We haven’t talked a lot about the Equal Credit Opportunity Act (ECOA) and its enforcing Regulation B. The basics are that discrimination by creditors on the basis of an applicant’s gender, race, color, religion, national origin, age, marital status or receipt of income under public aid programs are all prohibited under the law. This is Consumer Finance 101. But, why can’t we require that one spouse be the guarantor of his or her spouse’s account? The short answer is because that would be discrimination based upon marital status. The explanation though, gets a little complicated.
Assume that an applicant applies for individual credit in a non-community property state. (I will tell you now that in this hypothetical example, it is not going to matter whether the credit is “secured” or “unsecured.”)
In the hypothetical example above, let’s first assume that the applicant meets the creditworthiness standards of the creditor.
Now, recall that several blogs ago I addressed the distinction among co-makers, cosigners and guarantors. See here.
OK. Now here is the explanation:
First of all, if an applicant meets the creditworthiness standards of the creditor, then no guarantor or cosigner may be required by the creditor. This is a fundamental principle under the ECOA. If a spouse or another party has an interest in the collateral pledged by the debtor in a secured loan, then the spouse or other party may be required to pledge his or her interest in that collateral so that the creditor obtains a perfected security interest in the collateral. However, the creditor may not require that the spouse or third party become obligated on the debt.
Second of all, if an applicant for individual credit does not meet the creditworthiness standards of the creditor, then a guarantor or cosigner may be required by the creditor, but the creditor may not require that such guarantor or cosigner be the spouse of the applicant. And, the creditor may not avoid this restriction by requiring that the applicant change the application to a joint credit application with his or her spouse—that is turning the spouse into a co-maker. Doing either of these actions—(i) conditioning the extension of credit on requiring the spouse to be the cosigner or guarantor, or (ii) requiring that the spouse be a co-maker—constitutes discrimination under the Act.
Having said this, there is nothing wrong with a creditor asking or even suggesting that an applicant who does not meet its creditworthiness standards, ask his or her spouse to be a co-signer or guarantor. However, the creditor may not require that the spouse be such cosigner or guarantor.
If the application for the account (sale or loan) is made jointly to spouses as co-makers, then certainly, the creditor may require that both spouses sign the contract.
And, finally, if the application is taken in a community property state, then the creditor is permitted to inquire about the credit standing of the spouse even when the application is for individual, secured credit and the spouse is not an applicant.
Practice Pointer: Do not require that a cosigner or guarantor be a spouse, and do not even take credit information on an application about the spouse unless the credit is to be extended for a joint account or the applicant resides in a community property state.
Please note: This is the sixty-second blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.