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The best intentions: why Reg B errors keep on hurting

Joint signature issues keep plaguing lenders

One of the most common questions I'm asked about bank compliance from colleagues and clients is "What are the most common compliance violations?" 

And, then, of course, "How do you avoid them?"H

Even after all these years (38 years in fact), violations of Regulation B continue to make my list of top compliance violations. One particular aspect of Regulation B on which both Lucy Griffin and I agree as one of the most frequent problem areas in compliance is the failure to have evidence of a person's intent to be a joint applicant at the time of application.

How Reg B says things should work

Regulation B prohibits creditors from requiring the signature of an applicant's spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies for individual credit. Since Regulation B applies to all types of credit, this holds true for both consumer purpose and commercial loans.

When two (or more) people come into a creditor's office and voluntarily fill out and sign a joint credit application, it is reasonably obvious that there is an intent on the part of both parties to apply jointly for the credit. The creditor has not required the signature of the additional party as a condition of approving the loan. The application is made voluntarily by both people.

The Commentary to Regulation B states that "the term ‘joint applicant' refers to someone who applies contemporaneously with the applicant for shared or joint credit." (Reg B Commentary 1002.7(d)(1) - 2) 

If only the real world was that simple and cut-and-dried.

How Reg B works in the real world

Unfortunately, that's not always the scenario of all loan applications. Sometimes you have one person who fills out an application on one day and the second applicant, who is out of town at the moment, comes in to fill out an application several days later. The intent is still to apply jointly for the credit.

How does the bank prove that was the intent of the parties when there are two applications and they have different dates?

What happens if an individual initially applied for a loan and later changed his or her mind and decided to apply jointly with a spouse or other person? 

That scenario also does not fit neatly into the world of Regulation B. According to the Regulation B Commentary, "A person's intent to be a joint applicant must be evidenced at the time of application."  (Reg B Commentary 1002.7(d)(1) - 3)

So, Regulation B does not contemplate someone changing her mind.

It is the creditor that has to prove to the regulator that the creditor complied with Regulation B. The creditor must prove that it did not require the additional signer for a loan in which one of the applicants would have qualified on his or her own. And it must prove it did not require a spouse to sign, due to discrimination based on marital status or gender.

A walk on the commercial side

The problem also surfaces in the commercial loan department, where completed and signed loan applications are not always used.

Often, a loan application is in the form of a financial statement and business proposal, accompanied by tax returns. And, frequently the financial statements and tax returns contain joint information with a spouse of the applicant. Regulation B specifically prohibits a creditor from treating the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit. There has to be a separate and specific evidence of the intent of the parties to apply joint for the credit.

This is one of the common problem areas of Regulation B--the lack of the evidence of the applicants' intent to apply jointly.

Many banks have personal financial statement forms that have a place at the top of the form for the applicants to initial or sign their intent to apply individually or jointly. It's important that the bank verify that the applicants have checked the appropriate box and signed or initialed the space provided. A form with boxes and signature lines that are not completed doesn't help.

If an applicant brings in a previously prepared financial statement that doesn't have the intent boxes, a separate form supplied by the creditor is needed to obtain the required documentation.

It is important that creditors have explicit documentation of applicants' intentions regarding an application. It may be a checked and initialed box, a letter or email from the applicants, a separate form that is signed by the applicants, or some other documentation that satisfies the requirements of Regulation B.

When a promissory note is signed by an applicant and the spouse, and there is no clear evidence that the spouse intended to apply jointly with the applicant, there will be a lot of explaining to do.

Nancy Derr-Castiglione

"Lucy and Nancy’s Common Sense Compliance” is blogged by both Lucy Griffin and Nancy Derr-Castiglione, both ABA Banking Journal contributing editors on compliance. Nancy, a Certified Regulatory Compliance Manager, is owner of D-C Compliance Services, an independent regulatory compliance consulting services business that has provided expertise in compliance training, monitoring, risk assessment, and policies and procedures to financial institutions since 2002. Previously, Nancy held compliance positions with Bank One Corporation and with United Banks of Colorado. In addition to serving as a Contributing Editor of ABA Banking Journal, Nancy has served on the ABA Compliance Executive Committee; National and Graduate Compliance Schools board; conference planning committees, and the Editorial Advisory Board for the ABA Bank Compliance magazine. She can be reached at nancycastiglione@comcast.net

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