Bank receives consumer loan application (for auto loan) through an indirect lending platform with an applicant and co-applicant, and "co-applicant type" field of the application is listed as "spouse", but the primary applicant and co-applicant have different surnames and reside at separate addresses. Typically this is questioned by the bank to the auto dealer, and in some instances they may tell us the individuals are engaged and in other scenarios we don't hear anything back from the dealer, so we structure it more like a co-signer deal. Is this the correct thing to do? or how should these types of scenarios be handled? Can/should marital status even be considered?

(b) Specific rules concerning use of information. (1) Except as provided in the Act and this part, a creditor shall not take a prohibited basis into account in any system of evaluating the creditworthiness of applicants.

(8) Marital status. Except as otherwise permitted or required by law, a creditor shall evaluate married and unmarried applicants by the same standards; and in evaluating joint applicants, a creditor shall not treat applicants differently based on the existence, absence, or likelihood of a marital relationship between the parties.

If you're telling non-married co-applicants that they can't be co-borrowers, but that one must be a co-signer instead, then yes, i think you have an issue.

Under ECOA (Reg B) you cannot consider marital status when making a credit decision. Section 1002.6.
https://www.bankersonline.com/regulations/12-1002-006

Where state law impacts the potential loan, such as where state law gives a non-borrowing spouse ownership interest in real estate being purchased, then considering the marital status is allowed. But unless your state has similar laws about automobile ownership, then there's no reason to go down that road for a car loan. And again....telling someone who is otherwise qualified that they can't be a co-borrower isn't kosher.

Oh wow- been there done that - we had to do a 10,000 file indirect dealer application review after the Fed examiner quizzed one of our indirect underwriters. This was going on without anyone's knowledge in compliance. If you have two applicants - you have two applicants - if you change that for any reason all "you know what" is going to come down raining on your head.

How is the collateral titled? If in both names, then wouldn't it be co-applicants/borrowers. If the collateral is in one name, then a co-signor.

Rocky - maybe if you want to deliver a co-signer notice - but that is as far as that goes. Joint applicants are joint applicants under Regulation B. You do not get to make the determination what they are. .

Randy, although repealed in 2016, I had the definition of co-signor from Reg AA in mind. Thanks

(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.

What about a situation where a deal is submitted as a co-signer deal, but the individual qualifies for the credit themselves, and appears to be adding a "co-signer" merely for a lower rate. Can we tell them this doesn't qualify as s "co-signer deal" under our program and have them re-submit as individual credit? Or is this a no-no as well?

Rocky - with the repeal of Reg. AA it is likely still required under Section 5 of the FTC Act in most instances and Sections 1031 and 1036 of the Dodd-Frank Act.

TC - How in the world does a co-signed loan qualify for a lower rate? You get a co-signer to try and mitigate a higher credit risk. They are underwritten separately.

Our co-signer program is designed for applicants with limited/no credit, not derogatory credit. Here is the scenario where a co-signer deal would qualify for a lower rate. An applicant has a 650 credits score (with some credit), and submits application with a co-signer, who has an 800 credit score. We price loans using the highest credit score.

How and why - the co-signor is not technically an applicant. Why would you price a loan based on the co-signer? I have never seen that before. The loan is not to them and they are nothing more than a secondary source of repayment.

Do you inform all applicants with a 650 credit score that if they bring in a well qualified co-signer they could get a lower rate?

In some situations the applicant doesn't have a credit score, so the only score we have is that of the co-signer, so that is what we use to price the loan.

The basic rule about requiring a co-signer or guarantor, is determining if the applicant meet's the bank's definition of creditworthy. Correct? If the applicant does, then the bank can never require a co-signer or guarantor. So if we have a qualified individual who presents an application with a co-signer, and we approve/originate the loan as such, do we need to document that the borrower voluntarily brought the co-signer to the table, so it doesn't appear as though we required it?

I would think so, especially if you are giving these people price breaks based on the co-signer, if you choose to allow it at all - and then you have to ask yourself, what demographics are more likely to bring to co-signer when they are already qualified on their own and ask yourself if this presents fair lending issues. Personally, while I am not saying that you definitely have problems, I think your whole underwriting and pricing process needs to be thoroughly reviewed.