Colleen Shishido, Loan Manager
Oahu Teachers No. 2 Federal Credit Union
233 S. Vineyard Street
Honolulu, HI 96813
Re: Acceptance of Nonmembers as Joint Applicants
on a Loan
(Your June 6, 1995,
Letter)
Dear Ms. Shishido:
You requested an opinion regarding the ability
of a federal credit union (FCU) to permit nonmembers to participate in
loans to members. We apologize for the delay in our response.
Section 107(5) of the FCU Act (Act), 12 U.S.C.
§1757(5), only authorizes an FCU to make loans to its members. Nonmembers
can participate in loans as long as their involvement does not distort
the direct lending relationship between the FCU and the member.*
If the nonmember directly receives the use or benefit of the loan
proceeds, they would be an impermissible participant and the loan would
violate the Act.
Potential loans with nonmember involvement must
be analyzed to determine whether they would violate Section 107(5) of
the Act. Some of the elements that an FCU must consider in its analysis
include, the loan size in relationship to the member’s income and existing
debts, who is pledging the collateral, who is the primary obligor, and
who has use and benefit of the loan proceeds.
You stated in your letter that you “would like
to consider all joint applicants as joint applicants”; . . . “[j]oint
applicants who are not members, cannot apply for a loan on
their own.” (Emphasis added). Your statement reflects a misunderstanding
that a nonmember can obtain a loan as a joint applicant with an FCU member.
This is not correct. There is no authority for an FCU to make nonmember
loans. As discussed herein, the nonmember’s participation is to assist
the member in securing the loan. Any benefits to the nonmember must be
incidental.
You have requested our comments on two examples.
In each example, a member applies for a debt consolidation loan with a
nonmember co-signer or joint applicant. In your first example, the nonmember
applicant is the member’s spouse who is sharing in the proceeds of the
loan. In the second example, the member and the nonmember are not related.
While the nonmember in the second example has an adequate employment and
credit history, the member does not. In both examples, you have stated
that the member would not qualify for the loan on his/her own.
You state that your credit committee would approve
the loan in the first example but not in the second because it would consider
the married couple as joint applicants. As joint applicants, each person’s
income and debts are combined for a single debt ratio, which usually results
in a more creditworthy application. When the applicants are not considered
joint applicants, it is more difficult to approve the loan under your
FCU’s policies because each individual must have sufficient income to
repay their own as well as the new debt.
In the first example, although the wife is not
a member, (and, as you indicate, there are instances where she may not
be eligible for membership) she will be sharing in the proceeds of the
loan. Generally, due to the marital relationship, the member will be
jointly and severally liable on the marital debt to be consolidated.
So, even though the nonmember spouse would benefit from the loan proceeds,
the member can also be said to receive the entire benefit. Generally,
too, the marital estate would be available to satisfy marital debts.
Therefore, your assumption that marital status “should not have any bearing
in the qualifying process” is inaccurate. If the debt to be consolidated
is the individual debt of the member husband, treating the nonmember wife
as a joint applicant would serve to provide additional assurance of marital
estate assets being available as a source of repayment. If the individual
debt was that of the nonmember wife, however, this would be an impermissible
loan to a nonmember and a joint application would not be appropriate.
In your second example, two unrelated individuals
are applying for a loan to consolidate “both of their debts.” Because
the loan is being made to consolidate a nonmember’s debts, an FCU loan
is not appropriate. The FCU may make this loan only if the nonmember
joint applicant is not going to directly benefit from the loan but is
providing the FCU with a greater assurance for repayment. The FCU may
also deny the loan based on the member’s credit history.
We apologize for not offering you conclusive
answers to your questions. The final judgment is appropriately left in
the hands of the party with the facts, the credit union. Once the transaction’s
legality under Section 107(5) of the Act has been established, the FCU
should follow the appropriate guidelines to determine whether the applicants
qualify for the loan.
Sincerely,
Richard S. Schulman
Associate General Counsel
GC/JM:sg
SSIC 3500
95-0616
Enclosures
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