We require owners, partners, directors, and officers of an entity to guarantee loans made to the entity. If a borrowing entity (Company A) is owned by another entity (Company B), are we violating the Equal Credit Opportunity Act (ECOA) if we require the owner, partners, directors, or officers of Company B to guarantee Company A’s loan without obtaining a joint intent form? Also, if a borrowing entity is owned by an individual’s trust, can we require the trustee to guarantee the loan without obtaining a joint intent form?

We recommend obtaining a joint intent form when requiring personal guarantees from individuals who serve as owners, partners, directors, or officers of a business that is not the loan applicant — unless such guarantees are necessary for the applicant to qualify for the loan. We believe that you may require a trustee’s guarantee as representative of a business applicant’s owner (the trust), but this would be limited to a guarantee as trustee and not necessarily in the trustee’s individual capacity.

Under ECOA and Regulation B, creditors cannot require signatures of persons other than a loan applicant on any credit instrument, unless the applicant does not qualify for credit alone or the other person whose signature is required is a “joint applicant.” However, even if a business applicant is creditworthy, the official interpretations to Regulation B allow creditors to require personal guarantees from an applicant’s partners, directors, or officers, as well as a closely held corporation’s shareholders (provided that the guarantee requirement is not imposed on a prohibited basis). Additionally, a creditor may require personal guarantees if “the personal liability of an additional party is necessary to support the credit requested.”

We do not recommend stretching the official commentary’s logic to the owners, partners, directors, or officers of a second business that is not the loan applicant. For example, in the case of Company A (the loan applicant) and Company B (owner of Company A), we do not believe you could require the personal guarantees of individuals affiliated with Company B who are not partners, directors, or officers of Company A (again, unless such guarantees are necessary for Company A to qualify for the loan).

We do believe that you could require the guarantee of Company B, since Company B is an owner of Company A. Additionally, we believe that you may require guarantees from individuals affiliated with Company B if “necessary to support the credit requested.”

As to a business owned by an individual trust, we believe that you may require a guarantee from the trust — provided that the business is closely-owned (which would be the case if the trust is the sole owner of the business). Consequently, we believe you may require the trustee’s signature on a guarantee as representative of the business applicant’s owner. But again, we would not stretch the logic in Regulation B’s official commentary to require a trustee to sign a personal guarantee in the trustee’s individual capacity, unless you have another valid reason for requiring that individual’s personal guarantee.

For resources related to our guidance, please see:

Regulation B, 12 CFR 1002.7(d)(1) (“Rule for qualified applicant. Except as provided in this paragraph, a creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit.”)

Regulation B, 12 CFR 1002.7(d)(5) (“Additional parties. If, under a creditor’s standards of creditworthiness, the personal liability of an additional party is necessary to support the credit requested, a creditor may request a cosigner, guarantor, endorser, or similar party. . . .”)

Regulation B, Official Interpretations, 12 CFR 1002, Paragraph 7(d)(6), Comment 1 (“Guarantees. A guarantee on an extension of credit is part of a credit transaction and therefore subject to the regulation. A creditor may require the personal guarantee of the partners, directors, or officers of a business, and the shareholders of a closely held corporation, even if the business or corporation is creditworthy. The requirement must be based on the guarantor’s relationship with the business or corporation, however, and not on a prohibited basis. For example, a creditor may not require guarantees only for women-owned or minority-owned businesses. Similarly, a creditor may not require guarantees only of the married officers of a business or the married shareholders of a closely held corporation.”)