Our commercial lending practices are based on the idea that the more you can get the better. We nearly always obtain personal guarantees from all of the owners and officers of the business and we frequently ask for additional guarantees on top of that.

1. We consider joint financial statements from guarantors to be less beneficial than individual guarantees because the ownership of the jointly held assets can be manipulated and they'll be more difficult to reach in default. Are we creating a fair lending risk with this practice?

2. We often request guarantees in addition to those from the owners and officers. While we don't dictate who should provide these guarantees, the vast majority of the time they bring in their spouses to do it. How do we handle this without it being viewed as requiring spouses to provide guarantees?

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How do we handle this without it being viewed as requiring spouses to provide guarantees?

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If and when you have a spouses signature on either the note or a guarantee agreement, you had better have a written "intent to apply" as a joint applicant somewhere in your loan file.

Otherwise, I think your bank will be cited.

Based on the commentary to 202.7(d), a "joint applicant" is someone who "applies contemporaneously with the applicant for shared or joint credit". If someone is presented contemporaneously with the applicant as willing to be a guarantor, is that person actually applying for joint credit? I don't think they are. So I haven't interpreted guarantors as joint applicants regardless of whether they're offered at the beginning or requested by the bank later in the process.

I think the main issue is that when the bank says they need some additional strength behind the loan in the form of a guarantee from someone who isn't an officer or owner of the business they need to be able to show that the loan wouldn't meet the bank's credit standards without it. But in a commercial lending environment it's difficult to draw a line and say everything below this line won't meet our standards without additinoal guarantees.

So how do you support the bank's decision to require an additional guarantor?

And how to you show you're not forcing spouses if the vast majority of them come back with their spouses for guarantors?

You are going to have to be able to show that the company and the "inside" guarantors could not support the loan request within your bank's lending standards for these loans(such as DSR, LTV, Liquidity) without the "outside" guarantors.

If you can't do this, then you are headed for trouble with your examiners. The practice you describe is a major contributor to the "new" signature requirements.

Yes, that's my concern, especially when there isn't a clear bright line test for commercial lending standards.

But if we can show that an additional guarantor was justified, what can we do about the fact that most of them bring in their spouse as the guarantor eventhough our request for a guarantor is general and we don't make any reference to their spouses?

You'll just have to document the best you can your process. In these occasions we will issue a letter stating an additional signer is needed and that they may designate any person that meets the credit requirement. BTW, I hope you are underwriting the "outside" guarantors to show they have the "ability" to guarantee the loan and are bringing value to the loan. If they can't support the loan, why have them?

You also need to look at the laws of your state, especially if you are in a Community Property state. In Calfornia, for instance, either spouse can commit the entire community property. Therefore, if you have the business owner spouse, the signature of the other non-business owner spouse gets you absolutely nothing UNLESS the other spouse has significant SEPARATE property. If that is the case, you had better have the file documented to the hilt that you NEEDED that additional separate property AND that the other spouse volunteered it.

The practice you describe sounds very dangerous and IMHO would not pass the smell test with your regulators.

As a follow up to this question...now we've found some loans that the spouse is the guarantor and there's no specific reason documented in the file. The loan probably would have been approved without them. What do you do? Can you re-do the loan? Can you ask the spouse to sign a release of guarantee? Is there any way to rectify the problem with the loans currently in (potential) violation? Or, are we stuck with these loans till the examiners show up and jump all over it?

If you feel the spousal guarantees were taken with no legitimate business reason you can release them from liability by virtue of letter to them advising them they are relieved of liability on note X. Their signature would not be required.