Commercial Loans: Compliance Expands Its Reach

The traditional compliance examination has focused on the consumer lending and service activities of the bank. However, examiners are now expanding the scope of the products and activities they review to include the bank's commercial and small business lending activities.

Before compliance and safety and soundness examinations were separated, the safety and soundness examiners had possession of the commercial files. Compliance examiners directed their attention to the consumer loans.

Compliance constantly changes, and with it, the compliance examination changes. Recent developments in fair lending and CRA have brought attention to more than mortgage lending. Commercial lending and small business lending are now seen as a crucial element of the bank's CRA program. These practices are also being watched for discrimination problems.

These developments have called attention to bank's commercial files. It is now typical for an examiner to include commercial and small business loan files in the compliance examination. Be prepared for this by reviewing your own commercial files before the examination begins.

Examiners find several common compliance problems in commercial loan files. Several regulations that are considered "compliance" apply equally to commercial loans. Both the Equal Credit Opportunity Act and the Flood Hazard Insurance Act cover commercial loans as well as consumer loans.

Particular ECOA problems include notification requirements and the signature rules. Compliance examiners frequently identify spousal signatures that appear unjustified. If the lender obtains the spouse's signature in violation of ECOA, the bank cannot enforce remedies against the spouse. Moreover, the spouse may have a cause of action against the bank. The violation may be used as an affirmative defense. More dangerous to the bank, the violation may be the basis of a discrimination lawsuit brought by the spouse or in a >
Flood insurance also applies to any loan - consumer or business purpose - that is secured by improved real property. Thus, the bank should conduct a flood zone search for any commercial loan that is secured by improved real property. If the property is in a flood zone and insurance is required, the insurance should be maintained for the life of the loan.

Other compliance hazards involve accommodation loans - consumer purpose loans made to a commercial customer. The purpose or nature of the loan determines coverage - not the title of the loan officer making the loan. Truth in Lending applies to all accommodation loans such as car loans, mortgages, and home equity lines of credit. Be sure that there are proper disclosures for these consumer purpose loans. RESPA applies to all mortgages secured by a 1-4 family dwelling when the borrower is not a business. All of the RESPA disclosure requirements - and restrictions - may apply.

RESPA provisions to watch for include escrow notices and accounting requirements. Every "federally related mortgage loan," as defined in RESPA and Regulation X, for which the lender maintains an escrow account is subject to these requirements. Some commercial real estate loans fall within the scope of this definition and rule. They'll probably be caught in the bank's next compliance examination. It's time to be sure they are in compliance!

ACTION STEPS

Review your bank's policies on guarantees and determine whether it needs clarification to avoid illegal spousal guarantees.
Review all commercial files to determine whether spousal signatures are present. If the spouse's signature is not needed or not consistent with bank policy (e.g. all officers of the corporation must guarantee loans to the corporation) remove the spouse's signature.
Review the notification procedures used by commercial loan officers to determine whether the documentation supports a finding of compliance with Regulation B's notification requirements.
Review all commercial files secured by improved real estate to determine compliance with flood hazard insurance requirements.
Interview commercial loan officers to learn about the accommodation loans they make to their customers. If any loans such as home equity lines of credit or personal mortgages are booked on the commercial loan system, review them for compliance, especially compliance with Truth in Lending and RESPA.
Review your consumer loan files to identify business purpose loans. Consider whether these are more important to the bank's CRA performance as consumer or small business loans. This will depend on your CRA program strategy. Make sure you have a method for identifying these loans to show your CRA performance in the best possible light.