sole prop unlimited guarantee

We have a sole prop. with another individual giving a unlimited guarantee which includes future advances. Reg B seems to probibit this. Has anyone ran across this?

What part of Reg B do you think prohibits this practice??

What is the relationship of the other individual providing the unlimited guaranty? Also, is the income or assets supporting the ability to repay? The FDIC has been taking a close look at "non-applicant co-owners subsequent to the issuance of FIL 6-2004.

I'll run with this one. I think this is a great topic for discussion.

§202.7(d) prohibits a party from becoming liable unless they apply. If I sign an unlimited guaranty with my wife for our business operations, it could be used illegally by the bank in future credit obligations.

Most unlimited guarantees say they apply to EVERYTHING in the future (they automatically attach). That's why they are call "unlimited". Imagine my wife wants to get a credit in her own name to purchase a car. Technically she can't if the unlimited guarantee exists unless it is somehow "cut off". IOW, when she applies for credit, the guarantee that I signed in the past automatically attaches itself to her new credit obligation.

I'd say that's a problem with Reg B. What do you say?

We had an examiner point this out to us, and since then we have coverted to laser pro, which gives us a warning anythime we use a unlimited guarnatee (when the borrower is not a corp or ptrship). The explanation David gave coincides with that of the examiners. My confusion on this is that Reg B makes an exception to situations where the guarnator is a officer or director or large stockholder - none of which catagories you would have on a sole prop.


Staff commentary Regulation 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.

On a sole prop - there is no real business entity. They are in essence providing an unlimted guarantee for an individual. I concur with David's rationale.