Will Examiners Second Guess Unguaranteed Business Loans?

Will the National Credit Union Administration (NCUA) examiners second guess credit union business loans that don't have personal guarantees?

In May 2016, NCUA replaced the explicit requirement of personal guarantees on business loans with an implicit expectation that credit unions should obtain a personal guarantee.

According to its updated Examiner's Guide, "[a] credit union should only waive a requirement for a personal guarantee when the credit union has a rigorous credit risk management program in place and the ability to properly mitigate the additional risk. The reliance on a personal guarantee should not be relinquished solely to meet competitive pressure."

NCUA expects that only financially strong borrowers would be eligible to receive a personal guarantee waiver.

NCUA lists multiple factors that should be used to determine if a borrower is financially strong, including superior debt service coverage, positive income and profit trends, a strong balance sheet with a conservative debt-to-worth ratio, readily salable collateral supporting the loan, and a low loan-to-value ratio for the loan.

In addition, credit unions must set concentration limits in their policies on the maximum amount of business or commercial loans that do not have personal guarantees.

Moreover, NCUA expects a credit union to "monitor a borrower's financial condition by requiring frequent financial reporting and compliance with specific well-defined financial covenants. The borrower’s operation should be monitored by frequent contacts by the credit union with the borrower to evaluate if there have been material changes to the operations."

In closing, the Examiner's Guide states that "[e]xaminers should determine whether a credit union adheres to its policy in granting unguaranteed commercial loans. Examiners should give particular attention to the credit union’s ability to monitor the performance of these loans. Loans without the benefit of a personal guarantee should be reported to the board in the aggregate and clearly monitored for adverse changes in their repayment performance or overall risk."

Unfortunately, too much of the guidance is based upon subjective language, which will give credit union examiners a lot of leeway to second guess business loans without personal guarantees.

Read the section on personal guarantees.