We have a situation where the spouse of a business owner has voluntarily provided her guaranty. The borrowing entity is in the construction business and, therefore, requests extensions of credit on a frequent basis. Because the spouse does not have a "qualified relationship" with business, we would normally required the guaranty to be limited. However, this particular guarantor is REQUESTING an unlimited guarantee (she is stating none of the other banks they work with limit her guaranty). I'm not too familiar with the requirements around guaranties but I understand there are fair lending risks involved with unlimited guaranties for individuals who don't have a qualifying relationship. Is there a way to get around this due this being at the guarantor's request?

Thanks in advance for any input!

A guarantee is required by the bank or it is not. I have never been in a bank that would accept a "voluntary" guarantee otherwise at some point to time they are going to have to explain why they have it.

Our bank has been accepting voluntary guaranties and documenting our loan files appropriately based on the FDIC’s 2013 guidance on Managing Risk Related to Regulation B’s Spousal Signature Provisions—Guaranties which states, “We have heard from some banks that spouses without a qualifying relationship to a business have voluntarily offered to guarantee the debts of that business before the creditworthiness of that business has been evaluated. While voluntary guaranties are not prohibited by Regulation B, a bank accepting a voluntary guaranty should have contemporaneous documentation in the loan file demonstrating that the bank has analyzed the creditworthiness of the applicant, determined whether a guarantor was necessary, and if not necessary, that the spouse’s decision to offer the guaranty was, in fact, voluntary and a choice exercised after being fully informed of the options.”

Then what difference would it be if the guarantee was limited or unlimited. What you have to avoid is continuing guarantees - not the amount of the guarantee.

Ok, I am referring to continuing guaranties when I say unlimited-- my apologies. So, even if the guarantor is requesting to sign a continuing guaranty, no matter how well we document this was 100% her decision, we shouldn't do it?

Well continuing guaranties present sort of a conundrum when you are talking about Regulation B. How do you document the voluntary nature of the guarantee every time you extend existing or additional credit without documenting all of the issues that you mentioned above? How do you document "a choice exercised after being fully informed of the options” if all you do is say - yes we have it in file already? Hence my first comment - to who's benefit is all of this additional risk and work accruing too if the guarantee is not needed by the bank.

Thank you!

Nicki, Randy made it very clear - another way the regulators may look at a "not needed" guarantee, is that the request was off the record by the bank. It would be easy in a conversation for a LO to mention to the client that . . . "there would be a lot of work needed to get the loan request approved, but if you voluntarily agree to be a guarantor, . . . " There is no paper trail, but the suspicion of why would anyone in their right mind sign a guarantee if they did not need to? Too many of those, (or a complaint) and they could request an in-depth review.

Reviving this unlimited/continuing guaranty discussion.

As a standard practice, we do unlimited guarantees in commercial transactions where the principals of the business are the guarantors. It's my understanding that by signing an unlimited guaranty, they are guarantying all future loans to that business. Is this practice a Regulation B risk? I'm attempting to make a case for limited or specific guarantees, but would that only be applicable to sole props, business individuals or a consumer transaction?

Mel, IMHO, no, for a couple of reasons.

Consumer transactions are usually singular. Buying a house, car, etc. commercial, i.e. business purpose, are usually integrated with each other, such as capital, cash flow, inventory, equipment.

Additionally, ECOA is primarily protection of individuals - race, ethnicity, age, religion, etc. There are a few protections for businesses, specifically in the notifications. The big caveat I see is if unlimited guarantees are required of minority businesses, but not of similarly situated non-minority businesses, it could be an issue.

It actually all comes down to the definition of an applicant.

(e) Applicant means any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit. For purposes of §1002.7(d), the term includes guarantors, sureties, endorsers, and similar parties.

As you know, 1002.7(d) are the signature rules. So, if I apply and know that my credit is not that good and my brother also volunteers to be a guarantor on my loan, you would need to document that joint intent. If you had my brother sign an unlimited guarantee and I came back later and applied for another loan, you would again have to document joint intent for myself and my brother. So, in a case such as this, unlimited guarantees become sort of cumbersome and sets the bank up for future failure.

Conversely, on commercial transactions where the bank has a policy that says that principals, shareholders, etc. are required to guarantee any commercial loan of the nature of the loan at hand and those individuals sign an unlimited guarantee, the risk is less as long as all future loans are of the same nature that the bank requires such a guarantee and the individuals in question remain in the role that according to your policy, you would require a guarantee. If it's bank policy that such persons are required to guarantee the loan to receive the credit, then intent is not specifically required to be received from those individuals.

1002.7(d)(5) Additional parties. If, under a creditor's standards of creditworthiness, the personal liability of an additional party is necessary to support the credit requested, a creditor may request a cosigner, guarantor, endorser, or similar party. The applicant's spouse may serve as an additional party, but the creditor shall not require that the spouse be the additional party.

There is some risk here. As Randy stated "the risk is less as long as all future loans are of the same nature that the bank requires such a guarantee and the individuals in question remain in the role..."

Assume, for example, I'm an officer/director of a business and the lender makes me sign an unlimited guaranty. A year later, I leave that organization and am no longer an officer or director. If the business applies for credit after I leave, I'm still legally obligated because you have a contract signed by me that binds me to all future credit. That would be a violation of §1002.7(d).

So that I understand what is being said here in relation to a continuing guaranty and joint intent.....

It doesn't change the joint intent rules......

If guarantors who are required by the bank sign a continuing guaranty...they would not need to give joint intent for future applications....

If guarantors who are not required by the bank sign a continuing guaranty....they would still need to give joint intent for future applications....

Is this correct?

Let me rephrase this.....We apparently have longstanding unlimited guaranties in place....and it was the understanding of legal counsel and commercial that unlimited guaranties do not require joint intent for new applications of credit because that makes the unlimited guaranty null.....

Joint intent is documented before obtaining the unlimited guaranty......

We do have some where spouses of principals are involved......

So is legal and commercial correct....with an unlimited guaranty we do not need to get joint intent for future applications....

I think your first two statement regarding whether or not the guarantees are a bank requirement (in the case of a closely held business for example) are correct. Whether a new application makes a continuing guarantee null in your State, would be a State law issue.

Thanks, Randy...