Real Estate as Abundance of Caution (Unsecured)

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Question:

I keep getting requests from lenders wanting to do an unsecured business loan taking real estate as an abundance of caution. I am fairly new to the bank and I have told them on several occasions that we should not be doing this, but I am getting resistance and the lenders are trying to tell me that the bank has always done this. Can you tell me if there are any situations where it is acceptable to do this?

Answer:

Answer by Richard Insley: This sounds like a two-sided "but we've always done it this way" internal disagreement. No laws or regulations are mentioned to support or oppose the two opinions, so I guess it boils down to a matter of bank policy.

Answer:

Answer by Jim Bedsole: The key to remember is that the only thing "abundance of caution" gets you is relief from the appraisal requirements applicable to real estate secured transactions. Everything else that might be applicable is still in play. So for business loans, that includes flood determination, notice, and insurance requirements, Reg B appraisal notice and disclosure requirements (if dwelling secured, even if it's just an internal valuation), HMDA reporting (if purchase, refinance, or home improvement). None of those will be avoided because we only took the real estate as an "abundance of caution". You also have potential fair lending issues arising from who you require pledge real estate as an abundance of caution and who you do not.

Answer:

Answer by Dan Persful: Just a note of clarification. If the loan does not qualify for unsecured lending then taking property as an "abundance of caution" does not relieve you from the appraisal requirements. In other words they have to show (document) the loan qualifies without the property as collateral.

In order for a business loan to qualify for the abundance of caution exemption is discussed beginning on page 43 of the Interagency Appraisal and Evaluation Guidelines.