Is all that is needed to obligate co-signers to a commercial loan is to have them sign the promissory note?

No special disclosure requirement? It seems the co-signer notice doesn't apply since the loan is business purpose, correct?

Thanks in advance!

Also another question...

Can we under any circumstances require owners of a business to be co-signers on the note?

bump

Are they a co-borrower or a co-signer? Normally a commercial loan would have a guarantor rather than a co-signer.

Your credit policy should address these issues. Yes, a bank can require owners to co- borrow or guarantee. It must be consistently applied.

The issue for commercial deals is not regulatory but legal - consideration must be there for signers. Again, your policy and documentation procedures should address this.

Reg B comes up in spousal signature issues or other situations where borrowers are treated differently...i.e., all women must have a guarantor or co-signer.

Our credit policy states that for a commercial loan we will require a guarantee from the owners. I find that the lenders use co-signer and guarantor interchangeably. So while we require a guarantor on a commercial loan, the lenders are having the owners co-sign the loan instead of obtaining a guarantee.

I thought that we could only require them to guarantee the loan as a guarantor, but not as a co-signer per Reg B. To be a co-signer on the loan the person would have to apply of their own accord or in the case the applicant didn't qualify for the loan and we require the applicant to provide a co-signer to approve the loan.

Is my understanding too narrow?

Co-sign or guarantee, they are both the same under Regulation B. What docuemnts and how individuals should sign should be determined by your legal counsel.

I'm sorry, I must not be understanding something. I thought that we couldn't require business owners to co-sign a commercial loan and make them personally liable for the debt, but that we could require them to personally guarantee the loan using the appropriate documents.

Please see below:

Commercial Loan with Guarantors
Answer by David Dickinson, BOL Guru
Guru Bios

Question: On a commercial loan with guarantors, why is it best to process the loan using guaranty agreements instead of processing as co-signers or co-borrowers? We have loan officers that insist on processing the loan with the guarantor as a co-signer.

Answer: From a safety and soundness standpoint, it would be better to have a co-borrower/co-signer than a guarantor. Co-borrowers and co-signers are primarily liable for the debit. Guarantors are secondarily liable (meaning, you must exhaust your remedies against the primary borrowers first before you can go after the guarantors).

From a compliance stand point, you can't make anyone liable for a debt unless they apply [see §202.7(d)(1) and (d)(5) of Reg B]. There is a large exception to this rule for business debt. You can require the personal guaranty of partners, directors, officers and shareholders. However, you still can't make them a co-borrower or co-signer, they can only guaranty the debt. Refer to the Commentary to §202.7(d)(6) for more information.

The reason the questions have come up is our attorney is reviewing loan docs produced through ComplianceOne for a commercial loan with two owners that were going to co-sign the loan and the two owners and one spouse that are pledging their homes and additional land.

None of the documents produced include any co-signer language, and the mortgage specifically excludes the grantors of collateral from obligation on the note unless identified as a borrower in the mortgage. Well, they are not borrowers they were co-signers and so are not identified in the mortgage. The attorney doesn't think it note and mortgage will hold up.

Spoke with support at ComplianceOne and they indicated that their is no language for the co-signer because on commercial loans, banks almost always get guarantees instead of co-signers on the loans.

This prompted more research on my part, and I came across the guru answer from David Dickinson that I quoted above.

Having the owners guarantee the loan will fix our loan doc problem.

But ultimately I want to know if we could have required the owners to co-sign the commercial loan or are we limited to personal guarantees? Keeping in mind that the business qualified on its own.

Years ago (and I do mean years) this was referred to where I worked as the owner's endorsing the note. However I believe it's ultimately the same thing. Endorsement was preferred to a guaranty back then (mid 80's).

Here's some more from the FDIC to back up Dave's point:

"In summary, if the applicant (the business in your example) applies for individual credit and meets the creditor's standards for creditworthiness, Regulation B prohibits a creditor from requiring either the additional signature of a cosignor on the credit instrument or a guarantor.

If the applicant does not meet the creditor's credit standards, the creditor can require a co-signor (can't name them) or guarantor (can name officers, directors, etc.) but it cannot require that the cosignor or guarantor be the applicant's spouse."

Here's a a few links including what I've quoted:


D. For more information on requiring signatures, please refer to the following memorandums:

1. Guidance on Avoiding Violations of the Spousal Signature Provisions of Regulation B, FIL-9-2002:
http://www.fdic.gov/news/news/financial/2002/fil0209.html

2. Consumer Compliance Outlook – 4th Quarter 2008:
http://www.philadelphiafed.org/bank-reso...arter/q4_02.cfm

3. Spousal Signature Provisions of Regulation B, FIL 6-2004:
http://www.fdic.gov/news/news/financial/2004/FIL0604.html

Thanks for the response Jerod. Question...

Is it ok, as a part of policy, to always require that an officer, director, etc of a business to be a guarantor on the loan, for crediteven if the business itself qualifies for the credit ? This would be for safety and soundness reasons not credit qualification.