A previous loan application with a borrower (let's call them "Borrower A") was initially withdrawn. Borrower A re-applies for a loan with a co-borrower, Borrower B. Borrower B also happens to be A’s ex-spouse! The signature was requested because B is the co-owner of the property and the bank wanted to match the property owners to the borrowing entity. Borrower B was willing to become the co-borrower and subordinate her judgement lien to the bank.

However, the Bank decided not to proceed with the additional co-borrower since Borrower A has sufficient cash flow and decided to internally withdraw the loan to prevent any Reg B issues of:

1. Improperly requiring spousal signatures on loan documents
2. Failing to establish the intent to apply for join credit
3. Improperly taking marital status into account during underwriting

The borrowers were aware of the change and in agreeance with it. Loan was approved without Borrower B.

My thoughts and concerns:

1. In my opinion, this cannot be a withdrawn loan because the borrowers did not expressly state they wanted to no longer continue with the application.
2. I believe it may be a decline because the initial terms of having a co-borrower are being rejected so that we may prevent Reg B issues, but that is not an appropriate denial reason.
3. Unsure if the bank is allowed to not proceed with a loan app/modify it just to prevent a violation.
4. Furthermore, in regards to point 3, we already acquired the ex-spouse’s signature! Is this too late to remedy at this point anyway?
5. Is there even new application in all of this? All information is the same, just minus Borrower B since the bank alerted them to the change. Would that therefore be a "verbal application?"
6. Also, see “ex-spouse” maybe that point alone makes everything I have just typed above moot.


I’d love to get your feedback BO! Thanks in advance.

So the bank specifically requested that Borrower B was added to the loan originally?

Skittles question is a key fair lending issue regardless of the rest. The bank may require a signature of B on collateral docs, but not the Note. That can't be glossed over and based on the question sounds like a Reg B violation in itself.

Reg B:
1. A biggie and a fair lending violation.
2. If B applied with A this was easy to establish. If A just said B would be on it, that's a reason joint intent rules exist. If not obtained, that would be a problem.
3. It seems co-ownership was the issue, not that they were divorced. But if the bank "withdrew" the app for A because A&B were divorced, then it makes 1 above a little worse.

Your thoughts:
1. The bank can't withdraw the applicant(s), but it can approve, deny or counteroffer a request.
2. I don't know what the reason for denial was. It wasn't denied, it was wrongly withdrawn and the reason is not stated.
3. I don't believe the bank avoided a problem, it cast a spotlight on it.
4. If the bank had a signature, was B applying for the loan or not?
5. "Ex-spouse" doesn't impact the potential violations.

At issue I see, did the bank require a signature improperly? Did it fail to get joint intent timely? Did the bank believe it erred and create another problem by "withdrawing" the request instead of making a loan decision?

A may have cashflow, but the issue seemed to be collateral. A new application could be made, but it doesn't change the facts of this app. It would cause me to audit withdrawn apps more.

"The signature was requested because B is the co-owner of the property and the bank wanted to match the property owners to the borrowing entity."

You are going to in a world of hurt if this is your policy. Who owns the property has no bearing on who applies for a loan.

Correct it was to match the title of the trust, the name of the trust changed because they were married during the loan and were divorced prior to maturity. When reapplying the name of the trust changed from "Borrower A Trust", to "Borrower A and Borrower B Trust". The lending side thought they needed to to acquire Borrower B's signature to match the title of the trust.

A trust?? You never mentioned a trust in the original e-mails.

If this is a loan to a revocable trust, then you can ask the grantors to sign individually along with the trustees of the trust to ensure that you have an enforceable obligation in the event the trust is revoked.

This is a totally different scenario than previously painted.

Okay, I reported this issue to my manager and this is what I got back.

See above reply to Skittles for some details regarding why Borrower B's signature was requested.

Below is the information I got from my manager.

I missed this part, but the loan is a renewal. The original term matured and hence the name change of the trust when reapplying. The couple was married during the duration, and Borrower B acquired 50% of the property in the divorce. This is in CA so we are a coop state.

We are not requiring the additional signature for qualification reasons. It was just to match the name of the trust. However the lending side was unaware that Borrower A could be the main (and only) applicant to the newly named trust. The loan ended up being approved with just Borrower A as the applicant.

We considering this a mistake with documentation on the lending side. According to my manager, this could have been a UDAAP issue if we proceeded to let Borrower B sign the loan thinking they had to just because their name was on the trust.

I however do agree with all of the feedback, requesting the signature of Borrower B seems like an issue in itself and some training needs to be administered to the unit. Thanks again all!

"If this is a loan to a revocable trust, then you can ask the grantors to sign individually along with the trustees of the trust to ensure that you have an enforceable obligation in the event the trust is revoked."

Yup, my mistake. I goofed. Thanks for that *facepalm*