CO-SIGNING: LAW AND
PRACTICES OF CONSUMER
CASH LOANS AND
CONSUMER INSTALLMENT
CREDIT BY LENDING
INSTITUTIONS IN HAWAII
I
PATRICIA K. PUTMAN
UNIVERSITY OF HAWAII
Honolulu, Hawaii 96822
R e q u e s t NO. A-227
D e c e h e r 1963
Tom D i n e l l
Director
T A B L E OF C O N T E N T S
INTRODUCTION
STATEmiSP OF
........................... .
THE PROBLEM . . . . . . . . . . . . . . . . . . . . . . .
;
PROFILES OF CONSUMER LOAN LENDING INSTITLTIONS
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1
3
5
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I n d u s t r i a l Loan Companies . . . . . . . . . . . . . . . . . . . .
S m a l l Loan Companies . . . . . . . . . . . . . . . . . . .
F e d e r a l c r e d i t Unions . . . . . . . . . . . . . . . . . . . . . .
6
I m p l i c a t i o n s t o b e Drawn from t h e R e s p o n s e s o f
Financial Institutions
7
Banks
. . . . . . . .
LEGAL ASPECTS OF REGULdTION OF CO.SIGNING .
S t a t u t e s of Other S t a t e s. . . . . . .
Some L e g a l J u r i s d i c t i o n a l Problems . .
.
.
.
.
. . . . . . . . . . . . .
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Hawaii S t a t u t e s and Co-Signers o f N o t e s . . . . . . . . . . . . .
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compulsory L e n d e r s ' Exchange and Loan L i m i t a t i o n . . . . . . . . .
Limitation o f Co-Signer's L i a b i l i t y t o P r i n c i p a l . . . . . . . . .
I n f o r m i n g &.Signers . . . . . . . . . . . . . . . . . . . . . . .
Guarantor a s A l t e r n a t i v e t o Co-signer . . . . . . . . . . . . . .
Cautions . . . . . . . . . . . . . . . . . . . . . . . . . .
FOOTNOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix
Q u e s t i o n s I n c l u d e d i n t h e Q u e s t i o n n a i r e.
. . .
5
5
6
8
8
9
9
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12
13
13
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14
15
INTRODUCTION
The House of Representatives in adopting House Resolution 88 (First State
Legislature, Budget Session of 1962) requested the Legislative Reference Bureau
to study the practice of lending institutions in Hawaii with respect to the extension of credit on the security of co-signers. The House was interested in
determining whether the practice is indiscriminate; whether before accepting such
security, lending institutions check the financial ability of the co-signers to
pay; and whether the practice can be reasonably tempered to curtail financial
hardship and prevent any resultant recourse by co-signers to welfare funds. In
addition, individual legislators have requested the Bureau to report on aspects
of related problems. This study and report have been formulated in response to
these inquiries.
In recent years there has been growing judicial, legislative and sociological concern with the problem of protection of the consumer who borrows cash or
who buys on the installment plan. Ancillary to this concern for the consumer is
a parallel concern for his 'co-signer", apparently a problem of especial magnitude
in the State of Hawaii. A recent circuit court case illustrates pointedly some of
the elements of Hawaii co-signing law and practice.'
The defendant was found
liable in an action by a credit union to collect the principal, interest and attorney's fees on a six year old promissory note which the defendant and four
others had signed. Evidence was presented to the effect that the primary borrower
and the other co-signers had additional outstanding notes under which they had all
acted as co-signers for each other in a round-robin fashion. Subsequently they
all left Hawaii, except the defendant. This case might be considered an instance
of a legal result deviating from commonly accepted ideas of justice and fair play.
It has been reported unofficially that a few individuals are forced to seek
financial assistance from state and private welfare funds as a result of financial
difficulties caused or aggravated by improvident co-signing. Unfortunately, it is
difficult to determine whether practices relating to co-signing of notes have led
to excessive reliance upon welfare funds for subsistence by many persons because
the records kept by welfare agencies do not reveal the necessary data and information. Although persons receiving financial assistance are required to list their
creditors, they are not asked to identify which debts have been incurred through
co-signing.
This report is therefore confined to the specifics of the co-signing law and
practices relative to consumer cash loans and installment credit. Related and
pertinent fields of inquiry would include bankruptcy of the non-business debtor or
consumer-debtor and other aspects of consumer credit protection. The various
aspects of the co-signer problem, including pertinent law, a survey of certain
practices by lending institutions, and potential remedial measures, both legislative and administrative, are included in this discussion.
Several persons in the state departments of welfare and regulatory agencies
and in the credit business have helped in the preparation of this study by
CO-SIGNING
2
f u r n i s h i n g n e c e s s a r y information.
I n a d d i t i o n , t h e following p e r s o n s reviewed a
preliminary d r a f t :
George C o n i f f , C r e d i t Bureau o f Hawaii
M. M. Finnegan, Bank of Hawaii
Charles J; G i l l e s p i e , Deputy Bank Examiner, Department of
Regulatory Agencies
F. D . J e n s e n , F i r s t National Bank of Ilawaii
Frank Kahookele, Hawaii C r e d i t Union League
Paul Lucas, Hawaiian Lenders Exchange
Edward Matsumot0,Finance F a c t o r s , Ltd.
George D. Nickel, B e n e f i c i a l Management Corporation, Regional
Director, Public Relations
J o e Tom, Hawaiian Lenders Exchange
The s u g g e s t i o n s and comments of t h e reviewers were c o n s i d e r e d i n t h e r e v i s i o n s
f o r t h e f i n a l form of t h e s t u d y , b u t t h e L e g i s l a t i v e Reference Bureau assumes
s o l e r e s p o n s i b i l i t y f o r t h e contents.
F i n a l l y , a p p r e c i a t i o n i s due t o t h e f i f t y - n i n e
i n d i v i d u a l lending i n s t i t u -
t i o n s who r e p l i e d t o t h e q u e s t i o n n a i r e which provided much of t h e s p e c i f i c
i n f o r m a t i o n t h a t forms t h e b a s i s of t h e study.
S T A T E M E N T OF T H E
PROBLEM
There a r e two p r i n c i p a l t y p e s of c r e d i t t r a n s a c t i o n s i n v o l v i n g c o - s i g n e r s
and l e n d i n g i n s t i t u t i o n s t o which t h i s r e p o r t i s d i r e c t e d :
stallment purchases of personal property.
c a s h l o a n s and i n -
A c a s h l o a n made b y a l e n d i n g i n s t i t u -
t i o n may b e d e s c r i b e d a s a d i r e c t exchange of money f o r c r e d i t o r a s a l e o f money.
An i n s t a l l m e n t p u r c h a s e of p e r s o n a l p r o p e r t y i s commonly d e f i n e d a s a p u r c h a s e o f
consumer goods on c r e d i t under a c o n d i t i o n a l s a l e s c o n t r a c t t h a t p r o v i d e s f o r
r e q u l a r p e r i o d i c payments a f t e r an i n i t i a l down payment.
A
u s u a l subsequent
p r a c t i c e i s t h e t r a n s f e r by t h e r e t a i l s e l l e r o f any c r e d i t s e c u r i t y d e v i c e i n c l u d i n g promissory n o t e s t o a lending i n s t i t u t i o n .
Such c r e d i t t r a n s a c t i o n s a r e u s u a l l y d e s i g n e d t o a c h i e v e one o r more of t h e
f o l l o w i n g aims:
(1) t o r a i s e t h e c o n s u m e r ' s s t a n d a r d o f l i v i n g , ( 2 ) t o t a k e ad-
v a n t a g e of t h e c o n v e n i e n c e of " i n s t a n t money" o r ( 3 ) t o meet t h e e x i g e n c i e s o f
emergencies.
I n Hawaii t h e f i n a n c i a l i n s t i t u t i o n s which s u p p l y most consumer c a s h
l o a n s and h a n d l e f i n a n c i n g of i n s t a l l m e n t p u r c h a s i n g , a p a r t from t h o s e merchants
who p r o v i d e t h e i r own f i n a n c i n g a r r a n g e m e n t s , a r e b a n k s , i n d u s t r i a l l o a n compan i e s , s m a l l l o a n companies and f e d e r a l c r e d i t u n i o n s .
I n a d d i t i o n t o t h e many b e n e f i t s and n e e d s which consumer c a s h l o a n s and
i n s t a l l m e n t purchasing s a t i s f y , t h e r e a r e obvious a s s o c i a t e d dangers, a t t r i b u t a b l e
i n p a r t t o a b u s e s o r e r r o r s of judgment b y m e r c h a n t s and l e n d i n g i n s t i t u t i o n s and
i n p a r t t o unwisdom and e x c e s s e s b y t h e consumer b o r r o w e r s .
I n many c a s e s consumer c r e d i t i s advanced t o b o r r o w e r s on t h e s t r e n g t h of a s i g n e d p r o m i s s o r y n o t e ,
which may b e accompanied b y a c h a t t e l mortgage, b y o t h e r s e c u r i t y o r s i m p l y by t h e
s i g n a t u r e of a c o - s i g n e r of t h e n o t e . A p o t e n t i a l a r e a of d a n g e r i n t h e consumer
c a s h l o a n and i n s t a l l m e n t p u r c h a s i n g f i e l d l i e s i n t h e p r a c t i c e of s u p p l y i n g
s e c u r i t y f o r c r e d i t t h r o u g h t h e d e v i c e of c o - s i g n e r s .
A
co-maker o r accorrmodation maker o r a c c e p t o r , i n e f f e c t , l o a n s h i s c r e d i t
t o t h e p e r s o n borrowing money.
Under t h e r u l e s o f t h e Uniform N e g o t i a b l e I n s t r u -
ments Act ( C h a p t e r 197, Revised Laws of Hawaii 1 9 5 5 ) , a c o - s i g n e r of a p r o m i s s o r y
n o t e , whether he b e t e c h n i c a l l y a co-maker o r an accommodation maker o r a c c e p t o r
i s p r i m a r i l y and
terms, including
such a s c o s t s of
Solicitude
u n c o n d i t i o n a l l y l i a b l e on t h e n o t e a c c o r d i n g t o i t s t e n o r and
i n t e r e s t p r o v i s i o n s and o t h e r p r o v i s i o n s f o r payment of c o s t s
collection.
2
f o r t h e co-signer
f o c u s e s on t h e p e r s o n o f l i m i t e d f i n a n c i a l
r e s o u r c e s who i s c a j o l e d , c o e r c e d o r o t h e r w i s e induced t o l e n d h i s name o r c r e d i t
a s a d d i t i o n a l s e c u r i t y f o r a p r o m i s s o r y n o t e made t o s e c u r e a l o a n o r i n s t a l l a e n t
purchase.
The t y p i c a l c o - s i g n e r whose i n t e r e s t s a r e most i n need of p r o t e c t i o n i s
p r o b a b l y e i t h e r n o t c o m p l e t e l y informed of t h e s i g n i f i c a n c e and consequences of
t h e a c t o f c o - s i g n i n g an i n s t r u m e n t , o r h e i s l i k e l y t o o*verestimate h i s a b i l i t y
t o meet t h e f i n a n c i a l o b l i g a t i o n which h e knowingly assumes.
The day of r e c k o n i n g
f o r t h e c o - s i g n e r a r r i v e s when t h e p r i n c i p a l borrower o r i n s t a l l m e n t p u r c h a s e r
d e f a u l t s and i s found t o b e judgment p r o o f .
A t t h i s point i n the credit
4
CO-SIGNING
t r a n s a c t i o n t h e o r i g i n a l c r e d i t o r o r a subsequent h o l d e r i n due c o u r s e of t h e n o t e
i s f r e e t o proceed a g a i n s t any co-signer on t h e n o t e f o r t h e f u l l amount of t h e
p r i n c i p a l p l u s i n t e r e s t and any c o s t s of c o l l e c t i o n . The co-signer i s then r e l e gated t o a p o s i t i o n o f t r y i n g t o recover from t h e borrower o r o t h e r c o - s i g n e r s
through e x e r c i s i n g such r i g h t s of r e c o u r s e a s e x o n e r a t i o n , c o n t r i b u t i o n and
reimbursement.
Various approaches intended t o m i t i g a t e t h e a b s o l u t e l i a b i l i t y of t h e cos i g n e r , which under given f a c t u a l circumstances seems h a r s h and o p p r e s s i v e , must
be c o n s i d e r e d i n t h e l i g h t of a well-recognized dilemma. On t h e one hand remedial
a c t i o n i s c e r t a i n l y d e s i r a b l e t o p r o t e c t t h e u n f o r t u n a t e c o - s i g n e r ; on t h e o t h e r ,
t h e d i c t a t e s of contemporary commercial l i f e r e q u i r e a p o l i c y of f a c i l e n e q o t i a b i l i t y of commercial paper.
Proceeding from t h e e s t a b l i s h e d r u l e of law t h a t t h e l i a b i l i t y of a cos i g n e r , i n t h e absence of such r e a l d e f e n s e s a s f r a u d and m i s r e p r e s e n t a t i o n , i s
primary and u n c o n d i t i o n a l , it i s n e c e s s a r y t o i d e n t i f y t h o s e procedures of t h e
cash loan and i n s t a l l m e n t purchasing b u s i n e s s which p e r m i t and a r e conducive t o
r e s u l t s t h a t appear u n f a i r though t e c h n i c a l l y w i t h i n t h e l e t t e r of t h e law. Any
one of t h e following circumstances can be a c o n t r i b u t i n g cause i n l e a d i n g t h e
unwary co-signer i n t o extending h i s l i a b i l i t i e s beyond h i s f i n a n c i a l r e s o u r c e s :
(1)
F a i l u r e t o inform co-signers of t h e i r l e g a l l i a b i l i t y p r i o r t o
acceptance o f t h e i r s i g n a t u r e ;
(2)
F a i l u r e t o i n v e s t i g a t e thoroughly t h e c r e d i t of c o - s i g n e r s t o
t h e same e x t e n t a s i n v e s t i g a t i o n s a r e made of p r i n c i p a l borrowers;
(3)
F a i l u r e t o e s t a b l i s h t h e same c r e d i t requirements f o r c o - s i g n e r s
a s f o r p r i n c i p a l borrowers;
(4)
F a i l u r e t o inform co-signers of t h e names of o t h e r c o - s i g n e r s
t o loans;
(5)
F a i l u r e t o inform c o - s i g n e r s of delinquency i n repayment by t h e
p r i n c i p a l borrower b e f o r e d e f a u l t ; and
(6)
F a i l u r e t o inform c o - s i g n e r s o f a d d i t i o n a l amounts added on t o
e x i s t i n g o u t s t a n d i n g loans.
PROFILES OF C O N S U M E R
LOAN LENDING INSTITUTIONS
I n an e f f o r t t o a c q u i r e s p e c i f i c i n f o r m a t i o n a b o u t a c t u a l c o - s i g n i n g
p r a c t i c e s and p r o c e d u r e s of l e n d i n g i n s t i t u t i o n s i n Hawaii, a q u e s t i o n n a i r e ( s e e
Appendix) was s e n t t o 7 b a n k s , 69 i n d u s t r i a l l o a n companies, 11 s m a l l l o a n comp a n i e s and 115 c r e d i t u n i o n s i n t h e S t a t e . The q u e s t i o n n a i r e was p r e p a r e d a f t e r
c o n s u l t a t i o n w i t h r e p r e s e n t a t i v e s of each of t h e above c a t e g o r i e s of l e n d i n g
i n s t i t u t i o n s . A t o t a l of 59 r e p l i e s w e r e r e c e i v e d from 3 b a n k s , 25 i n d u s t r i a l
l o a n companies, 7 s m a l l l o a n companies (some o r g a n i z a t i o n s c o m p l e t i n g a s i n g l e
q u e s t i o n n a i r e c l a s s i f i e d t h e m s e l v e s a s b o t h a n i n d u s t r i a l l o a n company and a s m a l l
l o a n company) and 30 f e d e r a l c r e d i t u n i o n s .
S i n c e t h e q u e s t i o n n a i r e r e s p o n s e was from less t h a n o n e - t h i r d o f t h e l e n d i n g
i n s t i t u t i o n s , t h e i n f o r m a t i o n r e c e i v e d c a n n o t b e used t o i n d i c a t e any one p r e v a i l i n g p r a c t i c e or s t a n d a r d . However, t o t h e e x t e n t t h a t i n f o r m a t i o n was r e c e i v e d ,
i t i s p o s s i b l e t o p r e s e n t some o f t h e v a r i a t i o n s i n p r a c t i c e s and s t a n d a r d s .
P r o f i l e s of t h e r e s p o n d i n g l e n d i n g i n s t i t u t i o n s a r e s e t f o r t h below.
Banks ( 3 r e s p o n s e s
-
o u t of 7)
The r e s p o n d i n g b a n k s i n d i c a t e d t h a t t h e y do n o t r e l y t o any g r e a t e x t e n t on
l o a n s s e c u r e d by c o - s i g n e r s , b u t t h a t when a c o - s i g n e r i s n e c e s s a r y , h e i s i n formed o f h i s l e g a l l i a b i l i t y , sometimes i n w r i t i n g , and h e i s informed i n w r i t i n g
of d e l i n q u e n c y on t h e p a r t of t h e p r i m a r y b o r r o w e r .
The b a n k s t e n d e i t h e r t o
examine t h o r o u g h l y t h e c r e d i t of t h e c o - s i g n e r o r t o l i m i t t h e amount of l o a n s
which h e may c o - s i g n i n r e l a t i o n t o h i s f i n a n c i a l r e ~ o u r c e s . ~Bank c o l l e c t i o n s
from c o - s i g n e r s a p p e a r t o o c c u r i n an i n f i n i t e s i m a l number of c a s e s .
I n d u s t r i a l Loan Companies (25 r e s p o n s e s o u t o f 69)
Approximately o n e - f o u r t h o f t h e r e s p o n d i n g i n d u s t r i a l l o a n companies do n o t
i s s u e loans secured by co-signers, while another q u a r t e r u s e co-signers only i n a
few i n s t a n c e s . T h i s l a t t e r group of companies g e n e r a l l y i n f o r m s c o - s i g n e r s of
t h e i r l e g a l l i a b i l i t y o r a l l y though n o t i n w r i t i n g , makes a thorough i n v e s t i g a t i o n
o f t h e c r e d i t r a t i n g of t h e p o t e n t i a l c o - s i g n e r s , and i n f o r m s them of t h e names of
o t h e r co-signers.
They a l s o inform c o - s i g n e r s b o t h o r a l l y and i n w r i t i n g of
d e l i n q u e n c y on t h e p a r t o f t h e p r i m a r y b o r r o w e r . Each of t h e s e companies t a k e s
some s p e c i a l s t e p s t o i n s u r e t h a t t h e c o - s i g n e r ' s l i a b i l i t y w i l l not exceed h i s
a b i l i t y t o meet i t . T h i s group of companies c o l l e c t s o n l y a s m a l l p e r c e n t a q e of
i t s l o a n s s e c u r e d by c o - s i g n e r s from c o - s i g n e r s .
Ten of t h e r e s p o n d i n g i n d u s t r i a l l o a n companies e s t i m a t e d t h a t between 15
and 90 p e r c e n t of t h e i r l o a n s a r e s e c u r e d by c o - s i g n e r s .
A few, b u t n o t a l l , o f
t h e s e companies i n f o r m c o - s i g n e r s o f t h e i r l e g a l l i a b i l i t i e s o r a l l y ; o n l y one
i n f o r m s t h e c o - s i g n e r of h i s assumed o b l i g a t i o n s i n w r i t i n b and t h e n n o t a l l t h e
time.
The f i r m s i n v e s t i g a t e t h e c r e d i t r a t i n g of a c o - s i g n e r u s u a l l y t h r o u g h r e -
l i a n c e on a l e n s e r s ' exchange or c l e a r i n g house.
They atso p i a c e some r e l i a n c e
CO-SIGNING
on t h e i r own c r e d i t i n v e s t i g a t i o n s .
The m a j o r i t y , b u t n o t a l l , of t h e companies
r e v e a l t h e names of o t h e r c o - s i g n e r s i n some c a s e s , a s f o r i n s t a n c e upon t h e reG e n e r a l l y , t h e c o - s i g n e r i s informed i n w r i t i n g of a
q u e s t of a c o - s i g n e r .
d e l i n q u e n c y on t h e p a r t o f t h e p r i m a r y b o r r o w e r , b u t t h i s i s n o t always done.
o f t h e companies i n t h i s group do n o t always e x e c u t e new l o a n s f o r a d d i t i o n a l
Two
amounts l o a n e d t o a p r i m w y borrower o r i n f o r m h i s c o - s i g n e r s of t h e a d d i t i o n a l
amounts l o a n e d .
Two of t h e companies p l a c e no l i m i t on t h e number o r amount o f
Loan
l o a n s a c o - s i g n e r may s i g n ; l i m i t s employed b y t h e o t h e r 8 companies v a r y .
companies i n t h i s g r o u p i n d i c a t e d t h a t i n a r e c e n t 12-month p e r i o d t h e p e r c e n t a g e s
of l o a n s s e c u r e d by c o - s i g n e r s which were c o l l e c t e d from c o - s i g n e r s v a r i e d from
0 t o 20 p e r c e n t .
S m a l l Loan Companies ( 7 r e s p o n s e s o u t o f 11)
Of t h i s group of companies, 1 d o e s n o t i s s u e l o a n s s e c u r e d b y c o - s i g n e r s ,
w h i l e 4 companies i s s u e o n l y a s m a l l number of l o a n s s e c u r e d by c o - s i g n e r s .
The
p r a c t i c e s f o l l o w e d b y t h e s e 4 s m a l l l o a n companies p a r a l l e l t h o s e of t h e i n d u s t r i a l l o a n companies who i s s u e o n l y a s m a l l number of l o a n s s o s e c u r e d .
Their
c o l l e c t i o n s from c o - s i g n e r s v a r y from 0 t o 1 p e r c e n t .
Two o f t h e r e s p o n d i n g s m a l l l o a n companies r e l y e x t e n s i v e l y on i s s u i n g l o a n s
s e c u r e d by c o - s i g n e r s .
The p r a c t i c e s of t h e s e 2 companies t e n d t o v a r y i n t h e
same manner a s t h o s e f o r t h e i n d u s t r i a l l o a n companies, which r e l y more h e a v i l y
on c o - s i g n i n g .
F e d e r a l C r e d i t Unions (30 r e s p o n s e s o u t o f 115)
Four o f t h e r e s p o n d i n g c r e d i t u n i o n s do n o t i s s u e l o a n s s e c u r e d by cos i g n e r s w h i l e 1 r e q u i r e s t h a t a c o - s i g n e r have s u f f i c i e n t s h a r e s i n t h e u n i o n t o
s e r v e a s c o l l a t e r a l e q u a l t o t h e amount of a l o a n .
Such s h a r e s may n o t b e w i t h -
drawn o r p l e d g e d u n t i l t h e l o a n i s p a i d .
The p r a c t i c e s among t h e 26 o t h e r r e s p o n d i n g c r e d i t u n i o n s v a r i e d w i d e l y .
The p e r c e n t a g e s o f t h e i r l o a n s s e c u r e d by c o - s i g n e r s r u n t h e gamut between 1-1/2
t o 100 p e r c e n t .
Most o f t h e c r e d i t u n i o n s i n f o r m c o - s i g n e r s of t h e i r l e g a l
l i a b i l i t y o r a l l y ; some do s o sometimes; some inform them o n l y i n w r i t i n g ; some
b o t h o r a l l y and i n w r i t i n g ; and 2 of t h e c r e d i t u n i o n s do n o t i n f o r m c o - s i g n e r s
of t h e i r l i a b i l i t y .
Most o f t h e r e s p o n d i n g c r e d i t u n i o n s u s e t h e i r own i n v e s t i -
g a t o r s t o i n v e s t i g a t e t h e c r e d i t r a t i n g of c o - s i g n e r s .
A
few i n d i c a t e d t h a t t h e y
make no i n v e s t i g a t i o n o f c r e d i t r a t i n g of c o - s i g n e r s .
Some o f t h e c r e d i t u n i o n s r e v e a l t h e names of o t h e r c o - s i g n e r s t o a c3s i g r e r ; some do s o sometimes o r o n l y i f t h e i n f o r m a t i o n i s r e q u e s t e d by a cosigner.
C o - s i g n e r s a r e a l m o s t always informed of d e l i n q u e n c y i n repayment b y t h e
p r i n a r y borrowers:
methods.
sometimes o r a l l y , sometimes i n w r i t i n g and sometimes by b o t h
I n a l m o s t a l l c a s e s a new l o a n i s e x e c u t e d when a d d i t i o n a l amounts a r e
loaned t o a p r i m a r y b o r r o w e r . Many of t h e c r e d i t u n i o n s r e p o r t e d t h a t t h e i r
r e g u l a t i o n s were v a r i a b l e depending on t h e amount of t h e l o a n , t h e d i v i d i n g l i n e
PROFILES
7
varying between $450 and $1,000. Limitations on number and amounts of loans a
co-signer may sign range from 0 to 5 loans and from 0 to $5,000. There is no
pattern among the credit unions with respect to the number of co-signers relative
to the existence of other security and the amount of a loan. These 26 credit
unions indicated that in recent 12-month periods the percentages of loans secured
by co-signers which were collected from co-signers varied from 0 to 65 per cent.
1p.plications co be Drawn froa rhe
aesponses of Financial 1n;ticucions
A single significant and unarguable conclusion is readily drawn from the
information reported by these organizations most likely to be involved with cosigners for consumer credit: the procedures, regulations and standards which are
followed constitute a bewildering variety. A competent statistical inquiry
probably would develop interesting relationships, for instance, between the
thoroughness of credit investigations or the extent to which co-signers are informed of their legal liability and the proportion of co-signer notes collected
from co-signers. However, such a statistically significant relationship is not
necessarily a causal one.
A critical contemplation of the general nature of the rights and obligations
of co-signers would seem to necessitate certain minimal safeguards in order to
preserve or establish fair play to co-signers in credit transactions. As might
well be expected, the credit industry including credit unions would prefer "selfpolicing," but if the results of such self-regulation permit continued abuses
against the fair interests of co-signers, legislative or administrative remedial
measures are worth serious consideration. The lending institutions which currently subscribe to sound and ethically approved practices would not be affected
appreciably; those institutions which currently sanction unsound and unethical
practices would be affected but would have invited externally imposed regulation.
L E G A L ASPECTS OF
R E G U L A T I O N OF C O - S I G N I N G
O f f i c e r s o f a n a t i o n - w i d e i n d u s t r i a l l o a n company have i n d i c a t e d t h a t t h e y
had n o t e n c o u n t e r e d i n o t h e r s t a t e s t h e problem of co-makers o r e n d o r s e r s becoming
i n s o l v e n t b e c a u s e of o v e r e n d o r s i n g . F u r t h e r m o r e , t h e l i t e r a t u r e , c a s e law and
s t a t u t e s do n o t r e v e a l t h a t t h e " c o - s i g n e r " problem h a s w a r r a n t e d p a r t i c u l a r s t u d y
o r e x t e n s i v e r e m e d i a l l e g i s l a t i o n i n o t h e r j u r i s d i c t i o n s of t h e U n i t e d S t a t e s .
However, a few s t a t e s t a t u t e s may b e c o n s i d e r e d r e l e v a n t t o c e r t a i n f a c e t s o f
H a w a i i ' s c o - s i g n e r problem o r c o u l d b e a d a p t e d t o c o n t r o l misuse o r a b u s e o f cos i g n i n g a s a s e c u r i t y d e v i c e i n t h e c a s h l o a n and i n s t a l l m e n t p u r c h a s i n g b u s i n e s s .
S t a t u t e s of Other S t a t e s
Types o f s t a t e s t a t u t e s i n o t h e r s t a t e s which o f f e r some d e g r e e of p r o t e c t i o n t o co-signers,
o r which c o u l d b e amended t o c o v e r c o - s i g n e r p r o t e c t i o n , a r e
d i s c u s s e d below.
New Mexico; Cornuulsorv L e n d e r s ' Exchanqe.
aimed a t p r o t e c t i n g s m a l l l o a n
New Mexico h a s a n o v e l s t a t u t e
borrower^.^
This s t a t u t e provides t h a t small loan
b u s i n e s s e s may b e r e q u i r e d b y a d m i n i s t r a t i v e r e g u l a t i o n t o form and m a i n t a i n
membership i n a l e n d e r s ' exchange and may be l i m i t e d , a l s o b y r e g u l a t i o n , i n
i s s u i n g a d d i t i o n a l loans.
T h i s t y p e of l e g i s l a t i o n c o u l d b e expanded t o a p p l y t o
t h e o t h e r l i c e n s e d and r e g u l a t e d l e n d i n g i n s t i t u t i o n s i n a d d i t i o n t o s m a l l l o a n
companies and t o a p p l y s p e c i f i c a l l y t o c o - s i g n e r s a s w e l l a s t o p r i n c i p a l
borrowers.
A r i z o n a : Loan L i m i t a t i o n .
S e c t i o n 6-623 o f t h e Arizona Small Loan A c t
p r o h i b i t i n g l o a n s o v e r $1,200 " s h a l l a l s o a p p l y t o any l i c e n s e e who p e r m i t s any
p e r s o n as accommodation maker o r co-maker f o r any borrower t o owe t o s u c h l i c e n s e e
f o r one o r more l o a n s of money a t any t i m e t h e sum o f more t h a n t w e l v e hundred
d o l l a r s f o r p r i n ~ i p a l . " ~T h i s p r o v i s i o n b y s p e l l i n g o u t t h e l i m i t a t i o n a s it
a p p l i e s t o co-makers i s more e x p l i c i t t h a n t h e p r o h i b i t i o n i n s e c t i o n 195-22,
Revised Laws o f Hawaii 1955.
Such l o a n l i m i t a t i o n might b e expanded t o c o v e r
t o t a l o b l i g a t i o n s t o a i l l i c e n s e e s under bank and i n d u s t r i a l l o a n a c t s a s w e l l a s
s m a l l l o a n a c t l i c e n s e e s , and p o s s i b l y t o c r e d i t u n i o n s .
Iowa: S e l f - d i s c l o s u r e .
S e c t i o n 536.25 o f t h e Iowa Small Loan Act p r o v i d e s
t h a t "Every l i c e n s e e when making a l o a n h e r e u n d e r s h a l l r e q u i r e a s t a t e m e n t i n
w r i t i n g from e a c h a p p l i c a n t s e t t i n g f o r t h a d e s c r i p t i o n o f a l l i n s t a l l m e n t i n d e b t e d n e s s of such a p p l i c a n t by g i v i n g t h e amount of each such l o a n and t h e name
of t h e l e n d e r .
"'
T h i s requirement of w r i t t e n s e l f - d i s c l o s u r e of o t h e r i n s t a l l m e n t
i n d e b t e d n e s s c o u l d b e broadened t o i n c l u d e c o - s i g n e r
c o u l d b e made a p p l i c a b l e t o c o - s i g n e r s
l i a b i l i t y of t h e borrower,
a s w e l l a s b o r r o w e r s and c o u l d b e r e q u i r e d
o f a p p l i c a n t s f o r l o a n s from b a n k s , i n d u s t r i a l l o a n companies and p o s s i b l y from
c r e d i t unions.
LEGAL ASPECTS
9
Maine: c r e d i t I n v e s t i q a t i o n Charge. S e c t i o n 205111 of t h e Main I n d u s t r i a l
Loan Act p r o v i d e s "To charge f o r a loan made p u r s u a n t t o t h i s s e c t i o n $ 1 f o r each
$50 o r f r a c t i o n t h e r e o f loaned, f o r expenses, i n c l u d i n g any examination o r inv e s t i g a t i o n of t h e c h a r a c t e r and circumstances o f t h e borrower, co-maker o r
s u r e t y , and t h e drawing and t a k i n g acknowledgment of n e c e s s a r y p a p e r s , o r o t h e r
expenses i n c u r r e d i n making t h e loan. No charge s h a l l be c o l l e c t e d u n l e s s a loan
s h a l l have been made a s a r e s u l t of such examination o r i n v e s t i g a t i o n and no such
charge s h a l l exceed $5. "7 A p r o v i s i o n such a s t h i s could be made a p p l i c a b l e t o
small loan companies and t o banks, a s w e l l a s t o i n d u s t r i a l loan companies, i n
c o n j u n c t i o n with a requirement t h a t t h e y be members of a c e n t r a l l e n d e r s '
8
exchange.
Some Leqal J u r i s d i c t i o n a l Problems
C e r t a i n l e g a l problems a r i s e when s t a t e r e g u l a t i o n s a r e made t o apply t o
federally-chartered financial i n s t i t u t i o n s .
Federal C r e d i t Unions. A s i g n i f i c a n t impediment t o e f f e c t i v e l e g i s l a t i o n t o
p r o t e c t t h e i n t e r e s t s of co-signers o f consumer l o a n s i n Hawaii i s p r e s e n t e d by
t h e p o s i t i o n i n t h e S t a t e of t h e 115 c r e d i t unions, r e p r e s e n t i n g approximately
125,000 members, a l l of which a r e f e d e r a l c r e d i t unions c h a r t e r e d under t h e
F e d e r a l C r e d i t Union ~ c t . ' The i n d i v i d u a l f e d e r a l c r e d i t union by-laws r e q u i r e
It i s a t l e a s t d o u b t f u l i f s t a t e
approval by t h e Bureau of F e d e r a l C r e d i t Unions.
requirements and l i m i t a t i o n s could be made mandatory upon f e d e r a l l y - c h a r t e r e d
c r e d i t unions although v o l u n t a r y adoption of p a r a l l e l r u l e s a s s p e c i f i c union bylaws might very well be approved by t h e D i r e c t o r of t h e Bureau of F e d e r a l C r e d i t
Unions.
Although t h e r e i s l i t t l e c a s e law on t h e n a t u r e o f f e d e r a l j u r i s d i c t i o n over
f e d e r a l c r e d i t unions, such unions a r e r e f e r r e d t o a s " c r e a t u r e s of f e d e r a l
enactment. " l o
National Banks. A j u r i s d i c t i o n a l q u e s t i o n analogous t o t h e problem of
f e d e r a l c r e d i t unions i s posed by t h e two n a t i o n a l banks i n Hawaii. The c a s e law
i n t h i s a r e a is t o t h e e f f e c t t h a t a n a t i o n a l bank i s s u b j e c t t o s t a t e law, u n l e s s
t h a t law i n t e r f e r e s with t h e purposes of i t s c r e a t i o n o r d e s t r o y s i t s e f f i c i e n c y
11
o r i s i n c o n f l i c t with some f e d e r a l law.
Hawaii S t a t u t e s and Co-Siqners of Notes
The p r o v i s i o n s of t h e Revised Laws of Hawaii 1955, a s amended, which a r e
p e r t i n e n t t o co-signer t r a n s a c t i o n s i n c l u d e s e c t i o n 14A-14, Department of Regul a t o r y Agencies; Chapter 171A, C o l l e c t i o n Agencies; Chapter 178, Banks;
Chapter 194, t h e I n d u s t r i a l Loan Act; Chapter 195, t h e Small Loan Act; and
c h a p t e r 197, Uniform Negotiable Instruments Act.
Administrative Requlation.
One approach toward c o n t r o l o f co-signing pract i c e s i s a d m i n i s t r a t i v e r e g u l a t i o n which might be deemed t o fail w i t h i n t h e
10
CO-SIGNING
e x i s t i n g g e n e r a l and s p e c i f i c a u t h o r i t y of t h e d i r e c t o r o f r e g u l a t o r y a g e n c i e s o r
which might b e e s p e c i a l l y a u t h o r i z e d under e x p r e s s l e g i s l a t i v e mandate.
Advocates
of t h e a d m i n i s t r a t i v e approach s t r e s s t h e i n a d v i s a b i l i t y of l e g i s l a t i n g t h e
minutiae of commercial t r a n s a c t i o n s .
s e c t i o n 14A-14 d e l i n e a t e s t h e f u n c t i o n s , d u t i e s and powers of t h e department
of r e g u l a t o r y a g e n c i e s .
"The department s h a l l p r o t e c t t h e i n t e r e s t s o f consumers, d e p o s i t o r s and i n v e s t o r s throughout t h e S t a t e . It s h a l l s e t s t a n d a r d s and
e n f o r c e a l l laws, r u l e s and r e g u l a t i o n s governing t h e l i c e n s i n g and o p e r a t i o n of
and r e g i s t e r and s u p e r v i s e t h e conduct of t r a d e s , b u s i n e s s e s and p r o f e s s i o n s i n c l u d i n g banks, i n s u r a n c e companies, brokerage f i r m s and o t h e r f i n a n c i a l i n s t i t u t i o n s . " I n a d d i t i o n t o t h e s e broad r e g u l a t o r y a u t h o r i z a t i o n s , t h e d i r e c t o r of
r e g u l a t o r y a g e n c i e s i s given s p e c i f i c a d m i n i s t r a t i v e a u t h o r i t y over c o l l e c t i o n
a g e n c i e s , banks, i n d u s t r i a l loan companies, and s m a l l loan companies.
C o l l e c t i o n Aqencies.
Chapter 1 7 1 A p r o v i d e s f o r s t a t e r e g u l a t i o n o f c o l l e c -
t i o n a g e n c i e s , under t h e a d m i n i s t r a t i o n of t h e d i r e c t o r of r e g u l a t o r y a g e n c i e s .
I n a d d i t i o n t o t h e g e n e r a l p e r t i n e n c y of t h e r o l e of a c o l l e c t i o n agency i n t h e
d e b t o r - c r e d i t o r r e l a t i o n s h i p , s e c t i o n 171A-18.5, which a u t h o r i z e s c o l l e c t i o n and
a t t o r n e y s ' f e e s , would have t o b e amended i f , f o r i n s t a n c e , a c o - s i g n e r ' s l e g a l
l i a b i l i t y would be s t a t u t o r i l y l i m i t e d t o exclude c o l l e c t i o n o r a t t o r n e y s ' f e e s
o r t o c u t o f f t h e a c c r u a l of i n t e r e s t charges beyond t h e d a t e of m a t u r i t y .
Banks.
-
Chapter 178 c o n t a i n s two s e c t i o n s of p a r t i c u l a r i n t e r e s t t o consumer
c r e d i t transactions.
S e c t i o n s 178-2 i n d e f i n i n g t h e word "banks" s t a t e s t h a t it
means " . . . t h e b u s i n e s s of d i s c o u n t i n g and n e g o t i a t i n g promissory n o t e s , d r a f t s ,
b i l l s of exchange and o t h e r evidence of d e b t ; t o r e c e i v e d e p o s i t s of money and
d e a l i n commercial p a p e r ; t o lend money upon t h e s e c u r i t y of r e a l o r p e r s o n a l
and t o do such o t h e r b u s i n e s s a s may be u s u a l and lawful i n a banking
property
business...."
S e c t i o n 178-3 c o n t a i n s s i m i l a r language i n d e f i n i n g t h e term
...
"commercial bank".
These p r o v i s i o n s s u g g e s t a p o s s i b l e c o n c l u s i o n t h a t a loan
i s s u e d by a bank on t h e s e c u r i t y o n l y of one o r more c o - s i g n a t u r e s t o a promissory
n o t e i s n o t w i t h i n t h e powers g r a n t e d t o banks b y t h e l e g i s l a t u r e . The p a t e n t
answer, of c o u r s e , t o such a conclusion i s t h a t a s i g n a t u r e loan i s w i t h i n t h e
b l a n k e t a u t h o r i t y of t h e p h r a s e " t o do such o t h e r b u s i n e s s a s may be u s u a l o r
lawful i n a banking b u s i n e s s . "
To t h e e x t e n t t h a t banks d e a l i n n e g o t i a b l e instruments and d i s c o u n t comm e r c i a l paper i s s u e d i n connection w i t h i n s t a l l m e n t purchases ( a s c o n t r a s t e d t o
consumer cash l o a n s made by b a n k s ) , they a r e i n t e r e s t e d i n and a r e e n t i t l e d t o
r e l y on ready n e g o t i a b i l i t y of promissory n o t e s which i s of t h e essence of t h e
Uniform Negotiable Instruments Law.
I n d u s t r i a l Loan Companies. Chapter 194 d e a l s with i n d u s t r i a l l o a n companies
and t h e i r b u s i n e s s of lending money. It should be noted t h a t c r e d i t unions a r e
s p e c i f i c a l l y excluded from t h e p r o v i s i o n s of t h i s c h a p t e r .
S e c t i o n 194-14
a u t h o r i z e s i n d u s t r i a l loan companies "(bf t o lend money upon i n d i v i d u a l c r e d i t o r
upon t h e s e c u r i t y of co-makers, p e r s o n a l endorsement, o r t h e pledpe o r mortgage of
LEGAL ASPECTS
11
real or personal property or choses in action, or upon any combination of such
credit and security, and to contract for such interest, discount or other consideration as is permitted by this chapter; (c) to discount, purchase or otherwise
acquire notes, instalment contracts, warehouse receipts, or other choses in
action.. .
Statutory limitations on the legal liability of co-signers or statutory
regulation of the right to accept co-signers on negotiable instruments would
entail amendment of this section on powers of industrial loan companies. Again,
a distinction would be called for as between a loan issued directly by the loan
company or a negotiable instrument acquired by the company.
."
Small Loan Companies. Chapter 195 deals with small loan companies and their
business of lending money in the amount of $ 3 0 0 or less. As in the case of industrial loan companies, credit unions are specifically excluded from the provisions
of this chapter. Section 195-22 pertaining to loans in excess of $ 3 0 0 provides
that the limitation on interest rates applies "to any licensee who permits any
person as borrower or as endorser, guarantor or surety for any borrower, or
otherwise, to owe directly or contingently, or both, to the licensee at any time
a sum of more than $ 3 0 0 for principal."
The language of this statute suggests another curative amendment to protect
the interest of co-signers. The prohibition against owing $ 3 0 0 to the licensee
could be expanded to cover money owed to any licensee and could be further expanded to cover not only licensees under the Small Loan Act but also banks, credit
unions and licensees under the Industrial Loan Act. The effectiveness of such a
prohibition would call for a requirement that all covered lending institutions be
members of a lenders' exchange, similar to the New Mexico provision mentioned
above, and coverage would be complete except as limited by the jurisdictional
question of imunity of federal credit unions from state control.
CONCLUSION
R e g u l a t i o n s t o r e l i e v e t h e r i g o r o u s f i n a n c i a l b u r d e n s r e s u l t i n g from unr e g u l a t e d use of t h e co-signing device a r e not d i f f i c u l t t o formulate.
Such
r e g u l a t i o n s , i n a d d i t i o n t o s e l f - r e g u l a t i o n by t h e lending i n s t i t u t i o n s , include
r e g u l a t i o n by a d m i n i s t r a t i v e r u l e s u n d e r t h e e x i s t i n g a u t h o r i t y o f t h e d i r e c t o r of
r e g u l a t o r y a g e n c i e s and r e g u l a t i o n b y e x p l i c i t s t a t u t o r y p r o v i s i o n s .
A state
c o u l d make s u c h r u l e s o r laws a p p l i c a b l e t o a l l l e n d i n g i n s t i t u t i o n s w i t h i n i t s
b o r d e r s e x c e p t p r o b a b l y f e d e r a l c r e d i t u n i o n s and p e r h a p s t o a l e s s e r e x t e n t ,
n a t i o n a l banks.
Some p o t e n t i a l c u r a t i v e r u l e s and s t a t u t o r y p r o v i s i o n s a r e d i s c u s s e d below.
Compulsorv L e n d e r s ' Exchanqe
and Loan L i m i t a t i o n
L e g i s l a t i o n might r e q u i r e t h a t a l l l e n d i n g i n s t i t u t i o n s b e l o n g t o a l e n d e r s '
exchange o r s i m i l a r c r e d i t c l e a r i n g house agency and t h a t such i n s t i t u t i o n s b e
p r o h i b i t e d a g a i n s t e x t e n s i o n of c r e d i t t o a b o r r o w e r o r a c o - s i g n e r w i t h o u t a s c e r t a i n i n g t h a t h i s c r e d i t meets p r e v i o u s l y e s t a b l i s h e d s t a n d a r d s of a c c e p t a b i l i t y .
One o b j e c t i o n t o t h i s p o s s i b i l i t y i s t h a t l i m i t a t i o n s on d i r e c t and c o - s i g n e d
o b l i g a t i o n s might b e deemed t o c o n s t i t u t e a wrongful r e s t r a i n t of t r a d e i n v i o l a t i o n of a n t i - t r u s t l e g i s l a t i o n .
T h i s o b j e c t i o n , however, would seem t o m e r i t
c o n s i d e r a t i o n o n l y i f membership i n a l e n d e r s ' exchange w i t h r e s t r i c t i v e r u l e s on
~t would seem n o t t o b e i n p o i n t w i t h r e s p e c t t o l e g i s l a t i v e l y a u t h o r i z e d compulsory membership i n a n exchange where t h e l i m i t a t i o n s a r e
set p u r s u a n t t o a d m i n i s t r a t i v e r u l e s and r e g u l a t i o n s .
A second o b j e c t i o n q u e s t i o n s t h e p r o p r i e t y of p a r t i c i p a t i o n b y f e d e r a l
c r e d i t u n i o n s i n a l e n d e r s ' exchange a s v i o l a t i v e of t h e u n i o n s ' p r o h i b i t i o n
a g a i n s t divulging c o n f i d e n t i a l information.
The F e d e r a l C r e d i t Union Act d o e s
n o t p r o s c r i b e d i s c l o s u r e of i n f o r m a t i o n a l t h o u g h P a r t 320 of C h a p t e r I11 o f
T i t l e 45 o f t h e Code o f F e d e r a l R e g u l a t i o n s , r e l a t i n g s p e c i f i c a l l y t o r e c o r d s and
i n f o r m a t i o n of t h e Bureau of F e d e r a l C r e d i t Unions and t o o f f i c e r s and employees
o f t h e Bureau, t h e S o c i a l S e c u r i t y A d m i n i s t r a t i o n and t h e Department of H e a l t h ,
E d u c a t i o n and W e l f a r e , p r o v i d e s t h a t r e c o r d s and i n f o r m a t i o n of t h e Bureau a r e
It d o e s n o t n e c e s s a r i l y
d e c l a r e d t o b e c o n f i d e n t i a l and may n o t be d i s c l o s e d .
f o l l o w t h a t t h e p r o h i b i t i o n s t a t e d i n t h e R u l e s and R e g u l a t i o n s a p p l i c a b l e t o t h e
Bureau o f F e d e r a l C r e d i t Unions would a p p l y a s such t o t h e i n d i v i d u a l c r e d i t
u n i o n s b e c a u s e of p a r t i c i p a t i o n i n a l e n d e r s ' exchange.
I n f a c t , t h e specimen
copy of by-lawsunder which most f e d e r a l c r e d i t u n i o n s o p e r a t e p r o v i d e s t h a t a l l
t r a n s a c t i o n s of a c r e d i t union w i t h i t s members and a l l i n f o r m a t i o n r e s p e c t i n g
t h e i r personal a f f a i r s s h a l l be held i n s t r i c t e s t confidence, "except t o t h e
e x t e n t deemed n e c e s s a r y by t h e board i n c o n n e c t i o n w i t h t h e making of l o a n s and
the collection thereof."
I f it i s e s t a b l i s h e d t h a t membership i n a l e n d e r s '
exchange i s deemed n e c e s s a r y i n c o n n e c t i o n w i t h t h e making and c o l l e c t i o n of
l o a n s , i t would a p p e a r , t h e n , t h a t such membership would n o t amount t o a n i n v a s i o n
loans is voluntary.
CONCLUSION
13
of t h e g u a r a n t y of c o n f i d e n t i a l i t y . ~t p r e s e n t t h e v o l u n t a r y l e n d e r s ' exchange,
which i n c l u d e s t h e major f i n a n c e companies and a l l t h e b a n k s , o p e r a t e s w i t h i n
s t r i c t l i m i t a t i o n s on d i s c l o s u r e which i s a u t h o r i z e d o n l y t o m e m b e r s and o n l y f o r
t h e p u r p o s e of d e t e r m i n i n g t h e amount of o b l i g a t i o n s r e p o r t e d a g a i n s t an a p p l i c a n t
for credit.
F i n a l l y , t h e most s e r i o u s o b j e c t i o n t o t h i s p r o p o s i t i o n i n v o l v e s t h e i n c l u s i o n of c r e d i t union members under t h e same s t a n d a r d s o f c r e d i t a c c e p t a b i l i t y
t h a t a r e e s t a b l i s h e d f o r b o r r o w e r s who a p p l y f o r c r e d i t from commercial f i n a n c i a l
i n s t i t u t i o n s . The b a s i c s e c u r i t y f o r a c r e d i t u n i o n l o a n i s t h e c h a r a c t e r of t h e
borrower-member who e n j o y s a cormon bond of i n t e r e s t w i t h h i s co-members.
Such
s e c u r i t y f o l l o w s from t h e fundamental p h i l o s o p h y and p u r p o s e s o f c r e d i t u n i o n s
i n c l u d i n g concepts of democratic o r g a n i z a t i o n , s e l f - h e l p ,
and v o l u n t a r y and
c o o p e r a t i v e a s s o c i a t i o n . These p r i n c i p l e s g i v e r i s e t o c o n s i d e r a t i o n s o f c r e d i t
t h a t a r e f u n d a m e n t a l l y d i f f e r e n t from c r e d i t c o n s i d e r a t i o n s commonly acknowledged
by commercial l e n d i n g i n s t i t u t i o n s .
L i m i t a t i o n of C o - S i q n e r ' s
L i a b i l i t y co P r i n c i p a l
L e g i s l a t i o n c o u l d be e n a c t e d p l a c i n g a l i m i t a t i o n r e s t r i c t i n g t h e o b l i g a t i o n
o f a c o - s i g n e r t o t h e amount of t h e p r i n c i p a l loaned and t o e x c l u d e i n t e r e s t f e e s
a c c r u e d a f t e r m a t u r i t y , c o l l e c t i o n f e e s and a t t o r n e y s ' f e e s . Under a u t h o r i z a t i o n
of e x i s t i n g law, t h e power t o c o l l e c t i n t e r e s t f e e s a f t e r a c c r u a l , c o l l e c t i o n
f e e s and a t t o r n e y s ' f e e s i s c o n s i d e r e d an e f f e c t i v e d e t e r r e n t t o d e b t d e l i n q u e n c y .
I t i s p o s s i b l e t h a t r e s t r i c t i n g t h e o b l i g a t i o n of a c o - s i g n e r t o t h e amount of t h e
p r i n c i p a l loaned might encourage c o l l u s i o n between b o r r o w e r s and t h e i r c o - s i g n e r s
t o a r r a n g e f o r payment b y c o - s i g n e r s any t i m e b o r r o w e r s d e f a u l t i n o r d e r t o t a k e
a d v a n t a g e o f t h e l i m i t e d c o - s i g n e r o b l i g a t i o n . F u r t h e r , g r a n t o r s of c r e d i t would
p r o b a b l y r e a c t t o such l i m i t a t i o n s b y imposing more s t r i n g e n t c r e d i t r e q u i r e m e n t s
i n c a s e s of c r e d i t a p p l i c a n t s who a r e w i t h o u t s e c u r i t y o t h e r t h a n c o - s i g n e r s .
Informinq Co-Siqners
The d i r e c t o r o f r e g u l a t o r y a g e n c i e s c o u l d p r o b a b l y r e q u i r e , under h i s
e x i s t i n g powers and d u t i e s , t h a t e v e r y c o - s i g n e r b e f o r e s i g n i n g a c r e d i t i n s t r u ment b e f u r n i s h e d w i t h o r a l and w r i t t e n i n f o r m a t i o n which c l e a r l y and f u l l y
e x p l a i n s t h e e x t e n t of t h e c o - s i g n e r o b l i g a t i o n . T h i s r e q u i r e m e n t might b e i m plemented by t h e department by:
( a ) d r a f t i n g a model c o - s i g n e r i n f o r m a t i o n form;
(b) r e q u i r i n g t h a t a l l l i c e n s e d l e n d i n g i n s t i t u t i o n s f u r n i s h t h e form t o e v e r y
c o - s i g n e r and t h a t each c o - s i g n e r r e a 6 and s i g n t h e form b e f o r e t h e l o a n is
g r a n t e d ; and ( c ) c o n d u c t i n g p e r i o d i c s p o t - c h e c k s on c o - s i g n e r s t o v e r i f y i f t h e
r e g u l a t i o n i s b e i n g e n f o r c e d . L e g i s l a t i o n might f u r t h e r s t r e n g t h e n t h e e f f e c t i v e n e s s of t h i s r e q u i r e m e n t by p r o v i d i n g t h a t l e n d e r s must k e e p and m a i n t a i n a
s i g n e d copy of e a c h c o - s i g n e r form a s a c o n d i t i o n p r e c e d e n t t o f i l i n g an a c t i o n
t o c o l l e c t a d e b t from any c o - s i g n e r .
14
CO-SIGNING
Guarantor as Alternative to Co-Siqner
Legislation could be devised or lending institutions could provide as an
alternative to the absolute and primary liability of a co-signer, a method to
limit the obligation of any one co-signer in cases of credit secured by more than
one co-signer. For instance, under an agreement of absolute guaranty, the individual guarantors have only a secondary liability rather than the primary liability of co-signers. The obligation of the guarantor is that the principal
debtor will pay, but if he defaults, the guarantor will pay. The guarantor's
liability may be expressly limited to a specified amount in the terms of the
agreement of guaranty.
cautions
In considerating administrative or legislative curative measures, two
cautions should be observed. If regulations are not properly balanced or are
unduly restrictive, individuals seeking necessary credit may be forced to seek
through irregular channels. Secondly, an attempt to ameliorate certain abuses
the narrow field of co-signer liability by indiscriminate tampering with the
rules of negotiable instruments such as placing limitations on co-signer liability, could have far-reaching effects within the commercial community and the
economy. Particular care needs to be taken not to upset the provisions insuring
uniformity of legal treatment of negotiable instruments relating to commercial
transactions which are incorporated in the Uniform Negotiable Instruments Law.
This law, or its more modern form in the Uniform Commercial Code, applies in every
state.
Mrs. Ellen Onaga prepared the manuscript for printing.
FOOTNOTES
1. H. R. T. Employees Federal Credit union v. Kilaana
Bell and Irving Keiser, reported in the ~onotulu
Advertiser on October 8 and 9 and in the Honolulu
Star-Bulletin on October 10, 1962.
2. Territorial Collectors v. Harrison Et Als.,
43 H. 98 (1959) quoting from U. S. Court of Appeals, Ninth Circuit, Yost v. Morrow (1959):
"It is also settled law that an accoionodation
maker is bound if consideFation passes to the
principal maker, and that the acco-dation
nraker
has primary, n o t secondary liability." The rule
has also been stated as followr: "One vho signs
a note as accomdation maker is not a surety but
the one primarily liable w a holder for value."
(72 C. 3. S., Principal and Surety, sec. 216)
7. Industrial or Morris Plan Banks, Me. Rev. Stat.
ch. 59 (1954).
8. Edward W. Reed, Consumer Financing Costs and
Practices in Hawaii (Honolulu: Economic Research
Center, University of Kawaii, 1960). It has been
estimated that i n ~ ~ a w a ithe
i cost of a telephone
credit report from the Credit Bureau is sixty-five
cencs, and from the Lenders' Exchange ten cents.
A written report is esrimated to cost one dollar
and a half. Since 1960 these costs have increased
somewhat.
9. 48 Stat. 1216 (1934) a s amended 73 Stat. 628 (1959),
12 U.S.C.A. 1751.
10. House v. Schwartz, Supp. 1959, 188 N.Y.S.2d 308
3. The following quotation is from the First National
Bank of Hawaii, Standard Practice Nanual: ''There
may be instances where a loan application contains marginal factors which could affect the
borrower's ability to service his debt. In this
event, the support of a co-maker or endorser may
qualify the loan. The co-maker or endorser, unless he is an established borrower, should also
complete a loan application andlor financial
statement. Such person must have the ability to
assume the burden of servicing the borrower's
debt in addition to his own obligations in the
event that it becomes necessary.
"Credit investigation of the co-maker or
endorser must be made and the findings domiciled
in the borrower's loan jacket. It should be
remembered that a co-maker o r endorser does not
change a poor loan into a good loan and further
that the experience of calting on co-makers for
payment is not a pleasant one. For these m a sons, the co-makerlendorser should be thoroughly
apprised of his obligations in giving his guaranty
of payment."
4. N. M. Stat. Ann. ch. 48, art. 17 (1963):
"48-17-45. LENDER'S EXCHANGE. In order to preclude the burdenina
.of a snail loan borrower or
borrowers with mltiple loans, in any municipality
in this State where more than two licenses shall
at any tlme be in effect, the Examiner may by a
proper regulation and order require that the
licensees therein shall form and maintain membership in a lenders' exchange through which said
licensees may be kept fully informed as to outstanding loans in force under this Act to any one
borrower in other licensed offices in such
municipality.
"The Examiner's regulation and order affecting
licensees in such municipality may provide that
where one loan to the same borrower or borrowers
is in effect in one licensed office, a second loan
shall not intentionally or without due care be
made by a licensee in such municipality under this
Act, until the outstanding loan has been paid or
otherwise discharged out of the proceeds of the
second loan."
5. Small Loan Act, Ariz. Rev. Stat. Ann. tit. 6,
ch. 5 (1963).
6. Small Loan A c t , 10. Code cii. 536 (1962).
11. Comercia1 State Bank of Roseville v. Gidney,
1959, 174 F. Supp. 770, affirmed 278 F.2d871, 108
D.C. Cir. 37.
APPENDIX
QUESTIONS INCLUDED IN THE QUESTSOWASRE
~~~e of Lending Organization:
1. Nature of organization:
bank
industrial loan company
-
7
2.
-
s m l l loan company
credit union
Portion of total current outstanding loans secured by accommodation makers:
a.
b.
c.
d.
Estimated
Estimated
Estimated
Estimated
percentage
percentage
percentage
percentage
of total loans made secured by accoronodation makers
of total anount loaned secured by acconsnodacion makers
of toea1 loans made secured by acco-dation
nakers
of total amount loaned secured by accommodation makers &o
-%7-%
%
Note on Questions 3 and 4: If your policies and regulations relating to investigation of and informing of acconmodation makers vary depending on the amount loaned, please answer question 3 for loans exceeding your limiting
amount and question 4 for loans less than your limiting amount. If your policies and regulations do not vary with
the amount loaned, please answer question 3 only.
Always /FrequentlyI Sometimes 1 Never
(please indicate your policy by plac3 . Policies and regulations relating to investigation of and inin* a check in the appropriate column)
forming of accomdation makers on loans exceeding $
,
a.
Do you inform accommodation makers of their legal liability
prior to acceptance of their signatures:
If yes, do you inform them orally:
If yes, do you inform them in writing:
b.
Do you investigate credit rating of acco-dation
makers:
If y e s , do you use the services of a lenders' exchange or
clearing house:
If yes, do you rely on your awn credit investigators:
If yes, do you personally interview accomnodation makers:
c.
Do you inform accommodation makers of the names of other
accomdation makers:
d. Do you inform accananodatian makers of delinquency in
repayment by the primary maker before default:
If yes, do you inform them orally:
If yes, do you inform them in writing:
e.
4.
If additional amounts are loaned to the same primary
maker, is a new loan executed:
If a new loan is not executed, are accomdation mkers
informed of the additional amounts loaned:
Policies and regulations relating to investigation of and inforning of acfownodation makers on loans o r less than :$a.
Do you inform accomodation makers of their legal liability
prior to acceptance of their signatures:
sf yes, do you inform them orally:
If yes, do you inform them in writing:
b. Do you investigate credit rating of accommodation makers:
If yes, do you use the services of a lendeis' exchange or
clearing house:
If yes, do you rely on your own credit investigators:
lf yes, do you personally interview accoinmodation makers:
c.
Do you inform accomodation makers of the names of other
accommodation makers:
makers of delinquency in
d. Do you inform acco-dation
repayment by the primary maker before default:
If yes, do you inform them orally:
If yes, do you inform them in writing:
e.
ff additional amunts are loaned to the sane primary
maker, is a new loan executed:
If 8 new loan ia not executed, are 8cco;~-.odationrakers
informed of the additional anounts loand:
16
I
5.
Policies and regulations relating to acceptability of accomodation makers
who are already accommodation makers to existing loans:
a.
b.
6.
Is there a limit on the total number of loans such an accommodation
maker may have co-signed:
If yes, what is the nuxerical limit:
Yes
Is there a limit on the total amunt of loans such an accomnodation
maker may have co-signed:
If yes, what is the limit:
Yes
C
Policies and regulations relating to number of accommodation mkers on a
given loan:
a.
Do you require a ainimum number of accommodation makers for each loan:
If yes, does the minimum number depend on the existence of other security:
If yes, is the minimum number related to the amount of the loan:
7. Estimated portion of total loans for a recent 12-month period secured by
accommodation makers which were collected in whole or in part from
acco-dation
makers:
a. Estimated percentage of total number of loans secured by accommodation
makers which were collected in whole or in part from accommodation makers:
b.
Estimated percentage of total amount loaned secured by accomdation
makers which were collected in wkzole or in part from accomdation makers:
c.
Inclusive dates to which above estimates are applicable:
to*
-No
-No
PUBLISHED REPORTS OF THE LEGISLATIVE REFERENCE BUREAU
1953
1. Federsl Limitations on the Territorial Taring Power. 28p.
The Hawaiian Homer Commisrion. alp. (out of print)
1954
I. Konohiki Fishing Righk. 4lp. (out of print)
2. Home Rvia in Hawaii. 45p.
3. Goveinmental Employment in Hawaii, 25p. (Supplemented 1957 and 19621
4. Governmental Use o f Automobiles in Hawaii. 68p. (out of print)
1955
1. Digest of Propadr for Cambatting Unemployment in Hawaii. 52p.
1956
I. Residential Treatment of Maladiusted Children. 80p. (out of print)
2. Jury Feer in Civil Cases. 53p.
1957
1.
2.
3.
4.
A Study a i Extending Unemployment Insurance to Agricultural Labor in Hawaii. 64p.
A Study of Large Land Ownerr in Hawaii. 28p. (out of ~ r i n t ]
Mineral Rights and Mining Lewi. 49p.
A Report on Adminirtration of Territorial Courfr. 30p. (out of print)
1958
1. Revirion of State or Territorial Statutes. 2bp. (out of print)
2. Reapportionment of the Territorial Legidaiurs. 46p. $1
3. Hawaii Legislative Manual. 88p. (out of print)
1959
1. The Foreign-Trade Zone. 4 8 ~ .$I
2. Administration of Indigent Medical Care in Hawaii. 55p. (out of print)
%ma Effects of Hawaii's 1957 Tax Law. ll8p. $1.50
Hawaii State Government Organization. 2 mlumer. (out of print)
1960
1. Pre-Serrbn Filing end Related Legislative Precedurer. 38p. $ I
2. Capital lmptovementr Ptograms in Hawaii. 47p. $I
3. The Cortr of H ~ r ~ i t a l i z a f i ofor
n lndigentr i n Hawaii. 42p. $1
4. Public Arridance in Hawaii: Statutory Piovirionr and Trends in Payments. 31p. $ I
The Structure of the Hawaii State Government. 25p. (out of print]
1961
I. Disaster Relief: Canriderationr for State Actbn. bop. $I
2. Free Choice of Physician in Hawaii's Medical Care Progtam. 21p. $I
3. Real P r o ~ e r i yTax Exemption in Hswaii. 29p. $I
4. School Boards and Public Education. 139p. $I
5. Public Land Policies of the United Stater and the Mainland States. b7p. $1
6. The Hawsii Public Utilities Commission. 89p. $1
7. Care of the Chronically Ill and Disabled Aged. 44p. $ I
8. The Hawaii Antitrust Act. 68p. $2
i9b2
I. Tar Ptobiems and Fiscal Policy in Hawaii. 74p. $ l
2. Hawaii iegiriaiive Manuel. Rev. ad. 80p. $ i
3. Nursing and Nursing Education in Hawaii. 1 l7p. $1
1963
I. Study of the Workmen'r Compensation Law in Hawaii. 154p. $1
2.
3.
4.
5.
Hawaii's General Excise Tax. 56p. $1
Nonresident Students and the University o f Hawaii. 9bp. $ I
The Role of the State in the Regulaiian of Pharmacy. i59p. $I
The Uniform Commercial Code and the Hawaii Law. 34bp. $2