office of Foreign Assets Control (oFAC)
Requirements to check both depositors and borrowers against the
OFAC list is an activity closely related to BSA. OFAC’s programs
are designed to restrict the access of criminals, drug traffickers,
and terrorists to their assets. Before any funds leave the bank or
arrive through deposits or wires, the owner of the funds must
be checked against the OFAC list. If the owner matches a name
on the list, the funds must be frozen or blocked and reported
to OFAC. Any violations are considered serious and subject to
strict enforcement.
Reg o
Making commercial loans to insiders has often been the primary
cause of bank failures. Regulation O, and similar rules at FDIC
and OCC, restrict the amounts and types of loans that banks
may make to their insiders—directors, owners, and senior staff.
Banks must track and report the amounts loaned to each insider
and monitor their activity. A best practice is to establish a single
officer or office that has authority to approve loans to insiders.
At a minimum, commercial lenders must be able to identify all
insiders and their related interests and refer any loan request
from an insider to the designated office or individual for review.
SCRA
Some commercial loans may involve borrowers or guarantors
protected by the Service Members Civil Relief Act (SCRA). The
focus of compliance with SCRA tends to be on mortgages, car
loans, and credit cards because these are the most common types
of credit made available to service members. However, there are
situations where the service member has a commercial loan.
Commercial loans must be treated the same as consumer loans.
Commercial Real Estate lending
Some of the rules that apply to commercial lending are specific
to real estate lending. HMDA, flood, and appraisals would need
to be considered.
the home Mortgage Disclosure Act (hMDA)
Designed to measure and encourage lending in low and moderate
income (LMI) and minority neighborhoods, HMDA reaches commercial and consumer lending activities. This regulation counts
and considers loans secured by dwellings, including multiple
dwellings, such as apartment buildings.
Flood Insurance
Flood insurance rules apply to both consumer and commercial
lending to encourage safe and sound lending. These rules are
designed to protect both the borrower and lender. It is the only
type of insurance where the risk is actually known and should,
therefore, be considered essential when the improvements are in
a high-risk flood hazard zone. But compliance involves a bit of
paperwork, which commercial lenders (and mortgage lenders)
would prefer someone else do.
Timing, however, is important. Discovering at the last minute
that a property improvement is located in a high-risk, flood-
hazard zone can derail the proceedings. Because of this, it is
better to know early in the underwriting process whether flood
risk may affect the property value and the cost of borrowing.
Flood determinations should be ordered at the same time as the
appraisal. It doesn’t matter who does the flood determination
as long as it gets done.
Another problem for compliance is that borrowers don’t want
to pay for flood insurance. Borrowers put pressure on their loan
officer to take away what they see as an extra cost. Under pressure
to maintain the lender-client relationship, most loan officers are
sorely tempted to do what the client wants. It takes strict policies
and a great deal of training to avoid giving in. All loan officers
should understand that flood insurance is a protection for the
bank and the borrower, not just “compliance stuff.” They should
also understand that the earlier they know about the flood risk
of a property, the better they will be able to underwrite the loan
and work with the client.
Appraisals
Appraisal requirements are also universal, although rules for
commercial loans vary slightly from the consumer loan rules.
The two key issues for appraisals are the qualifications and the
independence of the appraiser. Commercial lenders generally
understand and respect these requirements.
But there is a new issue coming. In January 2014, changes to
ECOA and Regulation B will require providing the borrower with
notice and a copy of the appraisal if the loan will be secured by a
first lien on a one- to four-family dwelling. Because this rule applies
only to first liens, most of the situations where commercial loans
are supported by a security interest in the borrower’s home will
be exempt. However, commercial lenders will need to be sensitive
to situations where their lien is actually in the first position. The
timing of a notice up front at or within a few days of application
as well as the specific definitions of what “prompt” and “deliver”
mean will put constraints and requirements on an activity that
has had no such requirements before. This also requires the compliance officer to address what a “commercial loan application”
is; many times this is an informal and dynamic process without
a specific form. The necessities of timing and documentation
for the ECOA appraisal rule may be the final straw to compel
those banks that don’t use them and their commercial lenders
to develop and use an actual commercial loan application form.
Commercial lenders, through the
Bank’s Customer Identification Program,
should identify the owners of the
business, as well as determine the
legitimacy of the business.
