I posted this but need to change the situation based on additional info rec'd. Bank has an indirect auto lending area. When a dealership submits an ap on an individual with bad credit, there is always a co-applicant.

What do you think of a bank, for indirect auto loans only, requiring that co-applicants be either a relative or a member of the same household. If they live in the same house, the bank doesn't care if they are related, married, anything.

The problems arise when one of these people, usually the one who will actually be driving the car, is out of our market area or subsequently leaves our market area. The loan goes into default. The car is off in the hinterlands.

The car will be titled how ever they request it to be titled..could just be one borrower on the title. I would really prefer that these come in as co-signers, but the dealers are sending them in as co-aps.

The lenders feel the dealers advise the bad credit guy to just get someone with good credit to sign with them....there is no "notice to co-signer" because the application comes in from both.

I am struggling to come up with some ways to address the issue while complying with fair lending. I don't see why we would make a car loan to someone out of our market area. Perhaps we can limit that and eliminate part of the problem.

I am open to thoughts and suggestions.

The thing that crops up in my mind is that you don't leave room for all co-signers that might be out there. For instance, lets give me horrible credit. (well ok don't) I'd like to buy a new car and have all the other positives, income, etc. but I have to overcome the credit issue. I could have my significant other of many years sign with me. He would of course have perfect credit. (I should switch this around ) We don't live together all of the time, he maintains two homes and I maintain one, but if he's willing to sign, you'd want him as you could lean on him for the money in the long run if I scoot off with the car. Sure he isn't happy about it, but you have the legal recourse as he chose to do it in the first place.

If you're doing collateral loans, I guess you worry about where the car is going, but normally it's credit you lend on. If the second signer is strong but the car hops away...they still are a viable source of repayment. If you chose not to let me apply because I haven't married the guy or don't live with him...it feels a bit prejudice to me

That is where I keep ending up...it makes me uncomfortable. I would feel better making the loan and having a good borrower on the hook whether they like it or not. They were willing to sign!

Our bank is a heavy indirect lender with a moderately small lending area. We have addressed the problem you're describing with a policy that all borrowers, be they co-borrowers or co-signers, must have good credit. (This policy applies also to married people applying together, of course.) We do not allow "bad" credit to be mitigated by a cosigner. One consequence of such a policy is that we don't end up with the driver of the car, who would be the one with bad credit in your scenario, driving off to the hinterlands, as you put it, leaving the bank stuck with trying to collect from the good guy who consented to cosign but didn't really know what he/she was getting into.

Plus there is the issue of Reg B and can you require a specific co-signer (or restrict their choices to a certain pool.) I know this has been debated at the regulatory level, with one side saying Reg B says you must leave the choice of the co-signer completely up to the applicant, and the other side saying that the specific section referenced refers only to not being able to require the spouse as the signer, but that a bank could require the applicant to draw from another defined pool, as you have suggested. I don't know that that issue has been resolved yet to anyone's satisfaction. You may want to get guidance from counsel if it comes to that.

The "no bad credit allowed" is always an option. It is also a way to keep dealers from putting one past you. It is, of course, less customer friendly but much more safe and sound. If you decide to do this, be sure it is a written policy to avoid ECOA problems.

As for the co-signer limitations, speaking as an old Reg B expert, the regulation itself only prohibits a lender from requiring the spouse as a co-signer. The regulation does not prohibit requiring a family member or that the co-signer be in the same market. I know many examiners have raised concerns that restrictive co-signer policies could have a discriminatory effect, but that isn't the way the rule works.

Paragraph 7(d)(5)of the Commentary to Regulation B reads as follows:
"Qualifications of additional parties. In establishing guidelines for eligibility of guarantors, cosigners, or similar additional parties, a creditor may restrict the applicant's choice of additional parties but may not discriminate on the basis of sex, marital status or any other prohibited basis. For example, the creditor could require that the additional party live in the creditor's market area."

I agree with Lucy when she says, "The regulation does not prohibit requiring a family member or that the co-signer be in the same market." If you change the policy to, "The co-signer must be a family member AND the co-signer must be in the same market." then you have the potential for national origin discrimination.