Category: 

What is an Accommodation Party?

Article Details
  • Written By: L. Burgoon
  • Edited By: R. Halprin
  • Last Modified Date: 10 November 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
The mongoose was introduced to Hawaii in order to kill rats, but mongooses hunt in the day, while rats are nocturnal.  more...

December 7 ,  1941 :  Japanese bombers attack Pearl Harbor.  more...

An accommodation party is a person or entity who agrees to assume responsibility for the debt of another if the obligation goes unpaid. The party lends his or her name and good credit to the financial agreement and assumes the risk of repayment if the borrower defaults. Accommodation parties, however, are generally not reimbursed for their service or entitled to any financial bonus that stems from the loan. A common type of accommodation party is a loan cosigner. An accommodation party may also be known as a surety or third party guarantor.

Accommodation parties can be used in a variety of circumstances. The financial obligation may be personal, such as a car loan. Business transactions, such as corporate borrowing, also may necessitate third party involvement in securing the funds.

The most common reason a surety is required is when a lender is not satisfied that the borrower has sufficient financial resources or credit history to pay back a debt. For instance, if a borrower seeks a mortgage, but is determined to be too much of a credit risk, the financing company may require an accommodation party to become a co-signer before approving the loan. The borrower in this case is then known as the accommodated party. If the accommodated party defaults on the mortgage, the lending company can seek repayment from the accommodation party, who in turn can seek reimbursement from the original borrower.

Ad

Accommodation parties also may be used to obtain better loan terms, such as a lower interest rate. In this instance, the borrower is not considered such a credit risk that he or she would be rendered ineligible to receive a loan. The credit application may be enhanced, however, based on the accommodation party’s involvement.

The parties involved in accommodation situations typically must sign an accommodation paper. The paper functions as a promissory note, indicating that the surety assumes full financial obligation for the loan should the borrower default. The paper may outline the steps the lender must take should a default occur. For example, the accommodation paper may require the lender to contact the borrower a certain number of times or take the borrower to court before suing the accommodation party.

Accommodation parties must be willing to assume risk with little tangible reward. The benefit mostly comes from knowing that the party has helped a friend, relative, or associate secure financing. The risk is inherent because the surety would not be required to participate in the transaction if the borrower had adequate resources or credit to begin with.

Ad

You might also Like

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email