Personal Guarantees and MBLs

The National Credit Union Administration (NCUA) Board is proposing to eliminate from its Member Business Loan (MBL)regulations the requirement that a credit union obtain a personal guarantee when originating a business loan.

This comes five years after the NCUA Board rescinded an exemption for RegFlex credit unions from obtaining personal guarantees when making a MBL. In 2010, NCUA wrote that obtaining the principals’ personal guarantee is a prudent underwriting practice that greatly enhances the likelihood of loan repayment and should be required of all credit unions. A credit union that fails to do so subjects itself to increased risk.

According to the proposed rule, the NCUA Board continues to believe having the principals of the borrower commit their personal liability to the repayment of the obligation is very important for commercial lending and is a form of credit enhancement.

NCUA expects loans without personal guarantees may only be done with appropriate underwriting and portfolio safeguard. For example, a credit union should set limits for MBLs without personal guarantees as a percentage of a credit union's net worth.

Also, the NCUA Board expects a credit union to track commercial loans without personal guarantees and report on these loans to senior management and the credit union board.

I suspect that credit unions will wave the use of personal guarantees for the best commercial borrowers.

But I also believe that NCUA will probably revisit the issue of personal guarantees on MBLs the next time there is a downturn in the credit cycle.