Whether you want to build or purchase a condominium, you will likely be required to obtain a mortgage. Most people cannot purchase something so expensive outright and you likely fit into this category. With this in mind, you should understand that commercial mortgage loans will be regulated. It is important to make sure that your loan is compliant. Otherwise, you may run into problems along the way. In the early days, it was referred to as consumer compliance but that has changed.
Now, compliance impacts the entire bank. Compliance examiners are now studying commercial loan files. There are numerous things that can impact a commercial loan. Below, you’ll learn more about regulatory compliance for commercial mortgage loans and more.
Fair Housing
The Fair Housing Act plays an important role in the real estate market. Furthermore, it is going to impact commercial lending in various ways. First and foremost, it prevents lenders from discriminating against borrowers. The Fair Housing Act regulates mortgages for single family homes as well as loans for purchasing or construction any dwelling. For instance, this will impact your ability to get a loan to build a condo or apartment building.
Commercial lenders have to be very cautious because they do not want to discriminate against their clients. Discrimination is prohibited when considering the borrower, the borrower’s associates, and the property’s location. Commercial lenders must take steps to avoid discriminating against clients.
ECOA Regulation B
While many people do not know it, the Equal Credit Opportunity and Regulation B will be important for commercial lenders. The Consumer Credit Protection Act does not include a consumer purpose test. With that being said, Regulation B isn’t concerned whether the loan is for business or personal credit. Commercial loans are given special treatment thanks to the procedures of 1002.9. If there is a first lien security interest on a family dwelling for 1 to 4 families, there will need to be appraisal and valuation notices.
This has given examiners another reason to study commercial files. Either way, borrowers should know that ECOA prohibits discrimination in commercial lending and consumer lending. This is something lenders and borrowers will have to remember when working with commercial loans.
Flood Hazard
Commercial real estate is governed by flood insurance regulations. These regulations are based on whether the lending agency decides to obtain a security interest in any improved real property. One thing to note is that these regulations do not worry about consumer or commercial borrowers. They’re universal across the board. All common timing requirements and the certification will also apply to commercial loans. Any improvement located in a flood zone will need to be covered by insurance before the loan can be closed. It is vital to understand that this includes barns and warehouses.
Commercial lenders often believe it is up to the commercial borrower to determine whether they should obtain insurance. Congress believed otherwise. Congress enacted this law because it wanted to make sure that it didn’t have to bail out uninsured lenders after flooding. Some business customers may be hesitant about purchasing flood insurance. The lender will need to convince them otherwise. They can do so by reminding the borrower that disaster assistance is only available once.
Furthermore, it is a loan and not a grant. This means that the borrower will have to pay it back at some point. Either way, flood insurance regulations are very important when it comes to building a regulatory compliance framework.
Fair Credit Reporting Act
The Fair Credit Reporting Act primarily deals with consumer protection laws. However, there are times when it will also apply to business loans. This act includes all reports assembled, acquired, and used regarding consumers. Historical information about a corporation would likely not be covered by the Fair Credit Reporting Act. However, there is always a chance that a lender is going to obtain credit reports belonging to the owners and principals of the business. If this happens, those reports will be subject to FCRA. When the commercial lender obtains these reports, they will need to obey all regulations set forth by the Fair Credit Reporting Act.
The lender will need to provide notices if adverse action is taken based on information found in these reports. This is something borrowers and lenders need to consider.
Accommodation Loans
At some point, a commercial lender may be asked to provide an accommodation loan to one of their business clients. The loan may be associated with a mortgage, consumer loan, home equity, or something else. The loan may be a consumer loan. If the loan is consumed oriented, it must meet all requirements of consumer regulations. However, the loan may be made for business purposes. If this is the case, it would not have to meet those consumer regulations. Even if the borrower is a business, these rules may apply.