The proposed elimination of personal guarantees couldpotentially cripple underwriting and punish those credit unionsthat have not “excessively abused their privileges,” a group of 15member business lending CUSOs recently wrote to the NCUA regardingthe elimination of some RegFlex privileges.

The Regional CUSO Alliance shared several concerns in an April26 letter to the regulator, which has proposed eliminating fourregulatory relief items under Regulation 742 for well-capitalizedand well-run credit unions. The proposed personal guaranteeelimination “seems to solve a problem that does not even exist” and“any changes may cause unintended consequences, either by severelylimiting the competitive capability or by exposing credit unions topotential good faith violations of the core policy,” wrote RCAmember Bill Beardsley, who is also president/CEO of the MichiganBusiness Connection, a business lending CUSO.

“With or without regulatory requirement, the need to ask abusiness owner to stand behind his or her company's debt is acritical underwriting consideration both philosophically andfinancially,” Beardsley wrote.

Officially formed in November 2009, the RCA represents 15business lending CUSOs that support more than 400 credit unionswith nearly $3 billion in commercial loans outstanding. Less thanone-half of 1% of the loans serviced by RCA members have nopersonal guarantee, offering proof that “credit unions haveexercised prudence and restraint with their authorities relative towaiving personal guarantees.”

“We urge the NCUA to hold accountable the 'some' who haveexcessively abused their privileges but not at the expense of the'most' who have exhibited tremendous diligence in protecting theirdepositors,” 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 anylow-risk lender with very limited upside, should not be alone inaccepting the downside, he argued. “There are often, however,subtleties relative to requiring guarantees and frequentlycomplexities in identifying all beneficial owners.”

Beardsley said most credit unions, whether utilizing in-house oroutsourced underwriting expertise, have very conventional riskappetites and credit policies, with many sticking to their owngeographic markets, communities, industries and borrowers. InMichigan, the stakes are even higher as the state grapples with oneof the highest unemployment rates in the country. While theMichigan Business Connection has spent three-fourths of its time onexisting loans rather than new ones, to be prudent with creditquality, the CUSO has doubled its efforts on monitoring and creditrisk.

“In Michigan, it's exaggerated by the fact that many lendershave redlined our state,” Beardsley said.

In the RCA letter to the NCUA, there was also mention ofRegulation 723.7, which states that all MBLs are to be secured withcollateral to create a loan-to-value of 80% or less. Principals,other than a not-for-profit organization as defined by the InternalRevenue Service Code or those where the regional director grants awaiver, must provide their personal liability and guarantee.Federal credit unions and federally insured state-chartered creditunions that meet regflex standards are exempt from this requirementand may make their own determination whether to require thepersonal liability and guarantee of principals. ?Beardsley said thepersonal guarantee portion here is vague and its link to anyproposed change in Reg. ?742 on the same matter could produce?”unintended consequences.”

Regulation 742 has provided cover to credit unions by allowingguarantees to be obtained from majority or primary owners, who areoften the most qualified and valuable, when passive investors,family trusts established for minors or small-share technicalowners were either not necessary or available, Beardsley said.

Another point to consider, he added, is that any regulation thatplaces credit unions in an inferior position relative to otherlenders threatens the perception of their capability. He pointedout that every RCA CUSO CEO has significant commercial bankingexpertise, with an average experience level of more than 20years.

“When deserved, as we believe it is in this matter, we encouragethe NCUA to aggressively defend credit unions from overreachingsymbolic changes that create and/or further the perception thatcredit unions as an industry are not as capable as other lenders,”Beardsley said. “We appreciate that sometimes regulations must bewritten down to the lower industry performance levels. It iscritical, however, that such regulation includes exceptioncapability that allows for responsive and competitive membersolutions.”

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