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Applicants, Consumers, Co-Signers and Co-Borrowers: Those Pesky Definitions

We receive a lot of calls asking about the status of a party to a loan or loan application and what disclosures must be given to that party. The issue is compounded because in this area, the regulations differ in their definitions.

The first area of confusion is under Regulation AA and what constitutes a cosigner. A cosigner is a natural person who assumes liability for the obligation of a consumer without receiving anything of value from the obligation that the person is assuming liability for. The obligation is one for goods, services, or money for personal, family, or household use other than for the purchase of real property.

Many years ago my son purchased an automobile. The bank making him the loan to purchase the automobile required a cosigner. I was elected. I received nothing of value from the loan; the automobile was put in my son’s name; and I was a cosigner. I did receive some value in that my son no longer had to borrow my car, but that type of incidental value does not count.

A person is a cosigner if he or she becomes liable for a loan to a consumer and the person receives nothing of value for becoming a cosigner. It does not matter what the loan documents call the person or what documents the person signs to become liable for the loan. The person may sign the note and be called a co-borrower. For Regulation AA, purposes the person is a cosigner. Alternatively, the person may sign a guarantee agreement or may endorse the note. In either case, the person is a cosigner. If a person is a cosigner, then, the lender must provide the person the notice to cosigner required by Regulation AA, unless the purpose of the loan in question is to finance the purchase of real property.

A person who pledges collateral for a loan to another person is not a consumer and not a cosigner under Regulation AA because he or she did not become liable for the payment of the underlying debt. However, if the collateral is the principal residence of the person pledging it, then, for the purpose of Regulation Z, and the requirement for disclosures and the notice of right to rescind, the person is a consumer and must be provided those applicable disclosures.

It becomes even more confusing under Regulation B in that a person who is not a borrower but who will be liable for the repayment of a loan could fall within the definition of applicant. Thus, the person who was a cosigner under Regulation AA could become an applicant under Regulation B. Lenders cannot look to the Regulation AA cosigner rule to define who is or isn’t a cosigner for Regulation B purposes. Instead, you need to consider how the applicant’s applied, whether or not they walked in the door together. Generally, if they came in together, they are co-applicants or co-borrowers.

When my son was getting a loan to purchase his car, I knew he would need a cosigner; so, we went into the bank together. Both of us were applicants under Regulation B. As such, we both should sign the notice of intent to apply for joint credit. In most cases, the requirement for a guarantor or cosigner is not identified until after the application is taken and the credit reviewed. In that case, it is not a requirement that a subsequently identified guarantor sign the intent to apply for joint credit notice. But, if the guarantor is identified at the time the application is taken, such as in the case of my son and me, the notice should be signed by both. Also, all of the non-discrimination rules of Regulation B apply to cosigners and guarantors as well as borrowers. You do not have to provide a guarantor a notice of action taken because the regulation only requires you to provide it to the principal borrower, which if you are the guarantor is not you.

Under the Fair Credit Reporting Act and Regulation V, a cosigner is not covered. A cosigner is not entitled to any disclosures or other dispensations. Also, under HMDA and Regulation C, a cosigner is not an applicant and information about a cosigner is not required to be reported.

A clear understanding of the definitions of each regulation is mandatory for an understanding of the regulation and a compliant result. It is a good exercise to go back and read the definition section of each regulation. Often you will find some nuance that you did not see before.
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The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, Partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.