While acknowledging some credit unions have had problems within their member business lending portfolio over the past year, NACUSO General Counsel Guy Messick questioned whether having a personal guarantee attached to the loans had anything to do with them going sour.
That questioning will be the crux of a comment letter Messick is planning to submit to NCUA after the board passed in March a proposed regulation eliminating four of the 10 regulatory relief items provided to well-capitalized and well-run credit unions as defined under NCUA Regulations Part 742-best known as the "RegFlex" regulation. Initially proposed in 2001, the regulation was intended to eliminate unnecessary regulation for well-performing credit unions.
The elimination of the exemption for personal guarantees on MBLs "is only supported by evidence that business loans have caused significant losses in some credit unions," Messick said.
"While I am sure that is the case, there is no evidence as to whether the losses sustained would have been mitigated or eliminated by personal guarantees. If a small business goes bad, the owner usually has exhausted his own funds as well," Messick wrote on NACUSO's Web site.
"I question how many regional directors will be inclined to grant any waiver requests in this economy no matter how strong the deal," Messick said. "It is my personal opinion that NCUA has not fully established the evidence to support the action on personal guarantees."
The NCUA's MBL rule requires a credit union making a business loan to obtain the personal liability and guarantee of the borrower's principals as part of the rule's collateral and security requirements. Under the current rules, RegFlex credit unions are exempt from that requirement but may choose to require the principals' guarantee as part of their own underwriting standards and best practices.
"NCUA believes 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," the regulator wrote in its proposal. "A credit union that fails to do so subjects itself to increased risk, particularly in these economic times when MBL delinquencies and MBL charge-offs have increased."
Messick said while in a perfect world personal guarantees are desirable, he wondered how much of an actual difference they make in the collectability of the loan. "The problem is that the requirements of the personal guarantee have put credit unions in a competitive disadvantage," Messick said. "Many extraordinarily good loans to strong companies could not be made as banks have the flexibility to offer loans without personal guarantees."