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#2198266 - 11/15/18 02:10 PM UDAAP Notice to Co-Signers
Harambe Offline
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Joined: Jul 2016
Posts: 32
Good Morning,

I have a co-signer/UDAAP question that I am hoping you might be able to assist me with. 16 CFR 444.3(c) Unfair or Deceptive Co-Signer Practices states that "To prevent these unfair or deceptive acts or practices, a disclosure, consisting of a separate document that shall contain the following statement and no other, shall be given to the cosigner prior to becoming obligated"

To me the above indicates that we need to provide the co-signer notice on a separate document. Currently we provide it at the bottom of the promissory note. Should I tell out loan operations department that this notice needs to be separated, and provided on a separate document, or am I over thinking it?

Thank you very much for your help, it is greatly appreciated.

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#2198314 - 11/15/18 05:56 PM Re: UDAAP Notice to Co-Signers Harambe
burke116 Offline
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RVA
I thought that requirement was repealed with AA.

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#2198418 - 11/16/18 12:59 PM Re: UDAAP Notice to Co-Signers Harambe
Adam Witmer Offline
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burke116: While the requirement was technically removed with the repeal of Regulation AA, it is still a good idea to give it.
The agencies actually said this in 2014 here: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20140822a2.pdf

From the interagency statement:
The Agencies believe that, depending on the facts and circumstances, if banks, savings associations, and Federal credit unions engage in the unfair or deceptive practices described in these former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act.11 The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.

Then, footnote 11 states this:
11 The Agencies note that the FTC’s Credit Practices Rule requires—and the former credit practices rules applicable
to banks, savings associations, and Federal credit unions required—creditors to provide a “Notice to Cosigner”
explaining the cosigner’s obligations and his or her liability if the borrower fails to pay. The Agencies believe that
creditors have properly disclosed a cosigner’s liability if, prior to obligation, they continue to provide a “Notice to
Cosigner.
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Adam Witmer, CRCM

All statements are my opinion, not those of my employer, and should not be taken as legal advice.
www.compliancecohort.com

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#2198420 - 11/16/18 01:13 PM Re: UDAAP Notice to Co-Signers Harambe
Adam Witmer Offline
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Originally Posted By Harambe
Currently we provide it at the bottom of the promissory note.


Many of bank's I have reviewed over the years include the co-signer notice directly on the promissory note with a place for a separate signature/initials relating to the co-signer notice. The trick is that the notice should technically be signed before they become obligated, so placing it at the bottom of the note (after the note signature line) could be problematic. Some vendors place it before the note signature line. Though there is not currently an implementing regulation (see my last post), Regulation AA used to say it was acceptable either as a separate document or on the note: " The disclosure statement shall be substantially similar to the following statement and shall either be a separate document or included in the documents evidencing the consumer credit obligation."

That said, I also believe that some states require that the notice be a separate document, so you will want to check state law.
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Adam Witmer, CRCM

All statements are my opinion, not those of my employer, and should not be taken as legal advice.
www.compliancecohort.com

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#2257915 - 08/09/21 07:57 PM Re: UDAAP Notice to Co-Signers Harambe
Compliance NABW Offline
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Does an examiner get to define what a co-signer is vs. a co-borrower? If a bank has determined that a person is a co-borrower, because they made the person primarily liable for the debt, could they be taken to task for not providing this FTC co-signer notice? Can a person be a co-borrower, but not own the asset securing a loan? My understanding previously was that this is more of a legal issue and comes down to the note. If the person is made directly liable, I don't see how it matters whether they have ownership in the asset or not.

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#2257917 - 08/09/21 08:03 PM Re: UDAAP Notice to Co-Signers Harambe
rlcarey Offline
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Galveston, TX
If they receive no benefit from the transaction, they are a co-signor, regardless of how they are obligated on the loan. So if son and dad are on the loan for the purchase of a car and son is the only one on the car title, dad is a co-signer.

Any natural person who assumes liability for the obligation of a consumer (including, for example, a surety, guarantor, or other accommodation party), and who does so without receiving goods, services, or money in return for the obligation, or, in the case of open-end credit, without receiving the contractual right to obtain extensions of credit on the account, would be considered a cosigner for purposes of the rule.
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#2257923 - 08/09/21 08:26 PM Re: UDAAP Notice to Co-Signers Harambe
Dan Persfull Offline
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To expand on Randy's definition:

(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.
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#2257964 - 08/10/21 04:08 PM Re: UDAAP Notice to Co-Signers Harambe
Compliance NABW Offline
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I just don't get why it makes a difference that the person receives goods. If they are directly liable on the note as part of a joint application, then they are a co-borrower. I would understand a co-signer to be liable, but that would kick in when the borrower fails to uphold the payments. What makes a co-signer different from a guarantor? For HMDA, you report on a co-applicant, but not a guarantor. If they are applying for joint credit, I don't get why they would not be a co-applicant/co-borrower.

Assuming there is this specific categorization of co-signer though, based on Reg. AA no longer being in existence, is this notice a required document for Banks? Based on what Adam mentioned above, it would not seem to be so. Couldn't one argue that if they treated the co-signer as a co-borrower by making them directly liable as a joint applicant that the creditor was transparent about the person's liability obligations. In other words, even though a notice may not have been provided, wasn't the intent of the Regulation met (that the creditor is not deceptive)?

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#2257974 - 08/10/21 05:42 PM Re: UDAAP Notice to Co-Signers Harambe
Dan Persfull Offline
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is this notice a required document for Banks

Technically no with the repeal of Reg. AA . But you have the UDAP to worry about per the above cite provided by Adam.

If the examiners review your loan files and there are a few of them where the "co-borrower" was required as a underwriting condition and the co-signer notice was not provided then you are going to face potential UDAP charges.

What makes a co-signer different from a guarantor?

Co-signers are signatories on the note and are directly liable for the debt. You can collect from them without first trying to collect from the primary borrower.

Guarantors sign a guaranty document and are secondarily liable on the the debt. Generally you can not collect from them until you exhausted your collection efforts against the primary borrower.
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#2258063 - 08/11/21 05:13 PM Re: UDAAP Notice to Co-Signers Harambe
Compliance NABW Offline
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Thank you Dan for the explanation between the guarantor and the co-signer. Under that explanation, the co-signer basically sounds like a co-borrower. So, the only distinguishing thing with the co-signer vs. the co-borrower is that a co-borrower has some sort of stake in the asset/goods/services? Does this same concept apply to commercial loans?

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#2258064 - 08/11/21 05:17 PM Re: UDAAP Notice to Co-Signers Dan Persfull
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[If the examiners review your loan files and there are a few of them where the "co-borrower" was required as a underwriting condition and the co-signer notice was not provided then you are going to face potential UDAP charges.]

I mean if they are treated as a co-borrower, I don't see where UDAP comes in. When the note itself directly has their name on it, is not the note informing them of their liability in regard to the extension of credit?
Last edited by Compliance NABW; 08/11/21 05:17 PM.
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#2258065 - 08/11/21 05:21 PM Re: UDAAP Notice to Co-Signers Harambe
Compliance NABW Offline
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Notice to Cosigner

You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for the debt.

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#2258067 - 08/11/21 05:38 PM Re: UDAAP Notice to Co-Signers Harambe
Inspector Offline
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The notice is designed to alleviate the concerns related to misrepresenting a co-signors obligations. I don't think it would be a UDAP violation purely because the notice was not included but it would open the door to UDAP claims if there is any ambiguity in process or disclosures.
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#2258192 - 08/13/21 01:56 PM Re: UDAAP Notice to Co-Signers Harambe
Dan Persfull Offline
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Bloomington, IN
I don't think it would be a UDAP violation purely because the notice was not included

In my opinion that would depend how many "co-borrowers" were found in the exam that were "co-borrowers" as a condition for making the loan where joint intent was not clearly established at the time of application.

If the "co-borrower" meets the definition of a co-signer then they are co-signers regardless how they are designated by the financial institution.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#2258195 - 08/13/21 02:25 PM Re: UDAAP Notice to Co-Signers Harambe
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
Does this same concept apply to commercial loans?

Reg. AA was a consumer regulation. For commercial loans you need to look to Reg. B 1002.7(d) and its Staff Interpretation.
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