It’s common for many lenders to believe that commercial lending is exempt from federal compliance regulations. However, this would be untrue – commercial loans are subject to the following compliance regulations: Regulation C/HMDA, Flood Disaster Protection Act, and Regulation B/ECOA.
This article will focus on only one the regulations above – Regulation B. Under this regulation, a person is defined as “a natural person, corporation, government/governmental subdivision or agency, trust estate, partnership, cooperative or association” (§1002.2(x)). While the regulatory requirements are the same, the methods to meet the requirements differ in certain areas.
Adverse Action Notices
Regulation B requires that lenders notify an applicant of action taken within 30 days of receiving a completed application including any adverse action. If adverse action is taken, the Adverse Action Notice should include the following:
- A statement of the action taken,
- The name and address of the lender,
- The ECOA Notice which states that lenders are prohibited from discriminating and the restricted bases,
- The name and address of the Federal agency that administers the Bank’s compliance, and
- A statement of specific reasons for the action taken or the applicant’s right to request that list of specific reasons.
However, for business/commercial credit, the lender has an alternate means of compliance. If the business has revenue of $1 million or less in the prior fiscal year, the lender can do the following:
- Provide the statement of the action taken orally or in writing, and,
- Provide the disclosure to the applicant of their right to a statement of reasons and the ECOA notice either at application or with an adverse action notice.
In order to meet the requirements, staff must provide a general disclosure in their application package. Model Form C-8, located in the Appendix of Regulation B was developed to meet this regulatory requirement. By providing this form at application, the statement of action taken can be provided by either means, orally or in writing. If the decision is provided orally, procedures should be defined to ensure staff document when the oral notice was given.
If the business has revenue more than $1 million in the prior fiscal year, the lender can provide:
- Notification to the applicant, within a reasonable time, orally or in writing, of the action taken; and,
- A written statement of the reasons for adverse action and the ECOA notice if the applicant makes a written request for the reasons within 60 days of the lender’s notification.
Although Regulation B requires a written application for certain consumer mortgage loans, a written application is not mandated, but is recommended as a good practice for commercial loans. The challenge is identifying a “completed application” because once the lender has a completed application, the clock starts ticking to provide notice to the customer.
To comply, lenders should do the following:
- Define a completed application – identify the minimum documentation required to evaluate and make a credit decision for the amount and type of credit requested.
- Ensure that there is a process to document when a completed application is received. This can be an application, a loan memo, narrative, or comment in a conversation log.
- Ensure that a Notice of Action Taken is provided after the lender gets a completed application based on the timeframes in the regulation.
The Regulation spells out timing for Notices. When a loan is denied, an Adverse Action Notice must be provided within 30 days, but what if the loan is not a denial? There are still requirements depending on the action taken.
If the loan is approved or a Counteroffer is given, the customer should be notified of the action taken within 30 days. If the customer does not accept the Counteroffer, the lender should send an Adverse Action Notice after 90 days. However, if the lender communicated the Counteroffer in writing utilizing the combined Adverse Action Notice/Counteroffer form, Model Form C-4, no additional notification is required.
If the application is incomplete, the customer should be notified of the additional information needed within 30 days. If the applicant is notified verbally and the documentation is not provided, an Adverse Action Notice stating the application is denied due to incompleteness should be sent within the 30 days. If the applicant is provided with a written Notice of Incomplete Application (Model Form C-6) meeting all required content requirements, no subsequent notification is required. The required content of a Notice of Incomplete Application includes:
- Specification of the information needed,
- Designation of a reasonable period of time to provide the information, and,
- Informs the applicant that failure to provide the information requested will result in no further considerations being given to the application.
Lenders are required to document that the applicants intend to apply for joint credit. Commercial loan applicants are not required to complete an application, so documenting joint intent can be a challenge. If the lender does use a commercial application, the application should contain a statement or section for documenting joint intent. Simply signing the application or completing a financial statement is not sufficient. Commercial lenders may also use a separate form to document joint intent. Regardless of the method that the application is taken, the process for joint intent must:
- Be documented,
- Be completed at the time of application, and,
- Be distinctly different from the means to verify information. (For example, signatures on a joint financial statement affirming the veracity of information are not sufficient to establish intent to apply for joint credit.)
Providing Appraisal Notices and Copies of Appraisals
Regulation B requires lenders to provide a copy of the appraisal or valuation for an application for credit that is secured by a first lien on a one to four family dwelling promptly upon completion. In addition, lenders must provide a notice of the right to a copy of the appraisal within three business days of application.
Most institutions that offer commercial loans offer financing to purchase, refinance or improve a 1-4 unit dwelling. It does not matter if the collateral is a single family home built for speculation by the applicant or is a 3 floor building in the city with one apartment on each floor, or a 4-plex located in the suburbs; the collateral is classified as a dwelling.
However, what if the collateral is a mixed-use property – those pesky combined commercial/residential buildings? If the mixed-use building contains a commercial space and 1-4 unit residential space, it qualifies as a dwelling under the Regulation if the following criteria is present:
- Only the residential portion of the property is pledged as collateral for the loan; or
- The entire property, i.e., both the commercial and residential space is pledged as collateral.
In this example, the definition of a dwelling under Regulation B is satisfied and the applicant must be provided the initial appraisal disclosure as well as a copy of the appraisal/valuation.
If only the commercial portion of the property is pledged as collateral, the definition of a dwelling is not satisfied and the disclosure and copy of the appraisal/valuation is not required.
Another wrinkle in this seemingly benign Regulation is that the appraisal notice is required within three business days of receiving an application – regardless of whether the loan is approved or not. Further, if an appraisal or valuation was performed and the loan was not originated, the applicant must still receive a copy of the appraisal/valuation.
What can you do to help keep your commercial lenders on track? TCA recommends you:
- Develop procedures and processes that clarify what constitutes a commercial application.
- Define your adverse action practice.
- Determine how joint intent is obtained and documented.
- Develop a procedure to ensure that the initial appraisal notice will be provided within three days of application when applicable and
- Develop a process for delivering a copy of the appraisal/valuation to the applicant/borrower. The process should include the regulatory timing requirements as well as your institution’s expectation for documentation.
When your commercial staff need a refresher, TCA can help provide guidance on the compliance responsibilities for commercial lenders. TCA is A Better Way to understand compliance. Contact us at 800-934-7347 to schedule time for a consultation.
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