Only using a relative as a co-signer

I recently reviewed a notice of action taken and the lender turned the loan down because "co-signer of no relation to borrower and cannot be used". This seems to state that we only take cosigner that are relatives of the applicant (I know in the past we have taken co-signers that were not relatives). This lender indicated that we should update loan policy to this affect, but I am concerned about possible fair lending violations and dipararte discriminatory impacts. What about borrowers who don't live in the same area as their family, or whose family simply won't co-sign. I agree the relationship should be satisfactory to the bank, but isn't it a problem to state we won't use a co-signer who isn't a relative?

Thank you

Yes. If the co-applicant is qualified, what difference does it make if they are related? This sounds strongly like what you are really saying is you want a 'spouse' as a co-signer.

Check Regulation B Section 202.7, a lender can not tell an applicant who must be a co-signor. If they require a specific co-signor they are in direct violation of Regulation B.

You can't require it to be a spouse. You can develop any other criteria that you want as long as it is not discriminatory, including that the co-signer be of some relation to the primary applicant.

Paragraph 7(d)(5)

1. 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.

My concern about suggestions that it could be limited to a relative is that it could have the effect of being interpreted as "spouse." It could come back and bite a lender in its assets later.

I have been in banks with that specific reguirement and never ran into any problems. Even in one that had signature violations on commercial loans and the consumer policy was never an issue. If you are going to even accept co-signers, you want one with skin in the game and one with some influence over the primary borrower - so I don't see it as an unreasonable policy. You just have to be sure that whoever the co-signer turns out to be, they bring the required credit worthiness with them to support the original request - be it spouse or other related party.

Requiring a relative gives me pause. It does smack of trying to get to the spouse.

I don't agree. To make that assumption you would also have to assume the borrower even had a spouse.

Well of course, I meant if there is one. I'm jaded these days on this topic having reviewed several problem processes very recently.

What if you had a couple co-habitating that was requesting a loan. Would you deny the loan because they were not related? You would be discriminating against them because they were not married.

Thank you all for your responses! I'm not comfortable at all with this policy because it definitely opens the door to Reg B issues, and I appreciate all of the input.

If the spouse was able to bring something new to the transaction (income, assets, etc.) that the other spouse did not have access too, then they are most likely going to bring their spouse into the game anyway - I guess I am having a hard time seeing how having the policy read one way or the other makes any difference.

Regarding the co-habitation question - there is no marital discrimination - it is based on relationship to the borrower and has nothing to do if they are married or not.

If you allow marriage to establish relationship, and you do not allow unrelated co-habitants to co-sign, then it looks to me that you are likely to discriminate based on marital status.
An unmarried couple live in the same house…no co-singer permitted they are not related…They get married, they are now related, co-signer permitted. If you change how you treat them simply on the basis of a marital status (which is the only difference in this example)…How is this not discrimination based on marital status?
I think having a relationship requirement will lead to discrimination based on marriage as marriage effects relationship.

I co-habitated with various guys over the course of my life and I can tell you there was no relationship between us. I don't see that co-habitation equates to relationship. You would not be treating the applicant any different based on marital status - only adding possibly one other person that would qualify as a co-signer.

Regarding the co-habitation question:

Don't confuse applying for joint credit with the lender requiring a co-signer to qualify the loan.

You most definitely cannot treat joint applicants differently based on marital status but as Randy previously cited from the regulation for co-signers and/or guarantors you can be more restrictive in who you accept.

You also need to use a bit of common sense. Based on the length of co-habitation it could be feasible to make an exception.

Now with that said I personally don't' see the rationale limiting the co-signer to a relative. I rather have a strong non relative then a mediocre 4th cousin as a co-signer.

If you limit it to "immediate" family then you will have to designate what constitutes "immediate family". Once you do that then you most likely are walking a very thin line in designating who the co-signer must be, such as the father, mother, sibling, or grandparent.

Dan your point is well taken. I also don't see the point of the relation requirement.

As long as there is adequate consideration, I see no reason to limit to immediate family. A very close friend can have the same interest in helping (the consideration) as a family member.

I don't like to see too many restrictions on this because so many banks do still try to "require" the spouse by hook or by crook. I had someone recently tell me that the way to do that is to just reject everyone proposed until the spouse is offered.

Regarding spousal requirements -

to put in a perspective on training - what happens if a person is trying to take out a loan (excluding one with joint ownership of collateral) to get away from a bad marital situation, and the loan officer says "well, we can't do this without your spouse signing."

Sort of kills the hopes of getting money.