed and presented training programs that were delivered to bankers in 43 states. Jack has been an instructor at compliance schools presented by the Georgia, Iowa, Kentucky, Pennsylvania, Nebraska, New York and Texas bankers associations. He spent ten years developing and delivering compliance training for the FDIC and OTS. He is a Certified Regulatory Compliance Manager and a member of the National Speakers Association. He is also a "BOL Guru" and frequently answers compliance questions sent to "Bankers' Threads."

First published on BankersOnline.com 1/27/03