What is 'Accommodation Paper'
Accommodation paper refers to a third-party pledge attached to a to a promissory note that ensures payment to the recipient of the promised payment. Typically, the third party lends the power of their credit rating to support a borrower with a weaker rating.
BREAKING DOWN 'Accommodation Paper'
An accommodation paper facilitates the lending of money to a borrower who otherwise might have difficulty securing a loan due to a lack of creditworthiness. In signing the paper, the accommodator, or accommodation party, promises that the lender will receive timely repayment of a loan in the event that the borrower is unable to make that payment. The borrower is also known as the accommodated party. For legal purposes, the accommodated party retains primary liability for repayment of the debt even if the third party assumes payments.
A second benefit of an accommodation paper to the primary borrower is the potential for a more favorable loan offer. When a third party with a strong credit rating enters into a transaction, the lender’s exposure to default risk decreases. The lender will then be more willing to extend a lower interest rate or negotiate lower fees in such a case.
Accommodation Party and Similar Terms
The most common example of an accommodation party is a co-signer. This term is typically used to describe a friend or relative who signs a mortgage agreement along with the primary borrower. In doing so, the co-signer promises to guarantee repayment if the primary borrower is unable to do so. The co-signer receives nothing of monetary value in exchange. A co-mortgagor, however, does capture a partial ownership of the underlying asset in exchange for their support for the primary borrower. The co-mortgagor is in effect a co-borrower and participates in the mortgage on an equal footing to the other borrower. They must complete a full application and undergo a credit assessment on the same level as the other borrower. A co-mortgagor is not technically an accommodation party.
Accommodation parties are occasionally referred to as guarantors or sureties. These terms describe individuals entering a loan transaction to underwrite the borrower’s ability to repay. Guarantors tend to be corporate entities and the term is more common in commercial credit transactions. Typically, the lender must prove an attempt to collect from the primary borrower, or obligor, before they can approach the guarantor for collection. A surety exists on a co-equal level with the primary borrower, and the lender can pursue them for repayment while doing the same with the accommodated party.