Publications & ResourcesApril/May 2005
Surprise! You’ve Violated Regulation B!
By Michael A. Raskasky, Esq.
The Equal Credit Opportunity Act and Regulation B are frequent sources of confusion for bankers, particularly when dealing with corporate guarantees and spousal signatures. In recent months, bank regulators have increased their scrutiny of spousal guarantees, and many banks have been caught off guard by unexpected violations. This article highlights several significant spousal signature rules, provides examples of unexpected violations, and offers five practical tips to help banks avoid Regulation B problems.
Regulation B has three basic signature rules relevant to corporate guarantees:
If an individual guarantor is creditworthy, the bank may not require the guarantor to get another signature.
If an individual guarantor is not creditworthy, the bank may require another signature, but cannot require the signer to be the guarantor’s spouse.
A bank may require guarantees from all “participants” in a business - partners, directors, officers, shareholders - but if a spouse is not a participant, the bank may not require the signature of that spouse.
At first blush, these rules may seem simple, but the following examples may yield a few surprises.
Suppose that Sally is the president of Modernco, Inc. Sally’s husband Fred serves as the company’s vice president. The company obtains a loan from your bank. The loan officer requires both Sally and Fred to sign continuing guarantees for the company’s debt. Months later, Fred retires from the company. Shortly thereafter, the company obtains a second loan from your bank. The loan officer relies upon the existing continuing guarantees of Sally and Fred. Has your bank violated Regulation B?
The answer is yes. Since Sally and Fred were both officers with the company, both Sally and Fred can sign guarantees for the first loan. However, the bank cannot require Fred to guaranty the second loan, since he is no longer involved with the company. Fred’s guarantee is invalid as to any loan made after his retirement.
In another example, suppose Bob is the sole shareholder of Newco, Inc. Bob is married to Sue, who has no involvement with the company. Newco obtains a loan from your bank. Bob is not creditworthy, so the loan officer asks for an additional guarantor. Bob suggests Sue. Bob and Sue then voluntarily sign continuing guarantees. Has your bank violated Regulation B?
The answer, perhaps surprisingly, is yes. The bank’s request for Bob’s signature was proper, since he is the sole shareholder. Likewise, the bank’s acceptance of Sue’s signature was proper, since the bank did not require Sue to be the signer. Instead, the violation rests with the continuing guarantee. Since Sue does not participate in Newco, there is no permissible basis for requiring her to guarantee all future Newco loans. The loan officer should have used a guarantee tied only to this particular loan.
Finally, suppose Ted and Ned are equal shareholders of Oldco, Inc. Alice and Barbara are vice presidents with the company. Alice is married to Ted. The company obtains a loan from your bank. The loan officer requires Ted, Ned and Alice to sign continuing guarantees. Has your bank violated Regulation B?
Again, the answer is yes. The bank could require both Ted and Ned to sign guarantees, since they are shareholders. Likewise, the bank could require Alice to sign a guarantee since she is an officer. The violation occurred because the bank did not require Barbara to sign a guarantee. By requiring only Alice to sign, it appears that the bank discriminated against Ted and Alice based upon their marital status. The loan officer should have required Barbara to sign a guarantee as well.
So what should a bank do to prevent surprise violations such as these? Here are five practical tips:
Adopt and implement a Spousal Signature Policy
A well-written policy, if properly followed, will reduce the risk of inadvertent Regulation B violations.
ALWAYS document in your loan files the specific reasons for obtaining a spousal signature
In the absence of such documentation, the bank will have no way to prove that a spousal signature was proper.
Evaluate each loan separately to determine whether to request a spousal signature
A continuing spousal guarantee of one loan might not be appropriate for future loans to the same company, particularly where a spouse resigns from the company.
Never require a non-participating spouse to sign a continuing guaranty
Use a guarantee that is tied solely to the loan at issue.
Treat corporate officers the same
Beware of situations where only married officers are required to sign a guarantee.
Implementing these practical tips should help banks avoid surprise violations of Regulation B.
Michael A. Raskasky is a shareholder with Graham & Dunn, PC in Seattle. His practice emphasizes regulatory, operations and corporate matters affecting banks and other financial institutions. You may contact him at (206) 340-9623 or firstname.lastname@example.org.
Unauthorized reproduction of all or part of this material without the express written consent of the author is strictly prohibited. All rights reserved.