According to the Texas Attorney General’s Office, co-signers are responsible for debts when they sign on the dotted line and agree to guarantee loans for borrowers. Lenders can hold co-signers and primary borrowers jointly liable for repaying their debts. Creditors have the same remedies against co-signers as they have against primary borrowers. Furthermore, Texas law does not prohibit lenders from pursuing repayment from co-signers without first seeking repayment from primary borrowers.
When a co-signer signs on the application for a borrower, they are legally agreeing to assume responsibility for the debts in question in the event that the primary borrower defaults.
Exploring Texas Law
According to the Texas Administrative Code and Finance Code, creditors cannot charge consumers or their co-signers interest in excess of the state’s usury limits. Furthermore, creditors must disclose their late fees in writing before they can assess them. Consumer retail installments lenders, according to the Texas Attorney General, often require borrowers to provide co-signers guaranteeing their loans if their credit scores are not high enough. Furthermore, pawn shop and rent-to-own lenders must comply with the weekly maximum interest rates set by the Texas Office of the Consumer Credit Commissioner.
Assessing Federal Law
The federal Credit Practices Rule covers installment credit debts and debts that are co-signed. The Federal Trade Commission is responsible for enforcing the Credit Practices Act. According to the federal law, creditors must disclose the essential terms of their loan agreements before they can collect debts against co-signers. The consumer protection law covers auto dealer loans, retail loans and financial loans. The rule does not apply to credit card loans, bank loans or savings and loan association debts. Furthermore, the rule does not apply to commercial or business loans. The federal Credit Practices Rule requires creditors to disclose their co-sign agreement provisions in writing before they can enforce them. Creditors must provide these written disclosures to third-party co-signers warning them about their potential liability upon default.
Defining Interest Limits
Texas law limits the amount of interest that motor vehicle creditors can charge co-signers and borrowers. As of the time of publication, the Office of the Consumer Credit Commissioner prohibits lenders from charging retail vehicle consumers more than 27 percent interest for their car loans. Pawnshops are limited to 240 percent per year.
Some Prohibited Practices
The Credit Practices Rule also covers late fees, and covered lenders cannot charge late fees against primary borrowers or their co-signers for late fees paid late. In other words, covered lenders can assess late fees for late payments, but they cannot assess late fees simply because co-signers or primary borrowers failed to pay assessed late fees by certain dates. The practice of “pyramiding late fees” is illegal under federal law.
Other Additional Considerations
State laws do change from time to time, so it's worth checking with an attorney or researching the latest legal information before considering any particular loan terms.
In general, it's useful to shop around as much as possible when considering a potential loan, since different lenders may offer different rates or other terms that are more or less to your liking.
Jill Stimson has worked in various property management positions in Maryland and Delaware. Stimson worked for the top three property management companies in the commercial industry and focuses her career on property building logistics and tenant relationships. She holds a Juris Doctor and a Bachelor of Science in psychology.