Consumer Compliance & Commercial Lending: A Guide for Compliance Officers

While most fair lending requirements are geared toward consumer loans, a financial institution’s commercial products and services may also be subject to certain federal and even state consumer protection laws and regulations.

This guide offers a high-level review and summary of consumer compliance requirements related to fair lending, credit reporting, and other regulatory topics, along with how they can pertain to commercial lending.

This information is not intended to be comprehensive or constitute legal advice, but it will give new compliance officers an idea of how to review commercial lending transactions for consumer compliance.

Federal Laws and Regulations

ECOA – Equal Credit Opportunity Act (Regulation B)

Appraisals and the Appraisal Notice: Lenders must provide applicants with copies of appraisal reports used in connection with commercial lending transactions if the loan is secured by a first lien on a one- to four-family dwelling.  Lenders must also provide applicants with a written notice of the applicant’s right to receive a copy of written appraisals developed in connection with the application within three days of application, even if the loan is denied within the three-business-day period.

Joint Intent: Lenders must obtain each applicant’s affirmative intent to apply for joint credit, even for commercial credit. The intent must be stated at the time of application (not at the closing table) either in written form or verbally if the application was taken over the telephone. If intent is obtained verbally, lenders should have a procedure to document that verbal intent. Note that the signatures obtained on financial statements provided with the application do not suffice for this joint intent rule.

Adverse Action: Under Regulation B, lenders must notify applicants of the action taken on their applications within 30 days.

• Small Businesses: For applications from small businesses (revenues equal to or less than $1 million), the notice may be given orally provided the ECOA rights are disclosed at the time of application. Applicants must be informed of their right to receive a written notice with a statement of reasons for adverse action, and upon request, a written notice with a statement of the reasons must be provided. If the ECOA rights are not given at the time of application, a written notice of adverse action must be provided.
• Large Businesses: For applications from large businesses (revenues greater than $1 million), the communication of adverse action can be given orally. If an applicant requests a written statement of reasons within 60 days, it must be provided.

Fair Housing Act

The Fair Housing Act prohibits discrimination in any aspect of residential real estate–related transactions, and this includes commercial loans for buying, building, repairing, or improving a dwelling (including apartment buildings and housing developments). Commercial loans for this purpose need to be monitored for discriminatory practices.

HMDA – Home Mortgage Disclosure Act (Regulation C)

HMDA supports fair lending by requiring lenders to collect and report on data on certain loans originated or purchased by them. Since HMDA is a purpose-based regulation, it doesn’t matter if the loan itself is a consumer or business loan. As long as the purpose meets the definition of a “home improvement loan,” “home purchase loan,” or “refinancing,” it is a covered loan under HMDA. Many institutions have HMDA staff who specialize in the nuances of HMDA for commercial loans.

Fair Lending 

Rather than being a specific law or regulation, fair lending is the practice of not discriminating against borrowers. Fair lending guarantees the same lending opportunities to everyone. Regulations related to fair lending include the ECOA, Fair Housing Act, and HMDA (see above).

FCRA – Fair Credit Reporting Act (Regulation V)

Two areas under the Fair Credit Reporting Act pertain to commercial lending:

• Permissible Purpose: To pull a consumer credit report on an applicant or guarantor for credit, financial institutions need a permissible purpose. Because the individual has applied for credit, that’s generally considered a permissible purpose. However, institutions must still obtain permission from the individual before doing so, even on commercial credit.
• Adverse Action: If commercial credit were to be denied based on information found in the consumer credit report, those individuals are owed an adverse action notice.

Flood Disaster Protection (Flood Insurance) (Regulation H) 

The requirement for lenders to obtain evidence of flood insurance on loans secured by certain buildings (and sometimes even the contents of those buildings, if the contents also secure the loan) pertains to both consumer and commercial loans when a loan is made, increased, renewed, or extended. If a loan is not sufficiently insured, lenders/servicers must force-place coverage. Flood insurance is one of the regulations that is far more complicated with commercial lending than it is for consumer lending, due to requirements surrounding contents insurance and multiple buildings on a parcel, which is typical for commercial loans.

CRA – Community Reinvestment Act (Regulation BB)

The CRA was enacted to serve as a measure of how banks are meeting the credit needs of all segments of their communities, including low- and moderate-income neighborhoods and individuals. Thus, the purpose of CRA data collection and reporting is to enable examiners to determine if a bank is helping to meet the credit needs of its communities through its small business, small farm, consumer, and home mortgage lending as applicable.

SCRA – Servicemembers’ Civil Relief Act

Under the SCRA, lenders must provide concessions/benefits regarding debt that was incurred before servicemembers entered active duty. The SCRA pertains to practically any type of loan obtained by a servicemember. It provides benefits such as an interest rate cap and procedural limitations on foreclosure, repossession, and eviction. The interest rate cap pertains to commercial loans, as long as the servicemember is personally obligated on it.

BSA/AML and OFAC 

BSA/AML – Bank Secrecy Act / Anti-Money Laundering: The requirements of the BSA/AML—including an institution’s customer identification program (CIP), “know your customer” (KYC) practices, and suspicious activity monitoring—pertain to commercial customers in terms of their loans and deposit accounts. KYC can be more complex in terms of how complicated ownership arrangements can be for businesses, and this is addressed in the Beneficial Ownership Rule.

OFAC – Office of Foreign Assets Control Sanctions: Scanning the individuals and businesses involved in commercial loans is required to comply with OFAC sanctions requirements. OFAC does not specify how this scanning should take place, other than it needs to be risk-based, but a financial institution is prohibited from doing business with entities on the Specially Designated Nationals (SDN) list.

State Laws and Regulations

State Law More Stringent

Many states have their own versions of federal laws and regulations, which may or may not have more stringent requirements on the lender, and at least one state applies parts of the Truth in Lending Act (Regulation Z) to commercial loans in ways that federal laws do not.

Most states have their own definition of what a servicemember is for SCRA protections, which typically includes individuals serving in the state’s national guard.

New York and TILA-like Disclosures  

The New York Department of Financial Services (NYDFS) recently issued final regulations implementing the Commercial Finance Disclosure Law (CFDL), which requires disclosures relating to the major terms of commercial financing, formerly only required for consumer loans. The disclosures are required for commercial loans of $2.5 million or less. California has a similar law that has not taken effect yet, pending the promulgation of implementing regulations.

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