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Ensuring Compliance in Commercial and Agricultural Lending

Consumer Affairs Update - June 2016

June 22, 2016

Ensuring Compliance in Commercial and Agricultural Lending

Recent examinations show that some banks continue to struggle in ensuring compliance with consumer compliance-related rules that apply to commercial and agricultural credit transactions. This result is not necessarily surprising. On the one hand, the applicable rules generally cut across various business lines and products, thus requiring broader compliance strategies. But on the other hand, commercial and agricultural lending functions usually operate independently, outside the normal compliance-heavy consumer loan areas. Also, commercial and agricultural lenders may have less knowledge of applicable consumer compliance rules than a bank’s consumer and residential real estate lenders.

To help reduce the chance of potential violations, this article will provide a brief overview of the more significant compliance rules that apply to commercial and agricultural loans and strategies for ensuring compliance in these loan areas.

Regulation B—Equal Credit Opportunity Act. Many of Regulation B’s provisions apply to commercial and agricultural loan transactions, including the general prohibition against discrimination based on a prohibited basis in any aspect of a credit transaction. Regulation B also prohibits banks from requiring a spouse or another individual to sign on a loan if the applicant applies and qualifies individually for the loan. Requiring a spouse to sign a loan in these circumstances can lead to possible marital status discrimination.

We have seen some recent violations of the spousal signature rules, so we will provide additional detail on these rules.1 The regulation implements these requirements by requiring that for joint loans, the bank must establish at application that the borrowers intended to apply jointly. Most applications for consumer-purpose loans include information that satisfies this joint intent requirement. However, many banks do not obtain applications for commercial and agricultural transactions, which means that they must establish and document joint intent differently. A joint financial statement is not sufficient for establishing joint intent. Thus, banks should adopt consistent practices for commercial and agricultural lenders to establish joint intent at application, such as documenting in the loan file the applicants’ intent to apply jointly or requiring the borrowers to sign documentation at application noting their intent to apply jointly. Training commercial and agricultural lenders on spousal signature requirements is critical for helping ensure compliance with these rules and protecting against possible marital status discrimination concerns.

The adverse action notice requirements of Regulation B also apply to commercial and agricultural loan applications;2  however, the rules differ somewhat from the consumer loan requirements. The bank should adopt standardized practices and train commercial and agricultural lenders to help ensure compliance with the adverse action requirements for commercial and agricultural credit applications.

  • Business and agricultural borrowers with $1 million or less in gross annual revenues:
    Generally, the bank must provide these borrowers the same information it must provide consumer loan borrowers under similar timing rules.3 The primary difference is that the bank may provide the information orally or in writing.
  • Business and agricultural credit applicants with more than $1 million in gross annual revenues:
    The bank must notify applicants of the action taken, in writing or orally, within a reasonable time after application. It must provide 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 creditor’s notification.

Regulation H—Flood Disaster Protection Act. The flood insurance provisions of Regulation H apply to certain commercial and agricultural real estate loans. Banks must obtain a flood determination on most loans secured by improved real property or a mobile home, regardless of the loan’s purpose. The bank must notify the borrowers in advance and obtain adequate flood insurance coverage for any of these loans located in special flood hazard areas (SFHA) prior to making, increasing, extending or renewing the loan.4 Controls for helping ensure that the bank obtains flood insurance when appropriate and in the proper amount include the following:

  • Adopting processes to ensure lending staff does not close these loan transactions before adequate flood insurance is in place.
  • Centralizing flood insurance responsibilities with certain staff members to help build expertise with the flood insurance rules.
  • Monitoring flood insurance loans centrally, if possible, to help ensure that flood insurance policies remain in place and that the bank force places flood insurance when required, and
  • Testing loans secured by properties in SFHAs periodically to confirm compliance with flood-related rules.

Additional regulatory requirements. A 2015 Consumer Compliance Outlook article includes a discussion on additional compliance-related requirements for commercial transactions. 


1 A March 2012 article in Banking in the Ninth includes additional information regarding Regulation B’s spousal signature requirements.

2 Business credit, as defined in Regulation B section 1002.2(g), includes extensions of credit primarily for business or commercial purposes, including agricultural purposes. The definition has a few narrow exceptions described in section 1002.3(a)-(d).

3 See Regulation B section 1002.9.

4 See Regulation H section 208.25.

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