Hello, we have an officer who sent up a denial packet. The application was made by an entity (an LLC) in their name, and the individuals listed were to be guarantors only. However, the officer stated the reason for denial was the DTI of the guarantors.

From my years of understanding, you can't deny an entity for DTI because entities have no 'income'. I asked the officer to review the "Guide to Reasons for Adverse Action" and see the bottom two reasons which are typically the ones used when denying entities (those being (1) Lack of Established Earnings, or (2) Slow or Past Due in Trade or Loan Payments). Generally all of the standard denial reasons (except maybe value/type of collateral) are for individual applicants (not entities).
The officer responded that yes the applicant was the LLC but the denial reason stands as the guarantors' personal DTIs.

Does anyone else have thoughts on this? I'm still not comfortable signing off on denying an entity for an individuals' personal debts and incomes. If the officer is solely relying on the guarantors for repayment, wouldn't that make them co-borrowers instead of guarantors???

Thank you.

Apparently a guarantor was required in this situation (LLC does not qualify on its own or policy requires the guarantee of the principals of a closely held corp.). If the presented guarantor does not qualify to guarantee the debt then what other reason for denial would you use?

But at the point that the LLC didn't qualify on its own...wouldn't that ultimately be the denial (i.e. WHY did the LLC not qualify on their own)?
Like if I apply for a loan and don't qualify on my own, I'm denied for that reason, not because of why another party did not also qualify?

And since guarantors don't get Adverse Action Notices, that also makes me think we would not use the guarantors' DTI as a denial reason.

Further thoughts Dan? I appreciate it.

Why was there a guarantor involved. Did they apply with a guarantor - do you require certain individuals in a closely held business always guarantee such loans? We can't answer your question without knowing the facts of the situation. See Reg B.

Paragraph 7(d)(6).

1. Guarantees. A guarantee on an extension of credit is part of a credit transaction and therefore subject to the regulation. A creditor may require the personal guarantee of the partners, directors, or officers of a business, and the shareholders of a closely held corporation, even if the business or corporation is creditworthy. The requirement must be based on the guarantor's relationship with the business or corporation, however, and not on a prohibited basis. For example, a creditor may not require guarantees only for women-owned or minority-owned businesses. Similarly, a creditor may not require guarantees only of the married officers of a business or the married shareholders of a closely held corporation.

And since guarantors don't get Adverse Action Notices, that also makes me think we would not use the guarantors' DTI as a denial reason.

The adverse DTI reason notification would go to the LLC, not the guarantor. You have to inform the LLC the reasons for denial and if the guarantor's DTI is one the reasons for denial then that is what you disclose to the LLC.

The following from Randy's cite is what rely on.

A creditor may require the personal guarantee of the partners, directors, or officers of a business, and the shareholders of a closely held corporation, even if the business or corporation is creditworthy.

It seems that the LLC "couldn't" provide any current financials, so they were solely relying on the guarantors' income.
I have since also found out that we require personal guarantees on business credit cards made to entities.

Thank you all for your input.

Sounds like you just have an incomplete application to me.

At the end of the day, a guarantor must meet the bank's requirements. If they do not, the loan can't be made. The guarantee of a person close to the company (officer, partner, etc...) isn't obtained just for the sake of getting a signature.