If you are in attendance at the 2016 Temenos Compliance KnowledgeShare here in Orlando this week, you just heard a brilliant (well, maybe not so brilliant) presentation I just made on the topic of compliance and commercial lending. Commercial lenders make the big loans and generate the big revenue, with hopes of making the big bucks. A long time back, in my checkered history, I was a commercial lender; so, I completely understand the mindset that commercial lenders are elite. Some may pay lip service to the compliance officer but not necessarily listen to what they have to say, because after all, mostof the compliance rules don’t apply to commercial lending; the focus being on consumer lending. The emphasis there is most, because some of them do, and their violation can be pretty dangerous.
As an example, Regulation B and its rules against illegal discrimination is not a consumer regulation. It applies to every loan transaction in which a financial institution participates. I don’t think that institutions discriminate in their commercial lending, but there are probably more indicia of discrimination in commercial lending than there is in consumer lending; examiners just don’t know how to find it. That will change when the new CRA reporting rules are implemented. When that happens, lenders will have to make a record of the race, sex and ethnicity of their commercial borrowers. As HMDA did with consumer real estate lending, CRA will do with commercial lending. Now, the examiners will have statistics to manipulate, and if you allow me to manipulate your numbers, I can come up with about anything that I wish. So, realize it is coming and prepare.
Also with Regulation B, you have that pesky rule that outlaws spousal guarantees.
Regulation CC and its rules on the availability of deposited funds is also not just a consumer regulation. How often has a commercial lender called someone on the deposit side of the bank institution and said, “Charlie is two months late on his loan payments and is coming in this afternoon to try to work something out. In the meantime, let’s put a hold on Charlie’s deposit accounts”. Nowhere in Regulation CC does it provide for a “lender nervous” hold.
Also commercial lenders need to beware of the flood insurance rules, the standards for independent appraisals of real estate and Regulation U when they are making a loan secured by margin stock. Far more frequently than on the consumer side of the institution, a commercial lender is taking as collateral not only real estate but the contents of the real estate which triggers the requirements for contents coverage as well as the coverage on the building.
Finally, the Bank Bribery Act. It makes it illegal to solicit or accept anything of value from anyone relating to business of the institution. One exception is meals, travel and entertainment in connection with a business meeting provided that the institution would have paid for it if the third party had not. If a customer asks his or her commercial lender to go to a local high school football game and have a coke and a box of popcorn while there, not a problem. On the other hand, it is a problem if you are invited to fly first class to the Super Bowl, stay in a posh hotel, take a limousine to the game, etc. I have filed some pretty creative expense account reports in my time, but I don’t think that I could ever have gotten by with that one. Somewhere in between those two scenarios is the breaking point, and it is much closer to the high school game than the Super Bowl. The problem with accepting anything from a borrower is that it is always looked at in hind sight after the loan has gone bad, and the gift always looks worse in hind sight than it did at the time it was given.
One of the other aspects of the Bank Bribery Act that I dislike is the prohibition on a financial institution from making preferential loans to employees of other financial institutions. When I first got into banking, the bank I worked for had a deal with another bank down the street. All of our folks would go to it and get preferential rates on their loans and their folks would come to us. Seemed reasonable to me at the time. No more.
If your commercial lenders aren't heeding the compliance officer’s warnings, then someone needs to explain the facts to them in a little more forceful way.
If you didn’t attend the Temenos Compliance KnowledgeShare this week, I hope that you will consider one of our other sessions this year. You will find it a valuable use of your time.