Do the lenders at your credit union or bank know the common risk management expectations related to obtaining a loan guaranty? Does your loan policy provide appropriate guidance relating to guarantors? The NCUA has a regulation that credit union Member Business Loans (MBLs) generally require the personal liability and guarantee of the principal. In addition, credit unions are required by regulation to have a comprehensive written commercial loan policy and it must address guarantor financial reporting. In this article, I will focus on some of the specific items your loan policy should cover in relation to guarantees, financial information you should obtain, and the type of financial analysis you should do.

“A guarantor from a financially responsible party can help to ensure a loan is repaid. A guarantor may be able to preclude a loan from being classified or reduce the severity of the classification.” The above statements were made in the Policy Statement on Prudent Commercial Real Estate Loan Workouts put out by the Federal Financial Institutions Examination Council (FFIEC) in 2009. The NCUA is a member of the FFIEC. That policy statement goes on to state the attributes of a financially responsible guarantor include:

The guarantor has both the financial capacity and willingness to provide support for the credit through ongoing payments, curtailments, or re-margining.
The guarantee is adequate to provide support for repayment of the indebtedness, in whole or in part, during the remaining loan term.
The guarantee is written and legally enforceable.

Your credit union’s loan policy should have a section that addresses guarantors including the requirement to get a guarantor or seek a waiver as outlined in 12 CFR Section 723. The loan policy should include a description of authorized guaranty types, requirements for receipt and ongoing analysis of guarantor financial information, policy exceptions standards, and documentation requirements.

When you initially underwrite a loan that has a guarantor, you should analyze the guarantor’s global financial condition and global cash flow to determine the strength of this secondary source of repayment. To do this analysis, you may need more than a personal financial statement and tax return from a particular guarantor. In some cases, you will also need to obtain statements of liquidity, or obtain information about a guarantor’s other projects by obtaining K-1 schedules or even operating statements on other projects. You will want to make sure you understand a guarantor’s contingent debt obligations as part of the evaluation of the borrower’s global financial condition. Not doing a sufficient analysis of a guarantor could be criticized as a loan administration weakness by credit review or the examiners.

Some of the items you should consider when performing a guarantor analysis include looking at the legal structure of the borrowing entity and the guarantor's relationship to it; evaluating the guarantors asset valuations; verifying the guarantors liquidity; determining sources and amounts of recurring cash flow; evaluating actual and contingent liabilities; and reviewing any other factors necessary to demonstrate capacity to support the loan. Some of these other factors may be any contingent liabilities or other businesses the guarantor has which can weaken his ability to support your loan as a guarantor.

Your initial analysis of a guarantor should be done when you first underwrite and approve a loan. As mentioned above, your policy should dictate what type of ongoing analysis is necessary. At subsequent loan renewals or during annual loan approvals you may not need to do a detailed analysis. If the loan is performing well and is of high quality, has good prospects for the ongoing primary repayment source, and sufficient collateral coverage then detailed financial analysis of the guarantor may not be required. In addition, it may not be necessary to do more than a cursory review of a minor guarantor’s financial conditions if they are not a significant part of a loan’s repayment prospects.

When you obtain a guaranty, you are presuming the guarantor is willing to honor it. If the loan deteriorates and becomes reliant on the guarantor for support, then the guarantor must demonstrate support in some fashion. If that does not happen, then the risk rating on the credit should be determined as if there is no guarantee in place.

The concepts presented in this article are outlined in various regulatory guidance.

Rod Werhan was a career National Bank Examiner with the Office of the Comptroller of the Currency who retired in February 2020 after more than 36 years of service. His credit experience includes examining commercial and retail lending in community, mid-size, and large institutions.