CUNA’s compliance staff continued its look into the NCUA’s new member business lending rule last week with a CompBlog entry looking at personal guarantees. The removal of the personal guarantee requirement became effective in May 2016.
The NCUA changed the rule to eliminate the need to apply for a waiver from the personal guarantee requirement, giving credit unions the ability in some circumstances to make member business loans without a personal guarantee.
These circumstances can be very limited, as the NCUA has made it clear it will expect a personal guarantee in most cases. The most effective guarantee is still an unlimited, joint and several personal guarantee from the principals that have a controlling interest of a borrower’s operation.
Credit unions should only waive the requirement for a personal guarantee when the credit union has a strong credit risk management program and the ability to properly mitigate the additional risk, in order to meet the needs of a financially strong borrower.
According to the Examiner’s Guide, “financially strong” borrowers demonstrate a preponderance of the following:
The NCUA has also stressed the importance of documenting the mitigating factors that justify the credit union’s decision to make a loan without requiring a personal guarantee. When examining a credit union that grants commercial loans without personal guarantees, examiners will evaluate the strength of the credit union’s credit risk assessment process at inception and throughout life of the loan.
The decision to forego the personal guarantee should be supported by a comprehensive risk assessment, and credit unions should monitor the borrower’s financial condition by requiring frequent financial reporting and compliance with specific well-defined financial covenants.
For additional details, see the CompBlog entry.