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Signature Violations On Commercial Loans?

Increasingly, examiners are looking at commercial loan files and reporting that they find violations of Regulation B's signature rules. This trend of looking at commercial files means that the internal audits and monitoring should look for these problems - and fix them - before the examiners arrive.

Conducting a compliance audit of commercial loan files raises several problems. The first problem is convincing the commercial loan officers that they are in fact subject to myriad compliance rules. Only a few regulations, such as Regulation Z with its business purpose test, exempt commercial loan transactions. Regulation B's substantive rules, including the signature rules, apply to all credit transactions - including commercial credit.

The second problem is determining from the loan file exactly what happened. Because most commercial loans do not use application forms, there is no clear documentation of what the customer requested. In lieu of application forms, many commercial loan officers rely on financial statements submitted by the applicant.

The Regulation B signature problems often begin with financial statements when they are signed by both spouses or represent the assets of both spouses. Many commercial loan officers argue that when this is the case, both spouses are applicants. Unfortunately, the Equal Credit Opportunity Act doesn't permit this type of inference. The loan officer has an obligation to determine how the applicant or applicants want credit.

When auditing these loan files, look for several things. First, look for consistent procedures used in compiling and reviewing information about loan applications. Variations in procedures may result in discrimination - or in a plaintiff's ability to allege discrimination.

Second, look for any pattern of spousal co-signatures or guarantees. The higher the frequency of spousal signatures, the more suspicious you should be. Pay particular attention to signatures obtained on small business loans - loans to small companies. That is where discrimination and the concerns leading to discrimination are most likely to occur.

Third, determine why a spouse was required to sign the note. If the spouse is a co-owner or an officer of the company, their signature may be appropriate if it is the bank's consistent policy to require the signatures of all owners or all officers. However, if their signature is required simply because they are co-owners of property listed on the applicant's financial statement, requiring their signature is probably illegal. The lender should instead evaluate what property the applicant alone can actually offer and what property is needed to support the credit.

Be alert to any situations where the spouse's signature does not seem to support the loan - for example, a spouse who is not involved in the business.

Finally, discuss your findings with commercial lenders to get their explanation of why signatures were required. This is a way of finding out how well they really understand ECOA and Regulation B.

Examiners look for discrepancies between documentation in the file, signatures that appear on application and loan documents, and patterns of spousal signatures. When lenders take applications by compiling information rather than having the applicant complete an application form, the examiner and auditor must draw conclusions based on what documentation does exist.

The examiner's responsibility is to determine whether discrimination did or did not occur. The examiner must therefore question apparently extra spousal signatures and place the burden on the bank to explain and defend them.

Ultimately, the question for the bank is what will be determinative in court. To date, the cases based on business loan signature violations have the plaintiff spouses winning and the banks losing.

Advice for commercial lenders
If you have commercial loan officers who still believe that they are "safer" with that spouse's signature, ask them what they think they are getting. They will usually answer that having the signature will enable them to reach the house.

Advise them that if they want the house as security they should get the house (getting the spouse's signature only on the mortgage or deed of trust.) Point out to them that otherwise they are nothing more than an unsecured lender and as such they stand in line - usually last in line. However, they may indeed have gotten something with that spouse's signature: an ECOA lawsuit!

  • Schedule an audit of the commercial loan portfolio.
  • Check your state law on property ownership as it relates to the family residence, personal property, and business property. Use this information to help evaluate commercial lending policies and signature requirements.
  • Conduct the compliance audit. Make a point of smiling each day!
  • Based on the audit findings, provide advice and training for commercial lenders. Be prepared to overcome their compliance protestations with information about lawsuits and liability.
Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 3, 3/97

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