IBA Compliance Connection

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We had an application for a mortgage loan from an applicant whose income does not qualify under the qualified mortgage (QM) standards. His mother’s income would qualify by itself. Can we add the mother as a guarantor, even though she won’t be living in the home securing the loan?

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If the mother signs the loan as a guarantor, you would not be able to consider her income for purposes of a QM or ability-to-repay analysis. Under Regulation Z, a guarantor is not a “consumer,” and consequently her income and assets would not enter the QM or ability-to-repay analysis.

If the mother instead signs the loan as a co-borrower, you would be able to include her income. Regulation Z permits a creditor to consider a joint applicant’s income and assets when performing a QM or ability-to-repay analysis (and a creditor need not consider both applicants’ income and assets if one applicant qualifies by herself). However, you would have to include both the mother and son’s debt obligations in your analysis.

If the mother does agree to sign as a co-borrower, we recommend obtaining a new application from both the mother and son to document that both are joint applicants and providing the mother with a “Notice to Cosigner” under former Regulation AA. 

For resources related to our guidance, please see:

  • Official Commentary, Regulation Z, 12 CFR 1026, Paragraph 2(a)(11), Comment 1 (“Guarantors, endorsers, and sureties are not generally consumers for purposes of the regulation . . . .”)

  • Official Commentary, Regulation Z, 12 CFR 1026, Paragraph 43(c)(2)(i), Comment 5 (“. . . If the income or assets of one applicant are sufficient to support the creditor’s repayment ability determination, the creditor is not required to consider the income or assets of the other applicant. For example, if a husband and wife jointly apply for a loan and the creditor reasonably determines that the wife’s income is sufficient to repay the loan, the creditor is not required to consider the husband’s income.”)

  • Official Commentary, Regulation Z, 12 CFR 1026, Paragraph 43(c)(2)(vi), Comment 2 (“When two or more consumers apply for an extension of credit as joint obligors with primary liability on an obligation, § 1026.43(c)(2)(vi) requires a creditor to consider the debt obligations of all such joint applicants. For example, if a co-applicant is repaying a student loan at the time of underwriting, the creditor complies with § 1026.43(c)(2)(vi) by considering the co-applicant's student loan obligation. If one consumer is merely a surety or guarantor, § 1026.43(c)(2)(vi) does not require a creditor to consider the debt obligations of such surety or guarantor. . . .”)