What is 'Accommodation Endorser'

An accommodation endorser is one who agrees to back the credit obligations of another party in order to allow that party to obtain credit for which they would not otherwise qualify. It is the equivalent of a payment guarantee.

BREAKING DOWN 'Accommodation Endorser'

An accommodation endorser is a party in an accommodation endorsement, which is a written agreement from one entity to back the credit liability of another. This insurance is made without consideration and adds strength to the creditworthiness of the insured entity. Accommodation endorsements are usually made by a parent company to a subsidiary and allow the subsidiary to take on the parent's credit standing but can also be made among private individuals. This means that accommodation endorsers can either be corporate entities or private individuals. The advantage of having an accommodation endorser may not only include obtaining credit but may result in a reduced rate of interest as well.

An accommodation endorsement is applied when a corporate parent acknowledges that it will pay a loan if the subsidiary applying for the loan is unable to pay it. Accommodation endorsements are usually used by one person to back the credit liability of another person with a poor or inadequate credit history. This practice can be ill advised from a financial perspective because the holder of the note can go after the accommodator rather than the debtor and will do so if the accommodator has substantial financial resources or is easier to locate than the debtor.

Accommodation endorsements involve no transfer and negotiation to the accommodating endorser. The endorser merely lends his signature to the paper to induce someone else, often a bank, to accept the negotiation/transfer from the payee. An accommodation endorsement is similar to a government guaranteeing a third party's debt with its full faith and credit. There are important legal limitations to remember when dealing with accommodation endorsements. An accommodation endorsement of a partnership made by one partner, but which is not within the scope of the firm business, will not bind the firm and other partners, unless such endorsement was in fact specially authorized or agreed to, or is subsequently ratified. Likewise, a mere accommodation note or accommodation endorsement by a married woman is not sufficient to create a charge upon her separate estate.

Example of ‘Accommodation Endorser’

Accommodation endorsers typically have some relationship with the borrowing person. A common example from everyday life is when a parent guarantees the lease payments of a child by co-signing on the lease, so that the child can enter into a lease agreement for a car or an apartment. As a result, the creditworthiness of the party receiving this benefit is enhanced. It also applies as a banking practice whereby one bank endorses the acceptances of another bank for a fee, making them appropriate for purchase in the acceptance market.

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