commercial lending who - washington bankers says.pdf · •ecoa/regulation b anti-discrimination...
TRANSCRIPT
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Commercial Lending – Who
Says It’s Not Regulated?
Presented by
Janet M. Bonnefin
Aldrich & Bonnefin, PLC
October 1, 2015
Washington Bankers Association
2015 Regulatory Compliance Conference
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2
• UDAP & UDAAP
• Fair Credit Reporting Act
• ECOA/Regulation B anti-discrimination rules
• Notification of credit decision under Reg B
• Signature rules under Reg B
• Flood insurance regulations
• Reg Z coverage issues
• HMDA issues for commerciallenders
Agenda
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3
• Lending Limit (loans to one borrower)
Regulations
• Regulation O (loans to insiders)
• Real Estate Appraisal Regs
• Regulation U (loans secured by
margin stock)
Usual SuspectsPage 1
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• UDAP & UDAAP
• Fair Credit Reporting Act
• ECOA/Reg B
• Flood Insurance Regs
• Regulation Z (TILA)
• Home Mortgage Disclosure Act
• CRA
• BSA/AML
• Identity Theft & Red Flag Regs
Not-So-Usual SuspectsPages 1-2
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UDAP & UDAAP Laws
Page 2
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• Section 5 of FTC Act – UDAP
– Unfair or Deceptive Acts or Practices
• Enforced by OCC, FDIC & FRB
• Applies to both business-purpose and
consumer-purpose loans
Federal UDAPPage 2
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• Section 5 of FTC Act – UDAAP
– Unfair, Deceptive or Abusive Acts or Practices
• Enforced by CFPB as to
– Large depository institutions (with assets of
more than $10 billion)
– Other entities (mortgage products, payday
loans and private student loans)
– Larger participants offering consumer financial
products or services as determined by CFPB
– Service providers to these entities
Federal UDAAPPage 3
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• Wash. Rev. Code
–§19.86.020 – prohibits any unfair
methods of competition and unfair or
deceptive acts or practices in the
conduct of any business
–§9.04.050 – unlawful to disseminate an
false, deceptive or misleading
advertising
Washington UDAP LawPage 3
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• Business application for credit
• Loan officer quotes rate as WSJ
Prime + margin of 1.50% and $500
loan fee
• Rate set forth in note at time of loan
signing is Prime + margin of 2.50%
• Is this unfair? Deceptive? Abusive?
Hypothetical Example of
UDAAP Case
Page 3
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• Regulators expect UDAP or UDAAP
screen of all products
• Regulators emphasize UDAP &
UDAAP apply to all stages of
products
• Both consumer and commercial loan
and deposit products
Regulators’ ExpectationsPage 4
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FAIR CREDIT
REPORTING ACT
Page 4
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• FCRA regulates use and content of
consumer reports in connection with
both consumer and business loans
• Credit reports on businesses and
other entities are not subject to FCRA
Fair Credit Reporting ActPage 4
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• Where applicant is business or other organization
• OK to obtain a principal’s credit report
– If principal “is or will be personally liable” on loan
– Principal’s consent is not required
• Example – top of page 5
• For others, you need their written consent
FCRA: Using Consumer
Reports on Business Loans
Pages 4-5
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• Look to your institution’s policy to
determine who will be asked to sign
guaranties
• Example – page 5
• Exercise #1 – page 5
Using Consumer Reports (cont’d)
Page 5
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• Per FCRA, creditors may not
consider medical information when
determining whether a person
qualifies for credit
• Medical Information
– Health of any type
– Provision of health care
– Not age or gender per se
Use of Medical InformationPage 6
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• FTC: Business credit is covered if
individual is personally liable
• CFPB hasn’t taken an official position
on this issue
Medical Information (cont’d)Page 6
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• Is not a violation
• If creditor did not request it and
• Creditor does not use it
Receiving “Unsolicited”
Medical Information
Page 6
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• General exception allows use of
medical information as long as:
– It relates to debts, income, collateral or
purpose of loan
– It’s used in the same manner as
comparable non-medical information
and
– You don’t consider the applicant’s
health
Medical Info –
General Exception
Page 7
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• To prevent fraud or where required
by law
• To determine whether the conditions
necessary to trigger a power of
attorney have occurred
Specific ExceptionsPages 7-8
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ECOA & REGULATION B
Page 8
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• Creditor cannot discriminate against
an applicant on a “prohibited basis” in
“any aspect of a credit transaction”
ECOA’s General
Non-Discrimination Rule
Page 8
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ECOA Prohibited Bases
Race Sex
Color Marital status
National origin Receipt of public assistance
income
Religion Consumer’s good faith exercise
of consumer’s rights under
Consumer Credit Protection Act
Age
Prohibited BasesPage 8
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• All types of credit
• All applicants, including entities
• Applies to all aspects of a credit
transaction – the entire credit process
General Non-discrimination
Rule Coverage
Page 8
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• Disparate treatment
• Disparate impact
Different Types of
Discrimination
Page 9
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• Focus is on “disparate treatment”
• Claim of discrimination based on
direct or circumstantial evidence that
the creditor treated applicants
differently on a prohibited basis
Fair Lending ExaminationsPage 9
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• Direct evidence of discrimination– Examples – pages 9-10
• Circumstantial evidence– Using loan data to identify disparities
• Treat similarly situated persons the same way
• Consistency is key!
• It’s true that this is more difficult to determine in connection with business credit
• Adopt written policies and procedures and enforce adherence to them
• Track exceptions
Disparate TreatmentPage 10
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• Facially neutral policy/practice is
applied uniformly to everyone
• But policy/practice has a
disproportionate adverse impact on
applicants belonging to a protected
group
• Disparate impact theory has been
upheld in Fair Housing Act lawsuit
Disparate ImpactPage 10-11
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ECOA/Reg B Notice of
Adverse Action
Page 11
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• “Application”
– Oral or written request for credit made in
accordance with procedures used by creditor
• Are financial statements an application?
• Do you accept oral applications?
• “Completed application”
– Application as to which creditor has all
information it generally considers in evaluating
the particular type of credit requested
Notification of Credit DecisionPage 11
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• Refusal to grant credit in substantially the
amount or on the terms requested
– Unless you make counteroffer and applicant
expressly accepts
• Refusal to increase amount of credit
available to applicant who has applied for
it
• Refusal to refinance or extend term of
business loan if applied for
What is “Adverse Action”?Pages 11-12
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• You’re required to communicate your credit decision to the applicant
• Approvals may be communicated orally or in writing
– For both business and consumer loan applications
– But you must document your communication (such as sending confirming email)
General Notification RulePage 12
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• If commercial loan request declined, must
give adverse action notice
– Type of notice and timing depends on
applicant’s revenue size (more to come)
• Withdrawn applications
– If applicant expressly withdraws application
before credit decision is made, no further
action required
– Document the fact that applicant withdrew the
application
General Notification Rule(cont’d)
Page 12
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• Small business loan applicant
– Business with $1 million or less gross
revenues as of preceding fiscal year-end
– Includes start-ups and single-purpose
entities
• Adverse action notice can be given
– At time of application or
– After-the-fact, once adverse action decision
is made
Small Business Credit –
Notice of Adverse Action
Page 12-13
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• Option #1: At time of application –
give written notice of –
– Notice of right to a statement of reasons
– Creditor’s contact information; and
– ECOA notice
• Then if you decline the app, you may
notify the applicant orally
– But document oral notification
Notifying Small BusinessesPage 13
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• Option #2: Alternatively, give notice
to applicant at time of credit denial
• Notice must include either
– The reasons for denial or
– Statement that the applicant can
request a statement of the reasons
• Exhibit B to Outline
Notifying Small Businesses (cont’d)
Page 14
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• Completed applications
– Give notice within 30 days of receipt of
completed application
– Notify of approval, decline or
counteroffer
• Critical compliance requirement –
document when application becomes
complete
Small Business Credit –
Timing
Page 14
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• If incomplete due to something lender
must obtain – use “reasonable
diligence” to obtain missing information
• If incomplete as to something applicant
must provide – notify applicant
• Options – send notice of
incompleteness, deny application, or
provide additional time to provide
additional info or documentation
Timing – Incomplete AppsPage 14-15
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• Make counteroffer orally or in writing
• Send AA notice if not accepted within
90 days
• Ace Widgets example – page 15
• Set reasonable time limit for
acceptance
• Or send written combined
counteroffer and AA notice
Timing – CounteroffersPage 15
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• Gross revenues of more than $1 million
• Give oral or written notice of adverse action
• Oral notice acceptable in all cases
– Document that you gave oral AA notice
• Notify applicant within a reasonable time
• If applicant requests, provide reasons and ECOA Notice in writing
"Large Business" CreditPages 15-16
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• ECOA amended to require creditors to collect monitoring information when minority-owned, women-owned or small business applies for credit
• Similar to data collection on HMDA loans
• We’re waiting for CFPB to issue a proposed rule (and we’re willing to continue waiting)
Something We’re Looking
Forward To
Page 16
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Signature Rules Under
Regulation B
Page 16
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• If applicant qualifies under creditor’s
standards of creditworthiness,
creditor cannot require any additional
signatures, unless an exception
applies
• Creditors still allowed to require
signatures of officers or agents who
sign on behalf of business entity
General Signature RulePage 16-17
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• Joint applicants can be required to
sign all loan docs
• Problem w/personal financial
statements
– Signatures on joint financial statement
do not evidence joint application
– Commentary requires separate
“evidence of intent” to apply jointly
Special Word re
Joint Applications
Page 17
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• Suggestions for your PFS
– Identify applicants and guarantors
– “We intend to be jointly liable”
– Signature or initial lines with date
Joint Applications –
Suggestions
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• If under state law sole proprietor and sole proprietorship are one and the same, then you may require sole proprietor’s signature on loan documents
• California law treats sole proprietor and sole proprietorship as the same
• Consult legal counsel re other state’s laws
Applications from Sole
Proprietorship
Page 17
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• Regulatory violation
• Possible finding of disparate
(discriminatory) treatment
• Guaranties may be unenforceable
• Actual and punitive damages
• Can lower CRA rating
Sanctions Under
General Signature Rule
Pages 17-18
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• Insider guaranties
• Secured credit
• Applicant doesn’t qualify – additional
support needed
Exceptions to Signature RulePage 18
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• Even though business applicant
qualifies, lender may require
guaranties from insiders
• “Insiders” defined by lender’s policy
– E.g., owners of at least ___%
– But must be non-discriminatory
Exception:
Insider Guaranties
Page 18
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• Define policy – just owners?
• Do you want to extend policy to officers or managers who do not have an ownership interest?
• Ties back to FCRA issue as to whose credit report you can pull
• Can’t automatically apply exception to spouses of insiders
– Example on page 19
Adopt a Policy re
Insider Guaranties
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• May require signatures of co-owners
(even a spouse/co-owner) necessary
to make collateral available upon
default
• Can’t require co-owner to become
personally liable
– That is, you can’t require co-owner to
sign note or guaranty
Exception: Secured CreditPage 20
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• You may require a cosigner or
guarantor when an applicant just
doesn’t qualify
• Creditor may adopt non-discriminatory
guidelines for guarantors
• Renewals – be careful
Additional Support NeededPage 20
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FLOOD INSURANCE
REGULATIONS
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• Business, commercial & consumer loans covered
– Purchase, refis, equity, construction, etc., regardless of lien position
• Secured by improved real property or mobilehome
– Walled & roofed structure
– Includes buildings in the course of construction
Flood Insurance RegsPage 21
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• No exception for collateral taken as
abundance of caution
• Flood insurance, if required, can
NEVER be waived by the lender
Flood Regulations –
Coverage
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• Perform flood zone determination
– Most lenders outsource this function
• Use SFHD form to document
• 4 triggering events
– Make, Increase, Renew or Extend
(MIRE) a loan
• Special flood hazard area
– “A” zones & “V” zones
Lender’s DutiesPage 21
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• If property is in a special flood hazard
area – A zone or V zone, and
• Community “participates” in NFIP
• Then lender must ensure borrower
has purchased flood insurance policy
before loan closes
Flood Insurance RequiredPage 21
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• Give notice when property is in SFHA
• Notice must advise whether or not flood insurance is required
– That is, whether or not community participates in NFIP
• Give notice within a reasonable time prior to closing
– 10 days is considered reasonable
• Need evidence of insurance beforeloan closes
Notice to BorrowerPage 22
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• Lesser of 3 amounts
– Loan amount or credit limit
– NFIP maximum for property type
– Replacement cost value of improvements
• Flood insurance also required for personal property collateral located in building
– Be careful re terms of deed of trust
• Junior-lien loans – combine loan amounts
Amount of Required
Flood Insurance
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Building Coverage Regular Program
Single-family dwelling $250,000
2-4 family dwelling $250,000
Other residential $500,000
Nonresidential $500,000
Condominium master policies $250,000 x number of units
Contents Coverage Contents Coverage
Residential $100,000
Nonresidential $500,000
NFIP Coverage LimitsPage 23
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Loan amount $2,000,000
Total appraised value of real property $2,950,000
Value of land $1,100,000
Value of improvements $1,850,000
Value of inventory (high average) $ 340,000
NFIP Limit – Building $ 500,000
NFIP Limit – Contents $ 500,000
Required insurance – Building $ 500,000
Required insurance – Contents $ 340,000
Example – page 23Page 23
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REGULATION ZCOVERAGE RULES
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• Are business loans ever covered by
Regulation Z? Well, . . . .
• Consumer-purpose credit
– Extended to consumers (natural
persons)
– For personal, family or household
purposes (“consumer-purpose”)
Coverage of Regulation ZPage 24
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• Loans to organizations
• Business-purpose credit
– Special rules re:
• Investment loans
• Rental property loans
• Some types of credit “over $54,600”
depending upon collateral
Regulation Z Exemptions –
Overview
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• Loans to organizations – Exempt.
Period.
• Sole proprietors – if sole
proprietorship is not an “organization”
under state law, you must establish
business purpose
• Consumer loans to family trusts –
covered as of October 3, 2015
Organizational Credit
Exemption
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• Loans primarily for business, commercial or agricultural purpose
• Examples – pages 24-25
• Mixed-purpose loans
– Primary purpose controls
Business-purpose Credit
Exemption
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• Are they exempt as business loans? Not necessarily
• “Five factor” test – document your analysis– Is borrower’s occupation related to
investment?
– To what extent is borrower involved in managing investment?
– What is the ratio of income from investment vs. borrower’s total income?
– Size of loan
– Borrower’s stated purpose
Investment Loans to Individuals
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• Special rules apply to loans to individuals secured by rental property
• Two sets of rules – one for owner-occupied property and the other for non-owner occupied rental property
• “Non-owner occupied”
– Applicant does not intend to occupy residence for more than 14 days in coming year
Special Rental Property RulesPage 26
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• Loan to acquire, improve, or maintain
non-owner occupied rental property is
automatically exempt
• Regardless of # of units
• Don’t have to analyze under five
factors
• Caution re refinancings
Non-owner OccupiedRental Property
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• Property considered owner-occupied
if borrower intends to occupy
residence more than 14 days in
coming year
• Loan to acquire more than 2 units is
exempt
• Loan to improve or maintain
more than 4 units is exempt
Owner-occupiedRental Property
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Regulation Z Special Rental Property Rules
Occupancy Status
Purpose
Acquire Improve/Maintain
Owner occupied
1 to 2 units not exempt
3 units + Exempt
1 to 4 units not exempt
5 units + Exempt
Non-owner occupied*
Exempt (regardless of the number of units)
Reg Z Special
Rental Property Rules
* “Non-owner occupied” means the borrower does not
intend to occupy the rental property for more than 14
days in the coming year
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HMDA & REGULATION C
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• Is your institution subject to HMDA?
• Depends on institution’s asset size as
of prior 12/31, location of its offices
and whether it made a “triggering
loan” in prior calendar year
• Ask your compliance officer, CRA
officer or risk officer if you don’t know
the answer
HMDA & Regulation CPage 28
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• If institution meets asset-size threshold and has an office in an MSA, then HMDA coverage triggered if institution made a “triggering loan” in preceding calendar year
– Home purchase loan secured by a first lien on a 1-4 family dwelling
– Refinancing of a home purchase loan in which both loans are secured by a first lien on 1-4 family dwellings
Triggering Loan
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• Emphasize to commercial lenders
that if the bank is subject to HMDA,
they have to report all HMDA-covered
loans (regardless of the number of units in
the dwelling)
• Home purchase loans
• Home improvement loans
• Refinancings
HMDA & Regulation CPage 28
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• Refinancings – new obligation satisfies and replaces an existing loan by the same borrower, in which both the existing loan and the new loan are secured by liens on a dwelling
• Includes satisfying existing business-purpose loan
• Example – page 29
Refinancings under HMDAPage 28-29
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• Questions – time permitting
Janet M. Bonnefin
Aldrich & Bonnefin, PLC
18500 Von Karman Ave., Suite 300
Irvine, CA 92612
949-474-1944
ConclusionPage 29