The proposed elimination of personal guarantees could potentially cripple underwriting and punish those credit unions that have not "excessively abused their privileges," a group of 15 member business lending CUSOs recently wrote to the NCUA regarding the elimination of some RegFlex privileges.
The Regional CUSO Alliance shared several concerns in an April 26 letter to the regulator, which has proposed eliminating four regulatory relief items under Regulation 742 for well-capitalized and well-run credit unions. The proposed personal guarantee elimination "seems to solve a problem that does not even exist" and "any changes may cause unintended consequences, either by severely limiting the competitive capability or by exposing credit unions to potential good faith violations of the core policy," wrote RCA member Bill Beardsley, who is also president/CEO of the Michigan Business Connection, a business lending CUSO.
"With or without regulatory requirement, the need to ask a business owner to stand behind his or her company's debt is a critical underwriting consideration both philosophically and financially," Beardsley wrote.
Officially formed in November 2009, the RCA represents 15 business lending CUSOs that support more than 400 credit unions with nearly $3 billion in commercial loans outstanding. Less than one-half of 1% of the loans serviced by RCA members have no personal guarantee, offering proof that "credit unions have exercised prudence and restraint with their authorities relative to waiving personal guarantees."
"We urge the NCUA to hold accountable the 'some' who have excessively abused their privileges but not at the expense of the 'most' who have exhibited tremendous diligence in protecting their depositors," Beardsley said.
A business owner, with all the upside of business success, should generally be willing to accept the downside risk of failure, Beardsley explained. A credit union, or for that matter nearly any low-risk lender with very limited upside, should not be alone in accepting the downside, he argued. "There are often, however, subtleties relative to requiring guarantees and frequently complexities in identifying all beneficial owners."
Beardsley said most credit unions, whether utilizing in-house or outsourced underwriting expertise, have very conventional risk appetites and credit policies, with many sticking to their own geographic markets, communities, industries and borrowers. In Michigan, the stakes are even higher as the state grapples with one of the highest unemployment rates in the country. While the Michigan Business Connection has spent three-fourths of its time on existing loans rather than new ones, to be prudent with credit quality, the CUSO has doubled its efforts on monitoring and credit risk.
"In Michigan, it's exaggerated by the fact that many lenders have redlined our state," Beardsley said.
In the RCA letter to the NCUA, there was also mention of Regulation 723.7, which states that all MBLs are to be secured with collateral to create a loan-to-value of 80% or less. Principals, other than a not-for-profit organization as defined by the Internal Revenue Service Code or those where the regional director grants a waiver, must provide their personal liability and guarantee. Federal credit unions and federally insured state-chartered credit unions that meet regflex standards are exempt from this requirement and may make their own determination whether to require the personal liability and guarantee of principals. ?Beardsley said the personal guarantee portion here is vague and its link to any proposed change in Reg. ?742 on the same matter could produce ?"unintended consequences."
Regulation 742 has provided cover to credit unions by allowing guarantees to be obtained from majority or primary owners, who are often the most qualified and valuable, when passive investors, family trusts established for minors or small-share technical owners were either not necessary or available, Beardsley said.
Another point to consider, he added, is that any regulation that places credit unions in an inferior position relative to other lenders threatens the perception of their capability. He pointed out that every RCA CUSO CEO has significant commercial banking expertise, with an average experience level of more than 20 years.
"When deserved, as we believe it is in this matter, we encourage the NCUA to aggressively defend credit unions from overreaching symbolic changes that create and/or further the perception that credit unions as an industry are not as capable as other lenders," Beardsley said. "We appreciate that sometimes regulations must be written down to the lower industry performance levels. It is critical, however, that such regulation includes exception capability that allows for responsive and competitive member solutions."