Compliance Blog

May 27, 2016
Categories: Business Lending

Personal Guarantees and an SBA Reminder; Programming Note

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Welcome to the Brave New World of member business loans, where personal guarantees aren't strictly required. Like so many fictional summer camp attendees, the strict personal guarantee requirement died on Friday the 13th.

For the period between May 13th and the end of 2016, after which the remainder of NCUA's new commercial lending rules go into effect, a transitional provision has been added to 12 C.F.R. 723.7:

723.7 What are the collateral and security requirements?

(f) Transitional provision: A federally insured credit union that, between May 13, 2016 and January 1, 2017, makes a member business loan and does not require the full and unconditional personal guarantee from the principal(s) of the borrower who has a controlling interest in the borrower is not required to seek a waiver from the requirement for personal guarantee, but it must determine and document in the loan file that mitigating factors sufficiently offset the relevant risk.

So, credit unions wishing to make MBLs without a personal guarantee no longer need to seek a waiver, but they must determine and document the mitigating factors which offset the risk of not requiring the personal guarantee. However, it is important to remember that there is still a strict personal guarantee requirement for member small business loans guaranteed by the SBA, such as SBA 7(a) Loans and SBA 504 Loans.

Section 120.160 of the SBA's Business Loans Regulations requires a personal guarantee from all business owners holding a 20% or more ownership interest:

120.160 Loan conditions.

The following requirements are normally required by SBA for all business loans:

(a) Personal guarantees. Holders of at least a 20 percent ownership interest generally must guarantee the loan. SBA, in its discretion, consulting with the Participating Lender, may require other appropriate individuals to guarantee the loan as well, except SBA will not require personal guarantees from those owning less than 5% ownership.

The SBA does not provide waivers for the personal guarantee, except regarding loans to an employee stock ownership plan (ESOP). See, 13 C.F.R. 120.354.

Historically, SBA-guaranteed loans have always been exempt from the collateral and security requirements of section 723.7 of NCUA's MBL rules. See, 12 C.F.R. 723.4(c). But with the removal of NCUA's strict personal guarantee requirement, it is important to remember that not all strict personal guarantee requirements are going the same way.

Programming Note.

NAFCU's office will be closed at noon today, and all day Monday, in observation of Memorial Day. For those men and women who have served or are serving their country in the armed forces, NAFCU thanks you. We will be back to blogging on Wednesday. Everyone have a great long weekend!