The Origin of Co-applicants

Co-applicants are not a new phenomenon as part of a comprehensive application process. Most of us might have experienced a co-applicant process when we apply for a mortgage and sometimes an automotive or a car loan.

Some of us who have gone through the hassle of getting a tuition loan for college or university might have encountered this as well when our parents needed to complete part of the education loan application process as guarantors.

There could be situations where both spouses or husband and wife must complete a separate application as part of the comprehensive application process to give lenders more confidence in issuing a loan guaranteed by two or more applicants.

To control for various ways a co-application or a sub-application works, the application itself or the main application must live on our Product Studio that has awareness of what is happening in the main application. We took the time to think through various ways a co-application could come into existence based on context.

Why Do We Need Co-applicants?

There are two main reasons why a lender would need more than one applicant to complete an application. There are legal requirements, and most often, there is a risk requirement.

Let’s start with the legal requirements. In some states within the United States of America, when a spouse is applying for a personal loan, the other spouse must be notified and provide a signature on the application. These types of common law requirements are not unusual. There are nine community property states that require the spouse to be notified and sign for any personal loans the other spouse is entering into.

Some co-applicant requirements come from the lenders themselves. For larger loans against large assets, banks and lenders would like another applicant, typically the spouse, to sign for the lending contract. This is not a legal requirement but more of a safety measure for the lender or the bank to feel comfortable when extending credit.

There are other situations where a parent would like to help their kids start building credit, and there might be a sub-application process in which the child is added onto the main application so they can be an authorized user of the credit card. Sometimes the credit card issuing bank might report the child to the credit bureaus to help them build credit at a young age, but it is not required by law or offered by all credit card companies.

When the situation goes beyond personal credit and becomes a small business lending situation, the co-applicant process and requirements become even more complicated. The reason being that most small businesses have more than one principal owner who is part of the limited liability company or incorporation.

During COVID, the United States government started to dispense emergency cash to float businesses in the form of cash or tax credits. These loans and credits were dispensed through the Small Business Administration.

We saw a massive scale of applications asking for government assistance, and these online applications were being put together by a ton of banks and fintechs to facilitate credit issuance. Most of these applications were consistent with requirements that needed multiple small business owners to sign these forgivable loan agreements.

Sometimes these applications were completely in a single application process, assuming all of the business owners were in front of the same computer. But more sophisticated lenders offered a way to email a separate application to other business owners other than the one who initiated the application process.

LendAPI has designed various ways this process can be configured, whether the loan application requires one additional co-applicant or multiple business owners to sign an overall comprehensive application such as in the era of massive governmental bailouts with the Paycheck Protection Program and Employee Retention Credits.

Credit Risk Is The More Common Need for Co-Applicants

The more common reason why a co-applicant is needed is because of credit risk. We can render this process in two main paths, one of them is static, and the other is dynamic.

The most static way of asking for a co-applicant is that the main applicant knows that his or her credit rating or income level is less than stellar, and the main applicant proactively adds another co-applicant to be underwritten.

If the application process is designed in such a way that the applicant is able to create a sub-application, then often, an email or SMS is sent to the co-applicant to start a whole new application.

The lender at this point can make a choice of whether to underwrite the main applicant or wait for both applications to be completed and underwrite both at the same time, knowing that there is more than one application in flight.

From a lender’s point of view, this gets pretty interesting for the following reasons. If the main applicant actually qualifies for the loan by him or herself, the sub-application may not be necessary. But because that sub-application is already in flight, the lender can let the sub-application be completed for record keeping purposes or cancel that sub-application if it has not started.

There are other considerations as well, if the lender wants to let both applicants sign the agreement regardless of whether the sub-applicant is needed from a creditworthiness perspective, then the lender may want that applicant to finish anyway so they can jointly sign the agreement at the end of the process when both applicants finish their separate applications.

The most intelligent way of directing co-applicants is to ask for a co-applicant dynamically and contextually.

For example, if the main applicant is filling out an application and during the initial underwriting process, especially when the main applicant’s credit is pulled, the lender’s application might dynamically ask, in context, for another applicant to submit their application in addition to the main applicant’s application.

Although this is a very dynamic process, the main applicant might get caught off guard as to why the application process is asking for another signer or co-applicant. If it is not explained correctly, it might lead to confusion, abandonment, or even embarrassment.

However, if the messaging is done tastefully, the lender might experience a surge in conversion rate because there is a higher chance of approval with another applicant on file who may have a higher credit rating than the main applicant.

In the context of a small business loan, most lenders will require as many small business owners as needed who either own more than 10% of the business or all of the applicants compose more than 51% of total business ownership.

The interesting outcome of this formulation is that certain small business owners’ creditworthiness might be less than stellar and might cause a negative impact on the overall creditworthiness of the entire business. Lenders might have to carefully consider each business owner's profile and balance that with the need to maximize conversion rate.

Regardless of the setup, the decision path, and whether to enter co-applicants dynamically or statically, we have you covered at LendAPI. Our configuration tool works under all scenarios to produce the best path and presentation of the multi-applicant process.

The Ultimate Co-Applicant Experience

We have been working with a few of our key clients to understand their co-applicant experience, plus our professional experience, to produce the best and most configurable tool available for our clients to enjoy.

The configuration is complex, but we hope to solve all situations with this new feature and give you the ultimate experience when it comes to configuring the most complex co-applicant experience possible.

About LendAPI

LendAPI is a super-orchestration platform that helps banks, fintechs and retailers to launch embedded finance products instantly. Start a free trial at www.lendapi.com. Follow us on Linkedin, X, YouTube and our Weekly Newsletter with our Marketplace Slack Community.