Commercial Loan Applications And Reg B

by Kathy Curtis, Compliance Manager, Century Bank, Washington, DC

As is the case apparently at many banks, the commercial loan department of my bank had a hard time getting used to the requirements and limitations Regulation B overlays onto the loan application process with regard to adverse action notices and spousal guarantees. It was very difficult to consistently obtain the cooperation of the commercial lenders to have their assistants type the adverse action notice for a small business loan decline (as required for businesses with less than $1 million in gross annual revenues), and to properly document the file that the applicant "really did" volunteer his or her spouse to guaranty a loan or line of credit. Internal compliance audit exit interviews for this topic were met with resistance, disbelief that a possible violation occurred, or questioned whether the issue was even relevant to commercial lenders at all. ("My commercial lender friends at other banks don't have to worry about this, why are we different?")

These problems have virtually disappeared however, (although reminders are necessary periodically) due to a re-reading of the reg to try to find a solution. The solution was to design an easy to use commercial loan application form that the commercial lender would be motivated to use for, frankly, primary reasons other than compliance. Compliance is a happy by-product. (I'll take a victory any which way!) The regulation allows a bank to be exempt from having to send an adverse action notice to a small business loan applicant, as defined above, IF AT THE TIME OF APPLICATION, the bank provides certain disclosures to the customer IN A FORM THAT THE CUSTOMER CAN KEEP. [202.9(a)(3)(i)(B)] We designed the application to include those disclosures. Also, the head of commercial lending and I developed the form together, to jointly devise a solution. This helped to gain everyone's cooperation.

These following elements are what have proven to be practical from the point of view of the lender and is what helps to motivate use of the form. The form is a two part carbonless copy with the top white copy for the customer to keep.

The application form includes spaces for the customer to complete with information that the lender and underwriter need to know, and the bottom part of the application form gives a list of additional information the bank needs from the customer in order to pursue the request. The application is designed to support the more detailed Commercial Loan Information/Documentation Checklist which can be provided to the customer at the same time and which was well accepted and in use by the commercial lending team. Use of the form consistently clarifies for the bank what the customer wants to borrow the money for, how much, and for what purpose.

The form defines who the principals/owners of the company are.

The form defines who the guarantors will be, who are not also principals or owners of the company.

The form establishes a clear application date by which some action by the bank must occur, approval, denial, or request for additional documentation.

In addition, the bank's yellow copy of the form is extra long to 8 ?" x 14". The extra space at the bottom provides a place for the lender to instruct a support team of analysts and others to perform specific underwriting tasks by a certain deadline.

Loan files still come through occasionally for underwriting without a completed application, but this has become rare as time goes by and lenders find the form useful and informative. Those lenders are immediately reminded of the lack of the form as the need arises. Although not perfect, compliance is vastly improved and everyone is comfortable with the solution.

ACTION STEPS

This form is for your use. Borrow it and adapt it to your bank's procedures.
Discuss using a simple written application procedure with your commercial lenders. Remember that written applications are generally not required for commercial loans, but getting key points of information down in writing is a good idea.
Have commercial lenders participate in your form design. They will be more likely to use a form they designed than one that you force on them.
Audit some commercial loan files, looking for violations that the use of an application form such as this would resolve. Use the identified violations to support your case - in case anyone needs persuading.
Schedule training (a meeting format may work best) with commercial lenders to review the requirements of Regulation B, flood hazard insurance, and Bank Secrecy. Training may help you sell the advantages of a written application that takes care of many regulatory requirements.