Author: Anthony F. Geraci, Esq.
By now, most of our clients obtain personal guaranties on all their loans. However, almost as if it is an afterthought, they don’t know what to do with it when they tuck their paperwork away after the loan has closed.
Often, we get the question: “What should we do with the personal guaranty if this loan goes awry?”. Most of the time, the property will pay off your loan in full, so you will likely forget you even had the personal guaranty. However, just like that 37-page deed of trust, you’ll be glad you had it when you need it.
Purpose of the Guaranty
The purpose of the guaranty is both legal as well as psychological. For you, as the lender, it gives you peace of mind that whatever you are loaning on, your borrower is “committed” through their personal guaranty. Most importantly, though, by obtaining a personal guaranty, you are not only obligating the borrower’s assets on this loan, but now the guarantor as well. This is important for a variety of reasons, including the ability to possibly make your loan.
Psychologically, the guarantor understands that if the borrower defaults, the guarantor is on the hook for every dollar owed to the lender. This is important when it comes to default as both the borrower and guarantor need to come to the table to figure out how to repay your loan.
The Guaranty Could Make or Break Your Loan
By obtaining personal guarantees, you have another source to have your loan repaid. You also have another source of income, assets, and, of course, liabilities to consider in underwriting your loan. These can either make or break your loan.
Guarantors usually have multiple streams of income through multiple companies. By having their companies or them individually guaranty the loan, you can underwrite additional income, which may give you the debt service you need to complete the loan. Note that this assumes your policies and procedures allow for this.
Using the Guaranty as a Negotiating Tool
Many of our clients use the guaranty as a negotiating tool. Should the borrower default, the guarantor will be on the hook for all the debt owed. By pressuring the guarantor to make good on their promise, the guarantor, supposedly affiliated with the borrower, can add the needed pressure to get the loan performing again or modified.
A Case Study on Negotiation
One of our clients wanted to get their loan reperforming and did not want to foreclose on the property. The guarantor was the brother of the borrower. After being repeatedly ignored by the borrower, we drafted a demand letter to the brother to repay the loan in full. This got the guarantor’s attention as he was not aware his brother was not repaying the loan. Within 48 hours, the borrower called my client and they worked out a modification to get the loan reperforming.
When the Property is Insufficient or Becomes Undesirable to Foreclose On
Sometimes the Property does not make you whole, depending on the value of the property at the time you analyze your options. Maybe there was fire damage to the property and the borrower let the insurance coverage lapse, or maybe there was construction and, upon inspection, realize the only thing left is one wall.
A Case Study on Damages
One of our clients made a multimillion-dollar loan on a property secured by a car wash. At the time of foreclosure, the property had been inspected and required extensive environmental clean-up with the price tag in the millions. We reviewed the file and advised our client to let their lien go and go after the guarantor’s assets, which were sizeable. The loan was paid off in full along with our attorneys’ fees (which should be collectable based on your guaranties).
The guaranty is worth more than the paper it is written on: it is a multi-faceted tool in your tool belt that will assist you in getting what you want – your loan re-paid, re-performing, or modified to fit your goals. We have enforced guaranties, obtained deficiency judgments when the property was insufficient to make the lender whole, and used demands to get what our clients want to obtain at the end of the day.