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Thursday, August 6, 2015

Spousal Signatures under Equal Credit Opportunity Act

Question
When is a mortgage lender permitted to require a non-borrowing spouse to sign loan documents?

Answer
The Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, prohibits creditors from discriminating against applicants on a number of prohibited bases including marital status. [15 USC § 1691 et seq., 12 CFR § 202]  

Under Regulation B, unless a spouse is a joint applicant, a lender may not require the signature of an applicant’s spouse on any loan document, except any loan document that is reasonably believed to be necessary under applicable state law, if the applicant qualifies for the amount and terms of the credit requested under the mortgage lender’s credit standards. This is the case even if the subject property securing the credit is jointly owned by the applicant’s spouse. [12 CFR § 202.7(d)(1)] 

If the applicant does not qualify under the lender’s credit standards, which may not include a requirement for a spousal guarantee, then the lender may condition approval on the addition of a guarantor or cosigner. However, a lender is not permitted to require that this individual be the applicant’s spouse. [“Common Violations and Hot Topics,” Outlook Live Webinar, July 29, 2015, FRB] 

Generally, this rule applies to all open-end and closed-end, secured and unsecured extensions of consumer credit and business credit. However, there are exceptions.

Taking into account state property laws, a lender may be permitted to require the signature of a non-borrowing spouse on loan documents under three circumstances: 

1) With regard to secured credit transactions, a lender may require a non-borrowing spouse’s signature on any loan document necessary, or which the lender reasonably believes is necessary, to secure the credit under applicable state law and protect the mortgage lender in the event of default. [12 CFR. § 202.7(d)(4)] 

2)  With regard to unsecured credit transactions in community property states, a lender may require a non-borrowing spouse’s signature on any loan document necessary, or which the lender reasonably believes is necessary, to make the community property available under applicable state law to satisfy the debt in the event of default if
a. applicable state law denies the applicant power to manage or control sufficient community property to qualify for the amount of credit requested; and 
b. the applicant does not have sufficient separate property to qualify for the amount of credit requested without regard to community property. [12 CFR § 202.7(d)(3)]
3) Third, with regard to unsecured credit transactions in non-community property states, a lender may require a non-borrowing spouse’s signature on any loan document necessary, or which the lender reasonably believes is necessary, under applicable state law to enable the lender to reach the property relied upon in the event of the applicant’s death or default. [12 CFR § 202.7(d)(2)] 

Michael Barone
Executive Director
Director/Legal & Regulatory Compliance
Lenders Compliance Group