Regulation B and Guarantors as Joint Applicants

Issue/Inquiry

The Bank does not have a commercial loan application form and uses a Notice of Joint Applicants to verify that joint applicants for a commercial loan intend to be jointly liable for the loan. If it receives a credit application from a limited liability company with two individuals who will be guarantors, does it have to give the guarantors the Notice of Joint Applicants?

Response Summary

The individuals being offered as guarantors for the loan to the limited liability company will be considered applicants under Regulation B, since an “applicant” is any person who will be contractually liable for credit. This includes guarantors. Since Regulation B requires joint applicants to evidence their intent to be jointly liable for the credit, the individuals will have to be provided with the Notice of Joint Applicants.

Response Detail

The requirement for joint applicants to affirm their intent to apply for joint credit is established by the official commentary to Regulation B, as follows:

Evidence of joint application. A person's intent to be a joint applicant must be evidenced at the time of application. Signatures on a promissory note may not be used to show intent to apply for joint credit. On the other hand, signatures or initials on a credit application affirming applicants' intent to apply for joint credit may be used to establish intent to apply for joint credit. (See Appendix B). The method used to establish intent must be distinct from the means used by individuals to affirm the accuracy of information. For example, signatures on a joint financial statement affirming the veracity of information are not sufficient to establish intent to apply for joint credit. Official Interpretations, 7(d)(1)-3.

Under Regulation B, an “applicant” is:

[A]ny person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit. For purposes of §1002.7(d), the term includes guarantors, sureties, endorsers, and similar parties. 12 CFR §1002.2(d).

With respect to the term “credit,” the Official Interpretations provide as follows:

Regulation B covers a wider range of credit transactions than Regulation Z (Truth in Lending). Under Regulation B, a transaction is credit if there is a right to defer payment of a debt—regardless of whether the credit is for personal or commercial purposes, the number of installments required for repayment, or whether the transaction is subject to a finance charge. Official Interpretations, 2(j)-1.

The requirement for evidence of joint application, therefore, pertains to credit for personal or commercial purposes.

If the limited liability company was applying for credit and two members of the company were signing the application in their capacity as members, the limited liability company would be the only applicant. Since the individuals would be signing only as members and would not be personally liable for the credit, they would not be required to affirm their intention to be jointly liable.

In this case, however, the limited liability company is applying for credit with the two individuals signing the application in their capacity as members, but also offering themselves as guarantors for the credit, As noted, an “applicant” includes anyone who is or may become contractually liable for the credit, including guarantors, sureties, endorsers, or similar parties. Since the two individuals will be jointly liable for the credit as guarantors, they will be required to affirm their intention to assume such liability.

The Bank uses a separate “Notice of Intention” for joint applicants for commercial loans, because it does not have a commercial loan application form. Many other financial institutions use a separate clause on their application forms to verify the intention of the joint applicants to be jointly liable for the credit requested. The clause will be separately signed or initialed and dated by the joint applicants.

This entry was posted on Monday, May 1st, 2017 at 1:34 pm.