An accommodation party is a legal term used in commercial transactions. It refers to an individual who has agreed to act as guarantor to assist another's access to a loan or credit extension. You will also find the accommodation party referred to as:

  • Guarantor
  • Third-party guarantor
  • Surety
  • Accommodation maker (when signing a promissory note)
  • Co-signatory

What Are You Agreeing to As an Accommodation Party?

Essentially, you're agreeing to lend your own good credit rating to the financial agreement of another. It can involve some personal risk. You're agreeing to take on responsibility for another person's debt if they fail to pay. You would normally only do this for a friend, relative or business associate. There is no benefit to the accommodation party: this means no payment and no compensation. The accommodation party is liable should the accommodated party (the person requiring the accommodation party) default.

When Would an Accommodation Party Be Required?

An accommodation is necessary if an individual's creditworthiness is unsatisfactory to the person offering the terms: car purchase loans and mortgages are common examples. Business transactions, including corporate borrowing, can also require an accommodation party.

If the original borrower is incapable of paying or defaults on their loan, then the loan holder will expect the accommodation party to assume responsibility for the repayment. It is then up to the co-signer to recoup the money from the original borrower.

It's also possible to use an accommodation party to obtain better loan terms. In this instance, the borrower would not be considered ineligible for a loan, but they can enhance their application with the support of an accommodation party.

What Happens When You Act As Accommodation Party?

Everyone signs a document known as an accommodation paper that sets out the agreement terms, stating that the guarantor assumes financial responsibility for the loan if the borrower defaults. It may also outline requirements of the lender to try and recoup the money from the borrower before resorting to the accommodation party.

You can sign accommodation papers as the person agreeing to pay, the acceptor of the draft, or the endorser of the papers. You are agreeing to pay the loan and to indemnify the accommodation party against losses incurred.

Collateral in an Accommodation

Collateral refers to an object rather than credit. If a loan is secured by collateral provided by the accommodation party and the holder of the loan then damages it, the accommodation party is no longer liable for the cost of the damage on the loan. Similarly, if the collateral does not belong to the accommodation party and it is damaged by the loan holder, the guarantor is no longer responsible for the sum required to repair the item. Burden of proof is on the accommodation party.

Damaging collateral can alter the terms of accommodation including:

  • Failure to keep the item in its original state.
  • Releasing collateral without providing replacement of equal value.
  • Failing to look after the collateral in order to maintain value (i.e., a car.)
  • Failing to comply with the law when disposing of collateral.

Can the Terms of Accommodation Be Altered?

Yes, but tread carefully. If changes are to be made, then you must ensure everyone involved signs off on them, particularly if the sum of money is to be altered. If the individual holding the loan agrees to change the obligations on repayment, excluding repayment extension, then the changes mean the guarantor is no longer required to act as guarantor.

If you are a lender inheriting a modified loan, ensure you contact everyone involved to prevent a financial loss.

The accommodation party will not be discharged from duty if:

  • They agreed to the change that they now claim is the basis of wanting to give up responsibility.
  • The document, or a separate agreement, prevent them being discharged from responsibility.

A case in Indiana saw a dispute over a change to mortgage details for a building project. The original paperwork was signed by three companies and four individuals for the sum of $300,000. Over time, it emerged that a further $50,000 was required. Some of the original signers agreed to sign a second note to include this additional money but they then defaulted. Those who only signed the first note claimed they hadn't known about the second and that they were simply accommodation parties to the first loan and as such should no longer be obligated to pay as the second note discharged them of responsibility. The court agreed with them.

Although accommodation parties are common enough, it is not an undertaking to accept without due care as the personal risk can be high.

If you need help with acting as an accommodation party, you can post your legal need on UpCounsel's marketplace. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and have worked with, or on behalf of, companies like Google, Menlo Ventures, and Airbnb.