The Intersection of Commercial Lending and Consumer Protections

Compliance officers are quick to dismiss commercial loans as almost burdenless compared to consumer transactions. They worry about the alphabet soup of¬†consumer¬†compliance regulations, with ‚Äúconsumer‚ÄĚ being the operative word. Commercial loans don‚Äôt involve consumers; therefore, there is no need to worry about consumer regulations, right? Wrong.

If I had to guess, I’d say most of your minds went to the Equal Credit Opportunity Act (ECOA) or its implementing regulation, Regulation B, as you read the opening paragraph. Just like with consumer applications, denying a commercial application requires Regulation B’s adverse action notice, so it is often thought of as a consumer regulation but it clearly applies in the commercial context. It would help if you also kept in mind that the rules on denying on a prohibited basis also apply in the commercial context and that the ever-dreaded 1071 rule also resides in Regulation B and is specifically directed at commercial credit.

Another obvious example of consumer rules applying to commercial credit is flood insurance. Commercial credit secured by a structure in a flood zone is subject to flood insurance rules just like consumer credit, with the notable exception being that there is an exemption from the escrow requirement.

Some banks are surprised to learn that the Servicemembers Civil Relief Act (SCRA) applies to commercial loans. The SCRA provides certain financial protections to servicemembers and, in some cases, their spouses, dependents, and other persons subject to the obligations of servicemembers. The SCRA’s protections apply to obligations contracted before entering military service, and no distinction is made between consumer and commercial credit, so don’t be so quick to SCRA when dealing with a servicemember’s business loan.

HMDA has an explicit¬†exception¬†for commercial credit: ‚ÄúThe requirements of [HMDA] do not apply to ‚Ķ [a] closed-end mortgage loan or open-end line of credit that is or will be made primarily for a business or commercial purpose.‚ÄĚ However, the exception goes on to note that it applies unless the credit meets the definition of a home purchase loan, refinancing, or home improvement loan under HMDA. Hence, the exception is much narrower than it seems at first glance. Banks need to remember the potential transactional reporting requirements that may apply when they have business credit secured by a dwelling.

Everyone knows that Regulation Z primarily focuses on consumer credit. Commercial credit is specifically exempted. However, two provisions may apply to credit cards issued for business purposes. First, credit cards can be issued, regardless of their purpose, only in response to an application, oral or written request, or as a substitute for or renewal of an existing card. Second, the regulation has provisions specifically applicable to the unauthorized use of a credit card where a card issuer provides ten or more credit cards for use by the employees of an organization.

The most common questions on the Compliance Hub Hotline about Regulation CC involve consumer check deposits. The regulation sets forth the requirements for banks to make funds deposited into transaction accounts available according to certain time schedules and disclose their funds availability policies to customers. The regulation applies to both consumer and commercial accounts, so remember that the next time a commercial customer comes in to make a check deposit.

Always question what you think you know in compliance and when you’re having doubts, please feel free to reach out to us on the Compliance Hub Hotline.