Signatures: How to Document Signatures (5 Action Steps)

With the Federal Reserve's most recent attempt to clarify the signature rules of Regulation B, the debates about compliance and proof of compliance are running rampant. When and how can a lender accept or require a spouse's signature? How must or may the lender establish that the signature was obtained based on the wishes of the applicants rather than at the urging of the lender? In short, how to document and prove compliance?

Good procedures and consistent documentation are key to the institution's ability to demonstrate that it has dealt with each applicant in a consistent way and that the institution has not required signatures in ways that Regulation B prohibits. However, with the exception of loans subject to monitoring data requirements, Regulation B does not specify how compliance must be pursued and demonstrated.

Under the signature rules of Regulation B, you must be prepared to demonstrate why a signature was obtained or required and that it was done legally. Clearly, documentation is necessary to demonstrate legality. So, how is this done? How much documentation is enough and what type of documentation does it have to be?

Two approaches are clearly out the window. The appearance of the spouse's signature on the note cannot be used as evidence that the spouse signed willingly or that the lender had a legal purpose in requiring the signature. In fact, the presence of the signature with no other documentation does quite the opposite. It constitutes proof of discrimination unless the lender can demonstrate otherwise.

Similarly, the presence of joint assets on the applicant's financial statement cannot be used to argue that the spouse was an applicant. Again, if only this evidence exists, the presumption will be that the spouse's signature was illegally required.

With these classic loan officer favorites off the table, what should lenders do? What can be used as evidence that the spouse was an applicant or that the signature, if required, was legal? Regulation B allows certain steps - in order - that may result in the applicant choosing a co-signer. The co-signer chosen by the applicant may be the applicant's spouse or someone else.

Whatever choice is made, there are three critical elements. First, the co-signer must be the applicant's choice, not the lender's. Second, the co-signer must be willing to be a co-signer. Never forget that co-signers have free choice as well as the applicant. Finally, the co-signer must bring the needed additional support to the application. Without this additional support, there is no reason to have the co-signer.

Making a decision about a co-signer must also follow a careful sequence. The ECOA was passed to ensure that individuals who are qualified are able to obtain individual credit in their own name. This means that when someone applies for individual credit, the lender must first evaluate the qualifications of the applicant as an individual borrower. The first question the lender must answer is does the application as brought to the lender by the applicant offer enough to qualify for the credit requested. If the answer is yes, then the lender may not request any additional signatures other than appropriate corporate guarantees (more later) or signatures to perfect security.

If the answer is that the applicant is not qualified, the lender now has two choices. First, the lender may deny the application because the individual does not qualify for the credit as requested. Second, the lender may offer the applicant the opportunity to provide additional support for the application. The important issue is that the application as submitted is evaluated before any decision to deny or suggest additional support is made.

Even if careful procedures are followed, there is risk in this second step. The lender must always be consistent in making the choice between denial or counteroffer. And the lender must always be consistent in evaluating the co-signer or additional security that the applicant offers. For example, suggesting to a married individual applicant that a co-signer would be appropriate while suggesting additional security to an unmarried applicant would treat applicants differently on the basis of marital status.

Managing Risk
To manage compliance risk, we turn to policies and procedures. Consistency in treatment by all lenders comes down to a clear loan policy and good procedures.

Too often, policies are generically written. A policy may state, for example, that "if additional support is needed, the loan officer may suggest a co-signer." A statement such as this is pretty vague. It doesn't specify when or why additional support is needed. (Hopefully, this instruction precedes such a statement.) It leaves the choice of denial or additional requests to the lender. Finally, it appears to leave open how the loan officer can suggest a co-signer. A statement this vague will lead to violations of Regulation B because it fails to give adequate guidance.

To ensure compliance with Regulation B and all the fair lending laws, your procedures should contain enough specificity to guide lenders through the variety of choices that they will face with different applicant situations.

Several items are essential. Your loan policy should include an explicit statement about guarantors on loans. The policy should clearly state that all owners of a company must be personally liable on the loan. Alternatively, you may require that all owners or all officers of a company guarantee the loan. Be sure to clarify what constitutes ownership. Define what an officer is.

Next, set clear standards for documentation about ownership or officers that should be part of the loan file. For example, you may want to have copies of corporate certificates in the file. Alternatively, or in addition, you could require a corporate resolution authorizing the borrowing. Another indicator of ownership would be stock ownership. If a partnership, the partnership agreement should specify ownership. Documents such as these, together with a clear loan policy, would demonstrate the reason for the signature.

This documentation should be a fundamental part of making a loan. The documentation also ensures that the lender has good evidence of the legal status of the borrower - to say nothing of being essential for your Customer Identification Program.

What constitutes proof?
A signed application - dated on the application, not at closing - is the best proof. However, using a signed application is not required by the regulation. And lenders should realize that application forms signed at closing will not be accepted as proof of the co-signer's willingness when such a document can just as easily be used to show coercion.

Probably the most significant and meaningful proof is the routine documentation that should occur while the application is being processed. Documents that establish the legal nature of the company making application or the identification of the consumer should be a part of the loan file.

Next, the file should include documentation of the loan officer's analysis. Ideally, a loan file should show when and how the loan officer or underwriter came to the conclusion that the application needed additional support in order to be approved. And then the file should show how this was communicated to the applicant.

Finally, the file should show when and how the request for additional support was made. It is probably worth noting whether the request for corporate officers' guarantees was routine as directed by policy, or was generated by concerns about the adequacy of support for the loan application.

Regulation B requires that information used in considering the application be retained. This includes any correspondence with applicants and any persons who may sign or guarantee the loan. Lenders should make and keep copies of all communications regarding who will sign. This includes letters on official stationary, notes to the file, and copies of phone messages. All play a role in establishing when and how communication occurred.

ACTION STEPS

Review your loan policy and procedures for guidance on guarantors and co-signers. Determine whether it is sufficiently specific.
Now review some loan files. Be sure to sample loan types where problems may occur, such as small business loans and car loans. Evaluate whether lenders are following policy.
Next, look at the loan documentation in commercial loan files and determine whether it establishes ownership, legal status of the borrower, and authorization to borrow.
Consider whether all signers and guarantors are supported by adequate documentation or proof.
If you found any problems, use these as examples in your next round of training. Remember to include solutions along with flagging the problems.