All About the Equal Credit Opportunity Act (ECOA) – Joint Intent Rule
By Ken Simmons, Managing Director, SEDA Experts LLC
Many of us have buyer’s remorse and return items we just regret purchasing. People also have “credit” remorse as well. We obtain a credit card to purchase a particular gift; only to discover our significant other is no longer “significant”. Fortunately, you can return that diamond ring.
We are not always that lucky, other types of remorse cannot be rectified that easily. People agree to sign loan agreements as a “joint” applicant; or pledge collateral on a loan for someone they “love” to pursue their DREAM. Our spouses want to open a fish farm, buy fainting goats or start-up a recycled “fork” company. These seem like wonderful ideas when things are going well.
When things go wrong in their personal relationships; people want to return their loan or be removed from a credit (kind of like a Christmas return). Customers may feel the bank should allow them to be released from a credit contract because their personal relationship went bad. Others have buyer’s remorse for the fainting goat farm or pledging collateral on ”that” debt. Unfortunately, banks cannot just release people or collateral from a debt.
ECOA Joint intent rules provide security for banks against buyer’s remorse claims. The rule also provides consumers with confidence they understand their obligation in loan and collateral commitments.
What is required?
Banks are required to confirm (all) applicants applying for joint credit understand they are doing so. This confirmation (separate from signing the application) protects the bank from lawyers claiming the co-applicant did not understand what they were signing; and protects the customers by making sure they understand what they are signing.
While we would like to believe people understand their purpose for ‘attending” a meeting or signing a document…. Often Spouses and other “trusted” people ask us to sign documents we may not understand; and “we” sign documents without asking questions. Banks must ensure our customers understand the loan process.
When is this required?
Joint applicants must confirm their intent to apply for joint credit; anytime a lender has multiple applicants (two people, a person and a business, or two businesses) applying for joint credit.
Joint intent is an “at application” requirement. It is difficult for a consumer to WALK-AWAY from a contract at closing. Humility and embarrassment are elevated once the loan request is processed.
How is this accomplished?
The Bank must have the “joint”/ multiple applicants sign a disclosure or many times the application includes a separate statement requiring the applicant’s signatures (at time of applying for credit). The joint intent acknowledgment is separate from the applicant’s confirmation of the information (on the application) is correct.
Joint intent acknowledgment may be obtained verbally by the lender when applications are taken by phone. The lender must read the disclosure and document the customer’s confirmation on the application. The lender should write: “Read disclosure, customer confirmed joint intent by phone”.
Requiring Joint Debtors, Co-Signors, and Guarantors
Credit and collateral risk are significant to financial institutions. If the debtor does not meet their credit obligations; the collateral provides a second layer of protection for the bank. When a business applies for credit, financial institutions often require the owners, executives and board members to execute loan documents.
What is permitted?
According to ECOA, the bank may require a joint applicant, co-maker or guarantor to help secure the debt will be repaid. The applicant has the responsibility to provide the additional debtor.
What is prohibited?
Banks may not REQUIRE a “spouse” to serve as a co-maker, joint applicant or guarantor. The only exception to this is when the “spouse” is an owner, director or executive management of the business applying for credit (they have an investment in the business).
What else is prohibited?
In general, banks may not REQUIRE a joint applicant or guarantor (WHEN) the applicant is worthy to obtain credit on their own.
Why is this?
In the early 1900’s, women were not permitted to obtain credit. In the mid-1900’s, women were not provided credit opportunities without their husband serving as a co-signor. As late as the 1980’s, there are cases of lenders requiring spouses to serve as joint applicants or approve their spouse to receive credit.
What is the risk?
Even in the past two decades, Financial institutions have had to release “spouses” from business obligations because the “spouse” did not have ownership interest or hold a management position within the business. Spouses have also been released from personal credit agreements based on the same premise.
Underwriting and ECOA
Regulation B strictly prohibits banks from treating applicants differently based on marital status.
Commentary to this regulation states: Creditors must evaluate married and unmarried applicants by the same standards; and in evaluating joint applicants, a creditor shall not treat applicants differently based on the existence, absence, or likelihood of a marital relationship between the parties.
Lenders must not grant exceptions to the bank's credit and debt-to-income requirements for married/ joint applicants; but follow more stringent underwriting standards for unmarried/ individual applicants.
What does this mean for the bank?
Lenders may not allow their own personal feelings come into play when evaluating credit requests. You may believe an applicant’s creditworthiness and ability to repay would be stronger (if they were married) or (if they weren’t married). You may believe the credit would be stronger with a spouse or a joint signor. However, the credit request must be evaluated based on the conditions it is submitted to the bank. When the applicant applies for individual credit, underwrite the request that way. When applying for joint credit (the same applies). If you believe they need a co-signor, advise them of such. Just don’t require the co-signor to be their spouse.
Right to Receive a Copy of Appraisal Notices
Since 2010, ECOA has provided guarantees applicants will receive copies of appraisals and “other valuations”. The CFPB dictates Disclosure and Delivery Requirements for these documents.
Before the new rule, Consumers made claims that Banks had information (contained in Appraisals) that would have caused them to cancel credit transactions. These claims included facts like:
Sales prices exceeded property values; or
Unsatisfactory conditions of the property were not disclosed.
Previously creditors only had to provided copies of appraisals upon request and notify them of their right to make a request. But, who actually reads loan documents?
The ECOA Valuations Rule changed both of these requirements. Now, Creditors are required to disclose to applicants that they have the right to receive copies of appraisals and written valuations. The rule also requires creditors to automatically send a free copy of home appraisals and other written valuations promptly after they are prepared, regardless of whether credit is extended, denied, incomplete, or withdrawn. The customer is not required to “ask” for the documents either.
What transactions does this rule apply to?
The rule applies to all written valuations (not just appraisals) that you develop in connection with an application for covered transactions. It covers all first liens on dwellings, including closed-end mortgage loans and open-end loans. Transactions that apply to the ECOA Valuations Rule include:
When you receive an applicant’s application, you have three business days to notify the applicant of the right to receive a copy of appraisals.
You must promptly share copies of appraisals and other written valuations with the applicant.
Promptly means promptly upon completion, or at least three business days before consummation (for closed-end credit) or account opening (for open-end credit), whichever is earlier.
The applicant can waive the right to receive copies of the appraisal or other written valuations in advance of the document’s being provided.
If you do not consummate the loan or open the account and the applicant has provided a waiver, you have 30 days after you determine that the loan will not consummate or open to send the applicant a copy of the appraisal and other written valuations.
You cannot charge for copies of appraisals or other written valuations, but you can charge the applicant a reasonable fee to reimburse you for the cost of preparing appraisals and other written valuations unless applicable law prohibits it or otherwise restricts it. You may not upcharge consumers by adding fees to the cost of preparing the appraisal or other written valuations.
What loans are covered by the ECOA Valuations Rule?
The rule covers applications for closed-end or open-end credit secured by a first lien on a dwelling. These include:
Loans for business purposes (for example, a loan to start a business), investment or leisure purposes (such as a vacation home or investment property), or consumer purposes (for example, a loan to purchase a home)
Loss-mitigation transactions, such as loan modifications, short sales, and deed-in-lieu transactions, if they are credit transactions covered by Regulation B
Loans secured by mobile or manufactured homes
Time-share loans if they are credit transactions covered by Regulation B (and if, as in each of the above examples, they are secured by a first lien on a dwelling)
What loans are not covered by the ECOA Valuations Rule?
The ECOA Valuations Rule does not cover second liens and other subordinate loans and loans that are not secured by a dwelling (such as loans secured solely by land).
What is a dwelling?
A dwelling is a residential structure that contains one to four units whether or not that structure is attached to real property. The term includes, but is not limited to, individual condominium units, mobile homes, and manufactured homes.
What counts as an appraisal or other written valuation?
A “valuation” is any estimate of the value of a dwelling developed in connection with an application for credit. Here is a nonexclusive list of valuations:
An appraiser’s report (whether or not the appraiser is licensed or certified), including the estimate or opinion of the property’s value
A document your staff prepares that assigns value to the property
A report approved by a government-sponsored enterprise for describing to the applicant an estimate developed by the enterprise’s proprietary methodology or mechanism
Automated valuation model reports used to estimate the property’s value
A broker price opinion prepared by a real estate broker, agent, or sales person to estimate the property’s value
You must also share with the applicant any attachments or exhibits that are an integrated part of the valuation. Keep in mind that if a valuation is developed in connection with the application, then you must provide a copy to the applicant, even if you do not use the valuation or you use it only for a limited purpose.
What is not considered a valuation?
Not all documents that discuss or restate a property’s value are valuations. Documents that discuss property value but are not valuations include:
Internal documents that merely restate the estimated value of the dwelling contained in an appraisal or other written valuation you are providing to the applicant (for example, an internal email that only mentions the appraised value in the appraiser’s report to be provided to the applicant)
Government agency statements of appraised value that are publicly available
Publicly - available lists of valuations (such as published sales prices or mortgage amounts, tax assessments, and retail price ranges)
Manufacturers’ invoices for manufactured homes
Reports reflecting property inspections that do not provide an estimate or opinion of the value of the property and are not used to develop an estimate or opinion of the value of the property
Kenneth Simmons, with over 30 years of industry experience as Executive Vice President at leading financial institutions, and as Bank Examiner at OCC and FDIC, is a top expert in regulatory compliance, anti-money laundering, bank secrecy act, and financial crimes risk management.
Mr. Simmons is a Review Board Member & Faculty at the Association of Certified Anti-Money Laundering Specialists, and the North & South Metro Atlanta Compliance Roundtable Founder & Chairperson at the Community Bankers Association, and the founder and CEO of Compliance and AML Solutions.