Compliance for Commercial Lenders
We all know that the Achilles heel of the compliance program is commercial lending.
Too many commercial lenders are convinced - probably by talking with other commercial lenders - that the consumer compliance laws don't apply to them. Because they make commercial rather than consumer loans, they feel justified by definition in concluding that the consumer protection laws have nothing to do with business purpose loans. Unfortunately, this is a mis-perception - and an expensive one.What we call "consumer protection" often reaches beyond consumers and into the arena of commercial lending. In training for commercial lenders, these principles have to be driven home. Calling the issues consumer protections that must be followed in commercial lending just doesn't get the point across.
Selling compliance to commercial lenders must be done on their own terms. These are people who work under the banner of safety and soundness, not "that consumer protection stuff." To be convincing, any compliance requirement must therefore be presented in the context of safety and soundness. Present the requirement in the context of risk.
The risk may be that the soundness of the loan is threatened, such as loss by flood hazards. Or the risk may be that the safety of the loan is threatened by a lawsuit, such as a claim by a non-business-partner spouse that his or her signature was illegally required. Or the risk may be as fundamental as not knowing something you should have known, such as who all the borrowers actually are - or aren't - and that they lack the skills or the honesty to conduct the business as presented.
Some topics that commercial lending training must include are set forth below, along with some ideas on how to be persuasive in presenting them.
Flood Hazard Insurance
Flood insurance goes directly to safety and soundness because it identifies and requires insurance for properties that are known to be at a higher risk than other properties. Unlike other hazard insurances (which lenders and customers don't seem to question) flood insurance is only a requirement when the risk is known to be high because the property is located in a high risk flood plain. Customers try to save the little dollars while borrowing the big sums. For both customer and lender this is being penny-wise but seriously pound foolish. Lenders must understand that there are no waivers and no-one but FEMA may change the flood hazard designation. Lenders must also understand that flood hazard determinations should be done alongside appraisals - not at the last minute. The determinations go directly to the risk presented by the property supporting the loan.
Signatures and other ECOA issues
Discrimination of any kind generates legal liability and serious reputation risk. No institution wants to be known as the one that wouldn't. While lending discrimination on the basis of gender or race remains a concern, the most problematic violation remains spousal signatures. Commercial lenders have required spouses to sign simply because they exist. When there is no spouse, there is no signature requirement with the clear result of discrimination on the basis of marital status. Commercial lenders must understand that ECOA prohibits and puts an absolute stop to certain favored forms of commercial lender reasoning. The lender may not assume that jointly-owned assets mean both owners are borrowers. The lender may not assume that a spouse is a borrower. This means the lender should follow careful and consistent procedures early in the application stage to determine who the borrowers will be and the role of each borrower in the business.
FCRA and "consumer" reports
The Dunn and Bradstreet report is on the business but the credit report is about the consumer, even when that consumer owns and runs a business and obtains a business loan to do so. As such, the report obtained from the credit bureau is subject to the limitations and conditions set down by the FCRA. There must be a legitimate business purpose for obtaining the report. The scope has been defined as a person who will be personally liable on the loan, such as a signer or a guarantor. Without that connection, the lender may not obtain the credit report. This is yet another reason to clearly establish early in the application process who the signers and guarantors will be - and why.
Some of the most important contributions to the CRA program come from commercial lenders and the loans they make to small businesses. These loans are the mother lode when you are mining for CRA data because many of the loans are to small businesses and all business loans should generate jobs. And because few small businesses are high income, most of the jobs generated can be credited to the CRA efforts. All the CRA manager needs to know is what the lenders are doing. A little information from the commercial lender can make all the difference in the CRA rating. The information: business income, location, jobs, and - if relevant - impact on the community.
Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 5, 3/04
First published on 03/01/2004