Compliance Blog

Written by Brandy Bruyere, Director of Regulatory Compliance

As many of you know, on Thursday the NCUA Board finalized broad changes to its member business loan (MBL) rules. Most of these provisions will not become effective until January 1, 2017 and we will address some of those changes in future blogs. Today I want to highlight a change that will become effective in late April, 2016 relating to the personal guarantee.

As a reminder, for MBLs, section 723.7 currently requires the personal guarantee of the principals of the organization, with an exception carved out for non-profit organizations. A credit union's regional director can waive the personal guarantee requirement, but this process can take time that a credit union may not always have when a member is seeking a loan.

The final MBL rule contains a transitional provision specifically for the personal guarantee requirement that will allow credit unions some flexibility in this requirement. Under revised section 723.7(b)(1), if a credit union does not require the principal's full and unconditional guarantee, the credit union must document mitigating factors that will offset the relevant risk. This provision does not become effective until 60 days after the MBL rule is published in the Federal Register, meaning credit unions will still be required to obtain a member's personal guarantee until sometime in late April, 2016, absent a waiver from the credit union's regional director. Here is an excerpt from p. 65 of the section-by-section analysis in the rule's preamble:

The Board clarifies that the rule allows credit unions to grant loans without the personal guarantee of the principal(s) only when there are strong mitigating factors to offset the additional risk created when the loan is not guaranteed by the primary beneficiary of the transaction, which is generally the principal(s) of the borrower. The credit union's decision to forego the use of a guarantee should only be approved when it meets the needs of a financially strong member and other credit-risk mitigations exist.

The Board reiterates that having the principal(s) of the borrower commit their personal liability to the repayment obligation is, in many cases, very important for commercial lending. Accordingly, the rule makes clear that excusing principals from providing their personal guarantee for the repayment of the loan may only be done with appropriate corresponding underwriting parameters and portfolio safeguards. The credit union should set prudent portfolio limits for these types of loans, measured in terms of a reasonable percentage of the credit union's net worth. Commercial loans without a personal guarantee should be tracked and periodically reported to senior management and the board.

The final rule is located here, and NCUA created this summary of the changes. NAFCU's Regulatory Affairs team is working on a Final Regulation for our members which will be available in the coming weeks.