Academic journal article ABA Banking Journal

Are Commercial Lenders Killing Compliance?

Academic journal article ABA Banking Journal

Are Commercial Lenders Killing Compliance?

Article excerpt

By Jo Ann S. Barefoot

Consumer protection laws are designed to protect consumers. Business customers are exempt. So commercial loan departments needn't worry about cumbersome compliance, right?

Not always.

Most consumer regulations differentiate in some way between smaller loans to individuals and large loans to individuals, loans to businesses, and loans to individuals for business purposes. As a result, it is the exception for commercial lenders to deal with these regulations. Therefore, they don't tend to learn the regulations well, and it is not uncommon for commercial lenders to take a somewhat negative attitude toward consumer regulations.

The combination of a lack of expertise, a lack of routine procedure, and a negative attitude is a prescription for major compliance problems. In fact, commercial loan departments tend to contribute far more than their fair share of violations.

Remember, too, that the loans made by your business lending department tend to be larger than those made in your consumer areas. They also tend to involve more sophisticated borrowers. Both factors can lead to greater liability.

The following questions and answers can serve as a checklist to help assure that your commercial lenders comply with the law.

Regulation B

(Equal Credit Opportunity Act)

Contrary to what many commercial lenders may think, the Equal Credit Opportunity Act and Regulation B have always applied to business credit. Lenders may not discriminate on any loan on the basis of race, sex, religion, color, national origin, marital status, and age (provided the borrower is of age to enter into a contract). Also barred from consideration is whether the borrower receives public assistance or exercises rights in good faith under the Consumer Credit Protection Act.

Traditionally, Reg B has been more liberal in its procedures for business credit, compared to those for consumer loans. For example, it has been permissible to inquire about marital status for business-purpose loans. In addition, business credit has been exempt from most of the adverse action notification and recordkeeping requirements that Reg B applies to consumer credit.

These rules have changed as a result of the Women's Business Ownership Act of 1988, enacted to give small businesses, and particularly women entrepreneurs, the same ECOA rights afforded to consumer borrowers. For a detailed review, see the box elsewhere in this department.)

Q. Are you prepared to give adverse action notification on commercial loans?

Banks must give covered loan applicants oral or written notice of action taken within 30 days of receiving a completed application. If the action is adverse, you must notify covered applicants in writing of their right to receive the reasons for the bank's decision.

One exception: notices of adverse action for applications taken by telephone can be delivered orally. However, should you choose this procedure, develop a script lenders can routinely use. This ensures that no critical point will be left out. Furthermore, being able to demonstrate that the script is routinely used will serve as documentation against a charge that you didn't comply.

Notice of rights after adverse action can either be given after denial or provided to all applicants with the application. In the latter case, it must be in a form the customer can keep.

Q. Have you trained your people and changed your commercial loan forms to follow the new rules on marital status inquiries?

The old Reg B exempted business-purpose credit from its prohibition on inquiring about the applicant's marital status. Nonetheless, lenders were barred from considering marital status in making the credit decision.

The new rule treats commercial loans as consumer credit has been treated in the past. Accordingly, banks may only inquire about marital status in two situations. …

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