Like many borrowers, you may be drawn to nonrecourse loans
because the arrangements can shield you from personal
liability. But they do not provide protection in all
cases. "Carve-outs" in the loan documents can
saddle you with full liability if violated. However, you may
be able to minimize personal liability for violations through savvy
negotiating.
Exceptions to Liability Protection
Under a nonrecourse loan, the lender agrees that the borrower
will not be held personally liable on the loan.
Theoretically, that means the lender's only
"recourse" in the case of default lies in the collateral
(generally real estate).
However, the lender may include specific carve-outs — or
exceptions — that will nullify that restriction. Common
carve-outs include the borrower's fraud, misapplication of
insurance proceeds, waste, or intentional destruction of
property. Few court cases have directly tackled the
enforceability of carve-outs in nonrecourse loans or
