Commercial Lending Compliance: Are You Giving It the Attention It Deserves?
When financial institutions think about compliance risk, consumer lending often takes center stage. Mortgage disclosures, fair lending, deposit regulations, and consumer protection rules naturally receive significant attention. Commercial lending, on the other hand, is frequently viewed as having fewer regulatory requirements and, therefore, lower compliance risk.
While it’s true that many consumer regulations do not apply to commercial credit, that does not mean commercial lending is exempt from compliance obligations. In fact, commercial lending involves many regulatory expectations that require sound policies, knowledgeable staff, and ongoing oversight. The following are a few of the questions we hear most often.
If commercial loans are exempt from many consumer regulations, what key compliance requirements still apply?
Quite a few. Commercial lending compliance remains subject to:
- Equal Credit Opportunity Act (ECOA) and Regulation B
- Bank Secrecy Act/Anti-Money Laundering/Countering the Financing of Terrorism (BSA/AML/CFT)
- Office of Foreign Assets Control (OFAC) screening
- Flood insurance regulations
- Appraisal and evaluation requirements
- Home Mortgage Disclosure Act (HMDA)
- State lending laws
Does fair lending apply to commercial loans?
Yes. ECOA prohibits discrimination in commercial credit just as it does in consumer lending. Many commercial borrowers are small businesses or closely held entities with individual owners or guarantors, making fair lending considerations particularly important.
How does BSA/AML/CFT fit into commercial lending?
Commercial relationships often involve more complex ownership structures than consumer accounts. As a result, Customer Identification Program (CIP), Customer Due Diligence (CDD), Beneficial Ownership requirements, and OFAC screening become particularly important.
Obtaining and documenting accurate customer information is essential to meeting regulatory expectations.
Should commercial lending be included in the institution’s compliance management system?
Absolutely. Commercial lending should be incorporated into compliance policies, procedures, training, monitoring, quality assurance, and independent testing.
Excluding commercial lending from compliance reviews can leave financial institutions vulnerable to regulatory findings, operational issues, and legal risk.
Why is flood compliance still a significant issue for commercial lending?
Flood compliance is one of the most frequently cited compliance issues in commercial lending because the requirements apply regardless of whether the borrower is a business or an individual. If a commercial loan is secured by a building located in a Special Flood Hazard Area (SFHA) in a participating community, the institution must comply with the Flood Disaster Protection Act, including:
- Obtaining a Standard Flood Hazard Determination (SFHD) prior to closing
- Providing the required Notice of Special Flood Hazards when applicable
- Obtaining flood insurance in the required amount before loan closing, which may include content coverage
- Maintaining coverage, and monitoring for renewals and lapses
- Force-placing insurance when required if coverage is not maintained
- Monitoring for loans affected by map revisions or collateral changes
Flood compliance can become especially challenging for commercial relationships involving multiple parcels, mixed-use properties, construction projects, or complex collateral structures that can include building contents. Institutions should have clear procedures for determining which structures require coverage, documenting insurance calculations, and monitoring ongoing compliance throughout the life of the loan.
Do adverse action notice requirements apply to commercial loan applicants?
Many institutions associate adverse action notices with consumer lending, but Regulation B also establishes notification requirements for commercial credit applicants. While the timing and content requirements differ depending on the size of the business and the nature of the applicant, lenders should have procedures to ensure applications are tracked through final disposition and appropriate notices are provided when required.
For commercial applicants with gross revenues of $1 million or less in the preceding fiscal year, Regulation B generally requires the institution to provide a written statement of the reasons for adverse action or disclose the applicant’s right to request those reasons. For larger businesses, Regulation B provides significantly more flexibility than it does for consumer applicants or smaller businesses.
What are the adverse action notice requirements for businesses with gross revenues exceeding $1 million?
The financial institution must still notify the applicant, either orally or in writing, of the action taken within a reasonable time.
If the applicant submits a written request within 60 days, the institution must provide a written statement of the specific reasons for the adverse action along with the required ECOA notice.
Are commercial loans reportable under HMDA?
Yes. While many commercial lenders assume that business-purpose loans are outside the scope of the Home Mortgage Disclosure Act (HMDA), that is not always the case. HMDA coverage depends on the purpose of the loan and the type of collateral, not simply whether it is a commercial loan.
A commercial loan is HMDA reportable if it is secured by a residential structure (for example, a single-family home or a multifamily apartment building) and is also for the purpose of purchasing, refinancing, or improving a dwelling.
Conversely, many commercial loans secured by non-dwelling collateral, such as office buildings, retail centers, warehouses, or manufacturing facilities, are not HMDA reportable.
How can financial institutions reduce commercial lending compliance risk?
As commercial portfolios continue to grow in size and complexity, institutions should periodically evaluate whether their compliance controls have kept pace. Independent compliance reviews and commercial loan reviews can identify documentation weaknesses, process gaps, fair lending concerns, and regulatory issues before they become examination findings.
At CrossCheck, we help financial institutions look beyond the credit risk and evaluate the compliance risk within their commercial lending programs, providing practical recommendations that strengthen processes, reduce risk, and support safe and sound lending practices.
Compliance Check is CrossCheck’s compliance-focused quarterly Q&A series, where our experts take a deeper dive into a topic facing the industry, offering clarity and best practices for your institution’s compliance management efforts.
To receive Compliance Check via email or sign up for CrossCheck’s other publications, visit our subscriptions page.
Grappling with a regulatory compliance issue? We invite you to send your question to Ask CrossCheck. Our team of compliance experts are ready to provide the guidance and support you need.
