Whilst there is a requirement for all Credit Unions to obtain the relevant permissions with the Financial Conduct Authority (FCA) to conduct secured lending, there is no requirement to do so in relation to Corporate Loans and/or 2nd Charge Lending.
Corporate loans are not governed by the Consumer Credit Act and there is also specific authority within the Credit Union Act to do so. The only requirement from a Credit Union perspective, is that each Credit Union allows such loans within their rules and that “making the loan would not result in the aggregate of the outstanding balances on loans made by the credit union to corporate members exceeding ten per cent of the aggregate of the outstanding balances on all loans made by the credit union to members, or such higher percentage as may be specified”. To undertake such loans you would not require any permissions from the FCA.
Corporate loans would require specific drafting, which would be different from normal unsecured loan terms, and should be backed by both a personal guarantee and debenture. Obtaining both these documents, reduces your risk and allows you to have the ability to pursue the owners/directors of any business in the event of default and/or insolvency of the company.
The personal guarantee ties one or more directors/owners of the corporate entity into liability for repayment of the loan agreement. In the event of default and/or closure of the business, the personal guarantee allows you to pursue the directors/owners personally. A personal guarantee should be drafted, creating a precedent document which can be used on each application.
The debenture is a document which would be required on each application and is bespoke to each agreement, ensuring it is tied into the loan agreement. You may apply a charge for the drafting of the debenture which could be added to the loan agreement as an administration/ acceptance fee and therefore recoverable from the corporate member. You will need to ensure you are clear and up front if such fees are to be applied.
The FCA have aligned 2nd Charge Lending with the normal exemption Credit Union’s enjoy from the Consumer Credit Act on their normal unsecured loans providing the interest rate doesn’t exceed 42.6% pa. There are no formal regulatory requirements relating to a second charge mortgage made by a Credit Union.
A contract is excluded from the definition of regulated mortgage contract if, at the time it is entered into, it meets the following conditions:
it meets the conditions in PERG 4.4.1G (1) to (3);
the lender is a Credit Union;
it is a borrower-lender agreement;
the mortgage ranks in priority behind one or more other mortgages affecting the land in question; and
the rate of the total charge for credit does not exceed 42.6 per cent.