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Can a customer put up their property as collateral on a loan for another customer, but not be on the loan itself? – IBA Compliance Connection

Can a customer put up their property as collateral on a loan for another customer, but not be on the loan itself?

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Yes, one person’s property may be used to secure another person’s loan. Moreover, we are not aware of any law requiring a non-borrower owner of the loan’s collateral to sign the loan agreement or promissory note. However, in the case of a loan secured by someone’s residence, you likely will want the non-borrowing homeowners to sign a homestead waiver — but again, in such case, the non-borrowing parties are not required to sign the loan agreement or promissory note.

For resources related to our guidance, please see:

  • Conveyances Act, 765 ILCS 5/27 (“No deed or other instrument shall be construed as releasing or waiving the right of homestead, unless the same shall contain a clause expressly releasing or waiving such right. And no release or waiver of the right of homestead by the husband or wife shall bind the other spouse unless such other spouse joins in such release or waiver.”)