The importance of a Consumer Compliance program at a Non consumer Bank

We often hear the familiar refrain “we really don’t make any consumer loans except the occasional accommodation for a good customer – so we really don’t need a compliance officer or a compliance program.”  For many a bank this conclusion can seem straight forward and logical.  However, nothing could be further from the truth! 

The Intersection of Consumer and Commercial Lending

Though it may not seem apparent a first glance, there are a number of ways that consumer regulations can creep into the overall operation of banks that consider themselves, non-consumer.    First, there are a number of consumer oriented regulations that apply to all lending, not just commercial lending.  In addition, certain types of commercial lending still have a consumer aspect to it.  For example, commercial loans to buy apartments may need to be reported under the Home Mortgage Disclosure Act (HMDA).  Finally it has become increasingly clear that regulators like the CFPB are willing to use broad interpretations of consumer regulations to increase the impact and influence of these regulations.  [1]

Among all of the consumer regulations with the biggest potential impact on commercial lending is Regulation B which is the implementing regulation for the law known as the Equal credit Opportunity Act.  The requirements of regulation B apply to ALL loans, not just consumer loans.   The requirement to make a credit decision within 30 days of receiving a completed application and giving proper notification of adverse action are well known portions of the regulation.  However, it is important to note that there are several other portions of this law that must be considered.  For example, Regulation B specifically prohibits discouragement of an applicant.  It also prohibits a bank form refusing to grant credit based upon marital status or from discounting government income.    Though this regulation has in the past generally only been applied to consumer lending, there is nothing in the regulation that could or would prevent regulators from applying it to commercial lending.  

In point of fact, Reg. B is actually the heart and soul of fair lending regulations.   When reviewing a Banks compliance with Fair Lending, one of the main considerations that regulator will make is whether or not fair and equal consideration is being given to all applicants.  The guidelines in Regulations B are used to determine whether or not a Bank’s credit process is being is designed to deliver outcomes that do not have disparate impact.  

 In addition to Reg. B and Fair lending considerations, all banks must meet the requirements of the Community Reinvestment Act.  Even for a small community bank the requirements of the act include identifying the credit needs of the assessment area and making a majority of loans within that area.  These requirements put, at a minimum, the onus on a Bank to be able to document why being a commercial loan only lender meets the credit needs of its community.  In other words, it is fair game for examiners to ask a bank to document how its decision to refrain from making consumer loans is a business decision and not one that has disparate impact.

Yet another area where the CFPB and by implication other regulatory agencies have shown a willingness to apply consumer based regulations across the board is the Unfair Deceptive, Abusive Acts or practices regulation commonly known as UDAAP.  The fact is that the practices or policies that may violate this rule are really in the eye of the beholder.  Therefore the possible ranges of practices that may violate this law are widespread.  Based upon current experiences of banks, it appears that products that have complicated or high fee schedules often come under close scrutiny here.  Even banks that are commercial loan only status can run afoul of UDAAP. 

HMDA is another consumer based regulation that has impact on all banks.  In cases, where a commercial loan includes the purchase of a dwelling unit, reporting may be required if your bank is a HMDA reporter.  So for example, where the borrower is purchasing a retail space that includes six condominiums, there may very like be the need to record the dwelling units on your HMDA LAR!  It is also clear that at some time in the very near future, Banks will be asked to compile information on loans to women and minority owned business in a manner that will mirror the information that is currently collected for the HMDA LAR. 

Consumer Regulations Apply 

Ultimately, there is no such thing as a Bank or financial institution that can completely avoid consumer regulations.   Therefore, as your bank begins to prepare its risk assessment consumer compliance must be part of the consideration.  Moreover, the decision to allocate little to no resources in this area can be one that a Bank will come to regret in the future.    One of the main reasons firms like ours exist is to assist community banks that have made the decision to de-emphasize consumer lending maintain a strong compliance program nevertheless.    

While the compliance management program at a commercial loan only bank does not need to be as extensive as a bank that has a great deal of activity, the basic components of the program are the same.  There have to be policies and procedures established by the Board of Directors that detail the standards for compliance, management information systems that monitor for compliance, internal controls and monitoring  and training for compliance.  Without these basic pillars, a compliance program will be inadequate and potential trouble for any bank. 

The compliance program at a Bank that is largely non consumer can quickly and easily be the first line of defense against significant enforcement actions.  Oftentimes, when consumer compliance is not a large part of the daily operation of a bank, the requirements of the regulations often go unnoticed.  Even the basic requirement of notice within 30 days can slip or flood Insurance that is required can be overlooked.  In an instant, the one area that in which the Bank thought there would never be a problem; consumer compliance,  becomes a colossal headache!  

Regardless of the size of your bank or the level of intensity of consumer lending, a need will always exist for a compliance management program.    

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[1] Recent actions against automobile lenders, credit card marketers and mortgage insurance brokers all serve as examples.