[MCCompliance]

I know this topic has been discussed a lot, but we are having a debate here and would like some extra input.

Commercial loan request to a business to purchase commercial property. Business is owned 50/50 by mother and son.

We receive a PFS with the “intent to apply jointly” section completed by mother, son and father. Loan would be set up as the business as borrower and mother, son and father as guarantors. (We did not request or require the father).

Is it acceptable to have the father as guarantor? Some say yes, because he offered his guaranty upfront voluntarily. Others say no, because individuals cannot “apply” as a guarantor unless owner/officer, etc.

[kowsley]

In the commentary to 1002.7(d)(6) this issue is addressed (see below). I am assuming that since the business is owned 50/50 by mother/son then it is structured as a partnership. Based on the commentary it appears that the creditor may require the personal guarantee of the partners and would be allowed to accept the personal guarantee of the spouse of one of the partners as long as the creditor can demonstrate the need to have the additional guarantor on the loan, i.e. additional income needed. The spousal guarantee of the partners can’t be required as you noted in your question.

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.

2. Spousal guarantees. The rules in §1002.7(d) bar a creditor from requiring the signature of a guarantor’s spouse just as they bar the creditor from requiring the signature of an applicant’s spouse. For example, although a creditor may require all officers of a closely held corporation to personally guarantee a corporate loan, the creditor may not automatically require that spouses of married officers also sign the guarantee. If an evaluation of the financial circumstances of an officer indicates that an additional signature is necessary, however, the creditor may require the signature of another person in appropriate circumstances in accordance with §1002.7(d)(2).

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