Best-Ever Compliance Checklist for Commercial Loans · Best-Ever Compliance Checklist for Commercial Loans. Program Materials . Use this document to follow along with the live webinar

Your State Association Presents

Best-Ever Compliance Checklist for

Commercial Loans

Program Materials

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Wednesday, December 16, 2015 Presenter: Anne Lolley

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CCOOMMMMEERRCCIIAALL CCHHEECCKKLLIISSTT CCHHEECCKKLLIISSTT EEXXPPLLAANNAATTOORRYY MMAATTEERRIIAALL

Anne Lolley

877‐778‐5192 x4 (toll‐free) [email protected]

WEBINAR OF DECEMBER 16, 2015

2 Copyright © Anne Lolley COMMERCIAL CHECKLIST December 16, 2015

COMMERCIAL LOAN

BUSINESS AND AGRICULTURE

USE THIS CHECKLIST IF LOAN PROCEEDS WILL BE USED FOR BUSINESS OR AGRICULTURAL PURPOSES.

LOOK AT PURPOSE OF LOAN . . . COLLATERAL IS IRRELEVANT.

NEVER APPLICABLE

RESPA Integrated Disclosures ARM Disclosures Right of Rescission HOEPA / HPML Waiting Periods Federal Insurance Disclosures Risk‐Based Pricing Disclosures Privacy Notice Non‐HMDA Monitoring

APPLICABLE AS USUAL

No Discrimination Joint‐Credit Statement Adverse Action Notices ECOA Copy‐of‐Appraisal Rules Flood Insurance Appraisals and Evaluations Environmental Rules HMDA Article 9 Collateral Rules

HMDA WILL APPLY IN ANY OF THE FOLLOWING SITUATIONS: 4

Loan is to purchase a dwelling and is secured by a dwelling;

Loan is to improve a dwelling and is either (i) secured by a dwelling or (ii) classified as a home improvement loan; or

Loan is a refinancing (any purpose) and both old/new loan is secured by a dwelling.

DOES HMDA APPLY? Yes No

NOTE: HMDA will not apply to a loan to purchase farm property, even if there is a dwelling on that property.

APPLICANT

_________________________________________

_________________________________________

LOAN NO.

APPLICATION DATE

LOAN TYPE

New loan Refinancing

BORROWING ENTITY

Sole Proprietorship

Individuals Acting Jointly

General Partnership Limited Liability Company (LLC)

Corporation Limited Partnership

Limited Liability Partnership

Secured by dwelling First lien Junior lien

DURING APPLICATION PROCESS

_____ Determine if application is joint. If so, document that fact. 2

_____ If existing customer, resolve existing exceptions. 3

_____ If HMDA and applicant is a natural person, get monitoring data. 4

_____ Obtain authorization to get information. 5

_____ If loan will purchase real estate, get copy of purchase contract. 6

If loan secured by already‐owned real estate, get copies of: 7

_____ Deed _____ Title work _____ Appraisal _____ Existing mortgage

_____ If loan secured by real estate, order a survey. 8

_____ If loan is secured by real estate, obtain title insurance. 22

_____ If zoning will affect business, determine if appropriate. 9

_____ If secured by first lien on a dwelling, provide the ECOA 10 copy‐of‐appraisal notice within 3 business days after application.

_____ If applicant/owner is a trust, obtain (i) trust copy/certification. 11

_____ Check for lending limit and Reg O problems. 12

CIP – NEW CUSTOMERS ONLY

_____ Obtain customer information before making the loan. 13

_____ Verify customer identity within reasonable time.

ENVIRONMENTAL RISK ANALYSIS – IF REAL PROPERTY 14

Past and present uses of the property:

Government agency contacts?

Other relevant information?

ENTITY DOCUMENTATION 15

CORPORATION

_____ Articles of Incorporation ____ Bylaws _____ Corporate Resolution ____ Certificate of Good Standing

LIMITED LIABILITY COMPANY (LLC)

_____ Articles of Organization ____ Operating Agreement _____ Resolution ____ Certificate of Good Standing

GENERAL PARTNERSHIP

_____ Partnership Agreement ____ Resolution

LIMITED LIABILITY PARTNERSHIP

_____ Statement of Qualification ____ Partnership Agreement _____ Resolution ____ Certificate of Good Standing

SOLE PROPRIETORSHIP

____ Identification of sole proprietor ____ Tax returns ____ Other financial data

FINANCIAL INFORMATION 16

____ Financial statements ____ Tax returns ____ Other

DECEMBER 2015


GUARANTORS 17

_____ If new customer, identify (CIP procedures would work)

_____ If non‐individual, obtain entity documentation.

_____ If non‐individual, check on authorization to guarantee the loan.

_____ Obtain financial information showing ability to repay.

APPRAISAL/EVALUATION ‐ IF REAL PROPERTY 18

_____ Order new appraisal

_____ Conduct new evaluation (can use county tax data as basis) SELECT ONE

_____ Use existing appraisal or evaluation (must verify validity)

_____ Review appraisal or evaluation

COPY OF VALUATION 19

_____ If first lien on a dwelling, provide copy of appraisal or evaluation Must be received at least 3 business days before closing If waiver, provide by closing Remember mailbox rule (allow 3 business days for delivery)

ADVERSE ACTION (IF APPLICABLE) 20

_____ SMALL BUSINESS – Notice of Adverse Action within 30 days _____ BIG BUSINESS ‐ Notify within reasonable time

FLOOD INSURANCE – IF SECURED BY BUILDING 21

____ Obtain flood hazard determination (or recertification)

____ If SFHA, provide Notice 10 days before closing (get acknowledgement)

____ If SFHA and participating community, require insurance (before closing)

KEY MAN INSURANCE 23

_____ If an individual is indispensible, consider key man insurance

LOAN‐TO‐VALUE LIMITS 24

_____ Ensure that the bank complies with the loan‐to‐value limits

MORTGAGE 25

_____ Obtain completed mortgage (or deed of trust).

_____ If real estate has improvements, verify insurance coverage.

OBTAIN SECURITY INTEREST 26

_____ LIFE INSURANCE ‐ Assignment of Life Insurance

_____ CERTIFICATE OF DEPOSIT OR DEPOSIT ACCOUNT ‐ Assignment

_____ INVESTMENT PROPERTY (STOCKS, BONDS) – Assignment

_____ OTHER COLLATERAL ‐ Commercial Security Agreement

PERFECT SECURITY INTEREST 27

____ List of potential buyers

FARM PRODUCTS ____ Pre‐notification to buyers

____ UCC‐1 filed centrally

TITLED VEHICLES ____ Note lien on title

FIXTURES ____ UCC‐1 filed locally

CERTIFICATE OF DEPOSIT ____ Possession

BEARER STOCK CERTIFICATE ____ Possession

REGIST STOCK CERTIFICATE ____ Possession + Endorse/Re‐registration

UNCERTIFICATED SECURITY ____ Written agreement

MOST OTHER COLLATERAL ____ UCC‐1 filed centrally

ADDITIONAL STEPS TO PROTECT COLLATERAL 28

_____ If secured by equipment/vehicles, verify insurance coverage.

_____ If collateral on leased property, obtain landlord’s lien waiver.

_____ If PMSI in inventory or livestock, notification to lienholder.

_____ If perfected by filing, UCC lien search to determine priority.

PREPARE FOR CLOSING 29

_____ Promissory note / Guarantee

_____ Mortgage / Security Agreement

_____ Assignment of insurance / stock / deposit account / rents and leases

_____ Landlord’s lien waiver

_____ List of potential buyers

_____ If HMDA applies, obtain LAR data

_____ Schedule closing date, time, signers

_____ If loan is secured by real estate, coordinate with closing agent

_____ Prepare and mail instruction letter to closing agent

AT CLOSING 30

_____ Ensure that documents are signed, dated and initialed

_____ Collect any funds due from borrower

AFTER CLOSING 31

Record or file the following documents, as appropriate: _____ Mortgage or deed of trust (must be notarized)

_____ Assignment of leases and rents

_____ UCC financing statement

_____ Conduct a UCC lien search to verify bank’s filing

_____ Review documents; organize/assemble files; book loan

_____ Document and record exceptions

_____ Verify accuracy of “uploaded” information

DON’T FORGET 32

SCRA PROTECTIONS APPLY TO BUSINESS AND AGRICULTURAL LOANS.

NOTES AND INSTRUCTIONS


HMDA: Reg C/Appendix B

Reg B Commentary 7(d)(1)‐3

1

THE REQUIREMENT ORIGINALLY DESIGNATED AS BLOCK 1 (FOR KANSAS BANKS) IS NOT GENERALLY APPLICABLE IN OTHER STATES AND HAS BEEN REMOVED FROM THIS BOOKLET.

2

JOINT CREDIT STATEMENT

The Equal Credit Opportunity Act (Reg B) applies to all loans, including commercial loans. Under the ECOA, applicants must indicate—at the time of application—whether they are applying for joint credit. This requirement is found in the Regulation B Commentary and states as follows:

Evidence of joint application. A person's intent to be a joint applicant must be evidenced at the time of application. Signatures on a promissory note may not be used to show intent to apply for joint credit. On the other hand, signatures or initials on a credit application affirming applicants' intent to apply for joint credit may be used to establish intent to apply for joint credit.

This disclosure is typically found on the application form. If the bank’s business application does not contain this statement, a separate form will be required.

NOTE: When several individual applicants apply for a business loan, the bank must determine whether the individuals have formed a partnership. If so, the application is being made by a single partnership—it will not be a joint application.

3

RESOLVE EXCEPTIONS

If an applicant has existing loans with the bank, review those existing loans to determine if there are exceptions that need to be cleaned up before the bank can act on the application.

4

HMDA MONITORING

AND REPORTING

A bank is subject to the Home Mortgage Disclosure Act (HMDA) if it (i) has assets in excess of $44 million and (ii) has a home or branch office in a metropolitan area. [$44 million is the threshold for 2015; it changes annually.]

If a loan is subject to monitoring requirements and the applicant is a natural person (a sole proprietor), the lender must document the applicant’s ethnicity, race and sex. If the applicant is not a natural person (partnership, corporation), no HMDA monitoring is required.

If monitoring data must be collected (because the applicant is a natural person), the lender must inform the applicant:

That the federal government requires the information in order to monitor compliance with federal discrimination laws; and

For in‐person applications, that if the applicant does not provide the data, the lender is required to note the data on the basis of visual observation or surname.

Some business applications do not contain a monitoring block for this data. If that is the case, use a separate form to collect the information. A sample form is printed on PAGE 15.

Proposed Changes: In August of 2014, the CFPB proposed changes to the HMDA reporting rules. As of the date of this webinar (September 16, 2015) the proposal has not been finalized. The proposed changes, however, are briefly discussed on PAGE 23.

5

AUTHORIZATION

Obtain the applicant’s written authorization to obtain information from third parties.

6

PURCHASE CONTRACT

If the loan proceeds will be used to purchase real estate, obtain a copy of purchase contract.

7

REAL ESTATE INFO

If loan will be secured by real estate already owned by borrower, obtain copies of the deed, previous title work, previous appraisals, and any mortgages.

DECEMBER 2015


Reg B §1002.14

31 CFR §1020.220

FDIC: 1993 Financial Institution Letter – FIL‐14‐93FED: 1991 Supervision and Regulation Letter – SR 91‐

8

REAL ESTATE SURVEY

If loan will be secured by real estate, order a survey. Indicate whether the bank wants (i) an “Improvement Land Certificate” (ILC) that shows the improvements or (ii) a “contract” that only shows the pins.

9

ZONING

If zoning will affect the business operation, investigate the zoning and determine whether it is appropriate for the property’s intended use.

10

COPY‐OF‐APPRAISAL NOTICE

The copy‐of‐appraisal requirement arises under the Equal Credit Opportunity Act (Reg B), which applies to all loans, including commercial loans. For years, if a loan was secured by a dwelling, the bank had to provide a copy of the appraisal/evaluation, either (i) routinely or (ii) upon request (after providing a notice of the applicant’s right to receive a copy of the appraisal). Because of the new CFPB rules, the copy‐of‐appraisal requirement has now changed. Beginning January 18, 2014, if a loan is secured by a first lien on a dwelling, the bank must provide the applicant with a notice of the applicant’s right to receive a copy of any valuation (appraisal or evaluation). This notice must be given within three business days after application.

11

CERTIFICATION OF TRUST

If either the applicant or the owner of secured property is a trust, the lender should obtain either (i) a copy of the trust document or (ii) a completed‐and‐notarized Certification of Trust. If permitted in your state, the Certification is usually the easiest and best solution.

12

LENDING LIMIT/REG O

Make sure the loan will fall within the bank’s lending limit.

If the applicant is an insider, be sure to check for possible Reg O problems. Reg O is complicated and detailed, but a simple summary—showing the basic rules—appears on PAGE 16.

13

CUSTOMER IDENTIFICATION

(CIP)

Under the Bank Secrecy Act a bank must develop a Customer Identification Program (CIP). Your bank doubtless has such a program. If the applicant is an existing bank customer, someone will have already gathered the appropriate information. But if the applicant is a new customer, the lender must follow the bank’s customer identification program to identify the applicant and verify that identity. At minimum, the bank’s program will require the following:

Identify the customer by obtaining the following information prior to closing:

o Name, o Date of birth, o Address, and o Social security number or employer identification number.

Verify the customer’s identity within a reasonable time after the loan is closed.

Verification requirements are typically as follows:

Sole proprietorship Driver’s license + Other (refer to bank’s CIP)

Business entity Documentation shown in next section + Other (refer to bank’s CIP)

Each individual signer Driver’s license + Other (refer to bank’s CIP)

14

ENVIRONMENTAL RISK ANALYSIS

When a loan is secured by real property, the bank must consider the risk of environmental liability and conduct a brief analysis of that risk. This checklist enables the lender to conduct a simple environment risk analysis by asking two simple questions and documenting the responses right on the checklist. Usually the responses will not indicate a potential problem and the analysis will be complete. If the responses indicate an environment concern, the lender should turn to the bank’s environmental policy for additional guidance.

FDIC’S STATEMENT OF POLICY IS REPRINTED ON PAGE 19.


15

ENTITY DOCUMENTATION

If the applicant is a business entity (sole proprietorship, corporation, partnership, LLC), obtain copies of documents showing:

That the entity is authorized to do business in your state,

Whether the entity has the authority to borrow,

Who has the authority to sign the loan documents on behalf of the entity,

How many signatures will be required, and

How the signer must sign.

CORPORATION

Articles of Incorporation

Bylaws (along with any amendments)

Corporate Resolution (showing who has authority to borrow and sign for the corporation)

Certificate of Good Standing (for any state in which the entity does business)

LIMITED LIABILITY COMPANY (LLC)

Articles of Organization

Operating Agreement

Resolution (showing who has authority to borrow and sign on behalf of the LLC)


GENERAL PARTNERSHIP

General partnerships are not typically required to file with the state

Partnership Agreement (if written agreement exists)

Resolution (showing who has authority to borrow and sign on behalf of the partnership)

Certificates of Good Standing are NOT issued for general partnerships

LIMITED PARTNERSHIP

Certificate of Limited Partnership

Partnership Agreement

Resolution (who has authority to borrow and sign on behalf of the limited partnership)


LIMITED LIABILITY

PARTNERSHIP

Statement of Qualification

Partnership Agreement

Resolution (who has authority to borrow and sign on behalf of the limited partnership)


SOLE PROPRITORSHIP

Personal identification of sole proprietor

Tax returns

Other financial data as required by bank’s loan policy or procedures

HELPFUL INFORMATION

Documenting Business Entities ‐ Page 17 Obtain an EIN ‐ Page 18


16

FINANCIAL INFORMATION

OBTAIN FINANCIAL INFORMATION SHOWING APPLICANT’S ABILITY TO REPAY THE LOAN. ____________________________

IF THE BANK’S LOAN POLICY CONTAINS REQUIREMENTS FOR FINANCIAL INFORMATION, LENDERS MUST FOLLOW THOSE REQUIREMENTS.

OTHERWISE, CONSIDER OBTAINING THE FINANCIAL INFORMATION INDICATED BELOW.

ESTABLISHED BUSINESSES

Financial statements for the previous two fiscal years

The most current interim financial statement

Tax returns for the previous two years

NEW BUSINESSES

Financial statements of individual owners for previous three fiscal years

The most recent interim financial statement

Tax returns of the individual owners for the previous three years

ADDITIONAL INFORMATION

DEPENDING ON THE

SITUATION, THE ADDITIONAL INFORMATION SHOWN

AT THE RIGHT MAY NEED TO BE OBTAINED.

Monthly interim statements (year‐to‐date)

Balance sheet

Income statement

List of accounts receivable (aged)

List of accounts payable (aged)

An accountant’s compilations, reviews, audits (if applicable), as well as consolidated and consolidating statements

If borrower is a new customer, a Dun and Bradstreet report

REPORTS AND DOCUMENTS

THESE ADDITIONAL

REPORTS AND DOCUMENTS MAY BE APPROPRIATE

Feasibility studies (for development and construction projects)

Copies of leases and subsequent rent rolls (when repayment will come from income–producing property


Reg B §1002.14Reg B Commentary §1002.14(a)(1)

17

GUARANTORS

REQUIREMENT

HOW IT APPLIES

EQUAL CREDIT OPPORTUNITY ACT

The Equal Credit Opportunity Act (Reg B) applies to all loans, including commercial loans. It permits the bank to require that directors, partners or officers guarantee the loan. The bank cannot, however, automatically require the signatures of their spouses.

IDENTIFICATION Pursuant to safety and soundness considerations, a prudent bank will determine and

verify the identity of any guarantor. The CIP rules do not technically apply to guarantors, but could be used in the identification process.

ENTITY DOCUMENTATION

Obtain entity documentation (see “ENTITY DOCUMENTATION” on PAGE 6 for suggested documentation).

ENTITY RESOLUTION

If the guarantor is a non‐individual entity (corporation, partnership, LLC), use a resolution form that specifically authorizes the entity to guarantee the loan (commonly‐used resolution forms may not contain this authorization).

FINANCIAL INFORMATION

Obtain financial information showing guarantor’s ability to repay the loan. See “FINANCIAL INFORMATION” on PAGE 7 for suggested documentation.

18

APPRAISALS AND

EVALUATIONS

If a loan is secured by real property, the value of the secured property must be determined in one of the following ways:

A new appraisal;

A new evaluation; or

An existing appraisal/evaluation.

Note: No appraisal/evaluation is required when the mortgage is taken only as an abundance of caution.

Appraisals. If a loan is secured by real property and the amount of the loan exceeds $250,000, the bank must hire certified appraiser to conduct an appraisal of the real property securing the loan. Note, however, there are certain exceptions for (i) Certain business loans, (ii) same‐lender refinancings with no new money and (iii) same‐lender refinancings with no material change in the market or property. In these cases, an in‐house evaluation may be permitted.

Evaluations. If a loan is secured a real property and the amount of the loan is $250,000 or less, the bank can value the property by conducting an in‐house evaluation. An in‐house evaluation can be based on a county tax assessment, but the bank must (i) review the assessment, (ii) determine whether the assessment is valid and (iii) prepare a written review that includes a reconciliation of the value.

Business Loans of $1 Million or Less. If repayment for this type of loan is not dependent on (i) the sale of the real estate or (ii) rental income from the real estate, the bank can satisfy the appraisal requirement by conducting an in‐house evaluation.

Existing Valuations. If the bank has an existing appraisal or evaluation, it can use that existing valuation to support a new loan—but only if it documents that the existing appraisal or evaluation is still valid.

Reviewing Appraisals and Evaluations. As part of a bank’s credit approval process—and prior to the final credit decision—the bank should review appraisals and evaluations to ensure that they comply with the federal appraisal regulations and the bank’s internal policies. Note that both appraisals and evaluations must be conducted before the loan is closed.

Fed: 2010 Supervision and Regulation (SR) Letter – SR 10‐16OCC: 2010 Bulletin – OCC 2010‐42 FDIC: 2010 Financial Institution Letter – FIL‐82‐2010

A HELPFUL CHART OF THE APPRAISAL‐AND‐EVALUATION REQUIREMENTS APPEARS ON PAGE 21.


Reg B §1002.9

Reg B §1002.14

19

PROVIDING COPIES OF APPRAISALS

Under the Equal Credit Opportunity Act, which applies to all loans (including commercial loans), the bank must provide the consumer with a copy of any valuation (appraisal or evaluation) developed in connection with an application for a loan secured by a first lien on a dwelling. The copy must be provided promptly upon completion of the valuation and must be received by the consumer at least three business days before closing. If the copy is provided by mail or e‐mail, the "mailbox rule" applies: The consumer will not legally receive the copy until three business days after mailing or e‐mailing. The bank may, however, use evidence to show that the copy was received earlier. The bank cannot charge a fee for the copy, but can charge the applicant a reasonable fee to reimburse for the bank for the cost of preparing or obtaining the valuation.

The applicant can waive the three‐days‐before‐closing timing requirement (either orally or in writing), but even if it receives a waiver, the bank must provide the copy at or prior to closing. And note that the bank must receive the waiver at least three business days before closing. If the loan is not closed and the applicant has provided a waiver, the bank must provide the copy within 30 days.

Here is the required notice wording:

We may order an appraisal to determine the property’s value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost.

Finally, note that this requirement applies regardless of whether credit is extended or denied, or the application is incomplete or withdrawn. In addition, the new law makes it clear that the copies may be provided in electronic form, as long as the bank complies with the federal E‐Sign Act.

20

ADVERSE ACTION

The Equal Credit Opportunity Act, which applies to all loans (including commercial loans), requires the bank to provide the applicant with a Notice of Adverse Action. The rules are detailed and rather complicated:

Completed Application. If the bank denies a completed application (refuses to grant credit in the amount or terms requested), the bank must provide a Notice of Adverse Action within 30 days after receiving the application.

Completed Application. If the bank makes a counteroffer and the applicant accepts the counteroffer, there is no adverse action and no notice is required. But if the applicant does not accept the counteroffer, the bank must provide a Notice of Adverse Action within 90 days after notifying the applicant of the counteroffer.

Incomplete Application. Within 30 days after receiving an incomplete application, the bank must take one of the following actions:

o Deny the incomplete application and provide a Notice of Adverse Action within 30 days after taking the adverse action; or

o Provide a Notice of Incompleteness. This wording is incorporated into the usual Notice‐of‐ Adverse‐Action form. If the applicant fails to respond, the bank has no further obligation. But if the applicant supplies the information, the bank must take action on the application and follow the usual notification rules.

Withdrawn Application. If an applicant specifically withdraws an application, there is no “adverse action” and a Notice of Adverse Action is not required. If the applicant provides the bank with a letter of withdrawal, that letter should be kept in the file. If there is no letter, the lender should document the withdrawal. Consider using the “NOTES AND INSTRUCTIONS” portion of the checklist to make this note . . . and the lender should initial and date the notation.

The rules summarized above are applicable to all non‐business applications and can also be used for small business applications. A “small business” is a business with gross annual revenues of $1 million or less.

Note, however, that there are special rules for “big businesses”—businesses with gross annual revenues of more than $1 million. In this case, the ECOA requires the bank to notify the applicant within a reasonable time. Notice may be formal or informal, oral or written. A telephone call is okay, but must be documented. The bank is only required to provide a written statement of the reasons of the adverse action if the applicant requests those reasons in writing within 60 days after getting the notice of adverse action.

A DETAILED CHART OF THE ADVERSE‐ACTION REQUIREMENTS APPEARS ON PAGE 22.


FDIC: 12 CFR 339 FED: 12 CFR 208.25 OCC: 12 CFR 22

21

FLOOD INSURANCE

The bank must initiate flood insurance procedures when it makes, increases, extends or renews a loan secured by a building or manufactured home. The checklist shows the key requirements:

Determine whether the building is in a Special Flood Hazard Area (SFHA);

If the building is in a SFHA, provide the borrower with a notice; and

If the building is in a SFHA and the community participates in the National Flood Insurance Program, require flood insurance to be in place before closing.

In the case of a refinancing, the bank can use a previous determination if:

The determination is no more than seven years old; and

There have been no map changes.

In the past, bankers could get detailed information about flood insurance from FEMA’s handbook, Mandatory Purchase Of Flood Insurance Guidelines. Those Guidelines have become outdated because of the Biggert‐Waters Flood Insurance Reform Act of 2012, and FEMA has now rescinded those guidelines. In 2009 the federal banking agencies released a detailed document titled Interagency Questions and Answers Regarding Flood Insurance. This detailed and instructive document is available on the website of each agency. ______________________________________ There are several new flood insurance rules:

Exemption for Detached Structures. Under this new rule (already in effect), a structure that is part of a residential property, but detached from the primary residential structure and not used as a residence, is exempt from the flood insurance requirements. Be sure to note, however, that detached structures used for commercial, agricultural, or other business purposes are not eligible for this exemption and are subject to the usual flood insurance requirements.

Required Escrow of Flood Insurance Premiums. Under this new rule (effective January 1, 2016), banks must escrow all flood insurance premiums. There are numerous exemptions to this requirement, however, including an exemption for loans primarily for business, commercial or agricultural purposes.

Force Placed Flood Insurance. Effective October 1, 2015, the rules on force‐placement will change. The updated rule still requires banks to provide a notice if it determines that insurance has lapsed. And as before, the notice cannot be provided until insurance lapses. If the borrower fails to obtain insurance within 45 days after notification, the bank must purchase insurance on the borrower's behalf. Importantly, the new rule permits the bank to force‐place insurance immediately after the original policy lapses. Note, however, that if the borrower obtains a policy that overlaps with the force‐placed insurance, the bank would be required to terminate the force‐placed policy and refund any premiums paid by the borrower for the overlap period.

22

TITLE INSURANCE

Creditors typically require title insurance (or some similar method of title protection) even if they are not required to do so by law or regulation. For that reason, this checklist includes the title insurance "requirement."

23

KEY MAN INSURANCE

If a particular individual is indispensible to the operation of the borrower’s business, consider requiring key man life insurance and naming the bank as beneficiary. If the bank moves forward with the insurance, the lender should verify—prior to closing—that the bank has possession of the policy, as well as any necessary assignment.


24

LOAN‐TO‐VALUE LIMITS

Loan‐to‐value limits apply to all loans secured by real estate. The regulatory agencies have established certain limits for various types of real estate loans and those limits are shown below:

LOAN CATEGORY

LOAN‐TO‐VALUE LIMITS

Raw land

65%

Land development

75%

Construction:

Commercial, multi‐family, and other non‐residential (includes condominiums and cooperatives

1‐to‐4 family residential

80%

85%

Improved property

85%

Owner‐occupied 1‐to‐4 family and home equity

A loan‐to‐value limit has not been established for permanent‐mortgage or home‐equity loans on owner‐occupied, 1‐to‐4 family residential property. However, for any such loan with a loan‐to‐value ratio that equals or exceeds 90% at origination, the bank should require appropriate credit enhancement in the form of either mortgage insurance or readily‐marketable collateral.

25

MORTGAGE

If the loan is secured by real estate, make sure the following steps are completed:

Obtain completed mortgage (or deed of trust).

If there are improvements on the real estate, verify that improvements are covered by insurance.

26

OBTAIN SECURITY INTEREST

When the loan will be secured by collateral, the bank must have the owner of collateral sign a contract in which the owner agrees to let the bank have the collateral if the loan isn’t paid. This contract is usually called a security agreement, but it can also be in the form of an assignment. The checklist will help lenders quickly identify the correct form.

IF COLLATERAL IS . . .

USE THIS DOCUMENT . . .

Life insurance

Assignment of life insurance

Certificate of deposit

Assignment of deposit account

Deposit account

Assignment of deposit account

Investment property (stocks/bonds)

Stock assignment

All other collateral

Commercial security agreement

FDIC: 1999 Financial Institution Letter – FIL‐94‐99 FED: 1999 Supervision and Regulation Letter – SR 99‐26 (SUP) OCC: 1999 Bulletin 1999‐38


27

PERFECT SECURITY INTEREST

COLLATERAL

HOW TO PERFECT

TITLED VEHICLES

Prepare and file a notice of security interest (NOSI).

Get the lien noted on the certificate of title.

FARM PRODUCTS (LIVESTOCK, CROPS)

Obtain a list of potential buyers from the borrower.

Send a notice of security interest to potential buyers.

File a financing statement with the central filing office.

FIXTURES File a financing statement locally

CERTIFICATES OF DEPOSIT

Take possession of the certificate of deposit.

INVESTMENT PROPERTY (STOCKS, BONDS, MUTUAL FUNDS)

BEARER CERTIFICATE (does not indicate name of owner). Obtain physical possession of the certificate.

REGISTERED CERTIFICATE (indicates name of owner). Obtain physical possession of the certificate and either (i) have the owner endorse the certificate or (ii) re‐register the certificate in the bank’s name.

UNCERTIFICATED SECURITY (no paper certificate, such as a mutual fund). The issuer must agree in writing that it will comply with the bank’s instructions without further consent of the owner.

MOST OTHER COLLATERAL

File a financing statement with the central filing office.

UNUSUAL COLLATERAL

Check with your compliance officer or supervisor to determine the appropriate perfection method.

28

ADDITIONAL STEPS TO PROTECT COLLATERAL

Depending on the type of collateral, the lender may want to consider the following additional steps to ensure that the collateral is protected and can be repossessed if necessary:

IF COLLATERAL IS . . .

TAKE THIS ADDITIONAL STEP . . .

EQUIPMENT OR VEHICLES Verify that collateral is covered by insurance. COLLATERAL ON LEASED PROPERTY

Obtain a landlord’s lien waiver.

PMSI (INVENTORY OR LIVESTOCK) Send a notification to any existing lienholder. PERFECTION BY FILING

Conduct a UCC lien search to check for priority liens.

KEY MAN LIFE INSURANCE. In addition to the additional steps listed above, if a particular individual is indispensable to the operation of the borrower’s business, the bank might want to consider requiring key man life insurance and naming the bank as beneficiary. Prior to closing, the lender should verify that the bank has possession of the policy, as well as any necessary assignment.

29

PREPARE FOR CLOSING

When preparing for closing, here are some steps that will be helpful:

Prepare the promissory note.

Arrange for and schedule the closing date, time, signers.

If secured by real estate, coordinate the closing with the closing agent.

Prepare an instruction letter to closing agent.

If HMDA applies, obtain and document the loan application register (LAR) information.

HMDA: Reg C §1003.4 Reg C – Appendix A


30

AT CLOSING

Here is a partial list of documents that may need to be signed at closing:

Promissory Note

Guarantees

Mortgage (or Deed of Trust)

Assignment of Leases and Rents

Commercial Security Agreement

Assignment of Life Insurance

Stock Assignment

Assignment of Deposit Account

Landlord’s Lien Waiver

Listing of Potential Buyers

If the applicant has waived the copy‐of‐valuation timing requirement, the copy of the valuation must be provided at closing.

In addition, the closer will need to obtain any money due from borrower.

31

AFTER CLOSING

After the loan is closed, make sure these chores are completed:

Record the mortgage or deed of trust (must be acknowledged).

Record assignment of leases and rents.

File the UCC financing statement (not necessary if collateral is covered by existing filing).

Conduct a UCC lien search to verify bank’s filing.

Disburse funds.

Review documents; organize and assemble files; book the loan.

Document and record any exceptions.

Verify the accuracy of all “uploaded” information.

32

SERVICEMEMBERS CIVIL RELIEF ACT

The requirements of the Servicemember’s Civil Relief Act apply to commercial loans as well as consumer loans. Because of SCRA requirements generally are not triggered when a loan is initially executed, the checklist does not itemize the requirements. Bankers should, however, be aware of the SCRA requirements, including the following:

If a servicemember incurs a debt before entering military service, the interest rate on that debt is limited to 6% during the period of military service. If the debt is secured by a mortgage, however, the debt is limited to 6% during the period of military service and for one year thereafter.

If a legal action to enforce a debt against real estate is filed during, or within one year after the servicemember’s military service, a court may stop the proceedings for a period of time, or adjust the debt. In addition, a foreclosure will not be valid if it occurs during, or within one year after the servicemember’s military service unless the creditor has obtained a valid court order approving the foreclosure.


Quick Application Form - for existing borrowers

Applicant(s)___________________________________________________________

___________________________________________________________

Amount requested_____________________________________________________

Purpose of loan____________________________________________________________________________________________________

Collateral_________________________________________________________________________________________________________

________________________________________ ______________ ____________________________________ _______________ Signature of Applicant Date Signature of Applicant Date

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐USE ONLY WHEN GOVERNMENT MONITORING IS REQUIRED‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

INFORMATION FOR GOVERNMENT MONITORING PURPOSES

The following information is requested by the Federal Government for certain types of loans related to a dwelling in order to monitor the lender’s compliance with equal credit opportunity, fair housing and home mortgage disclosure laws. You are not required to furnish the information, but are encouraged to do so. The law provides that a lender may not discriminate either on the basis of the information, or on whether you choose to furnish it. If you furnish the information, please provide both ethnicity and race. For race, you may check more than one designation. If you do not furnish ethnicity, race, or sex, under Federal regulations, this lender is required to note the information on the basis of visual observation and surname if you have made this application in person. If you do not wish to furnish the information, please check the box below. (Lender must review the above material to assure that the disclosures satisfy all requirements to which the lender is subject under applicable state law for the particular type of loan applied for.)

BORROWER

CO‐BORROWER

□ I do not wish to furnish this informa on. □ I do not wish to furnish this informa on.

ETHNICITY: □ Hispanic or La no □ Not Hispanic or La no


RACE: □ American Indian or Alaskan Native □ Asian □ Black or African American □ Na ve Hawaiian or Other Pacific Islander □ White

RACE: □ American Indian or Alaskan Native □ Asian □ Black or African American □ Na ve Hawaiian or Other Pacific Islander □ White

SEX: □ Male □ Female

SEX: □ Male □ Female

TO BE COMPLETED BY LENDER

□ This application was taken in person (if applicant chooses not to provide the information, note the data on the basis of visual observation or surname).

□ This application taken by mail or telephone or Internet.

Lender's Name________________________________________ Bank Name_______________________________________________ Lender’s NMLS Identification Number _____________________ Bank's NMLS Identification Number____________________________

TYPE OF CREDIT

I intend to apply for individual credit.

We intend to apply for joint credit. APPLICANT(S) INITIAL HERE:

CHANGE IN FINANCIAL INFORMATION?

Has any aspect of your financial status changed since you last provided complete financial information to the bank? YES NO

CONTACT ANNE TO RECEIVE THIS FORM—IN WORD VERSION—FOR YOUR WORD PROCESSOR


GOVERNMENT MONITORING FORM

APPLICANTS APPLICATION DATE

INFORMATION FOR GOVERNMENT MONITORING PURPOSES

The following information is requested by the Federal Government for certain types of loans related to a dwelling in order to monitor the lender’s compliance with equal credit opportunity, fair housing and home mortgage disclosure laws. You are not required to furnish the information, but are encouraged to do so. The law provides that a lender may not discriminate either on the basis of the information, or on whether you choose to furnish it. If you furnish the information, please provide both ethnicity and race. For race, you may check more than one designation. If you do not furnish ethnicity, race, or sex, under Federal regulations, this lender is required to note the information on the basis of visual observation and surname if you have made this application in person. If you do not wish to furnish the information, please check the box below. (Lender must review the above material to assure that the disclosures satisfy all requirements to which the lender is subject under applicable state law for the particular type of loan applied for.)

BORROWER

CO‐BORROWER

□ I do not wish to furnish this informa on.

□ I do not wish to furnish this informa on.



RACE: □ American Indian or Alaskan Na ve □ Asian □ Black or African American □ Na ve Hawaiian or Other Pacific Islander □ White

RACE: □ American Indian or Alaskan Na ve □ Asian □ Black or African American □ Na ve Hawaiian or Other Pacific Islander □ White

SEX: □ Female □ Male

SEX: □ Female □ Male

TO BE COMPLETED BY LENDER

□ This application was taken in person (if applicant chooses not to provide the information, note the data on the basis of visual

observation or surname).

□ This application taken by mail or telephone or Internet.

Lender's Name________________________________________ Lender’s NMLS Identification Number _______________________

CONTACT ANNE TO RECEIVE THIS FORM—IN WORD VERSION—FOR YOUR WORD PROCESSOR


REG O – INSIDER LOANS

ASSUME UNIMPAIRED CAPITAL AND SURPLUS OF $100 MILLION

TYPE OF LIMIT

DETAILS

NOTES

GENERAL LIMIT

Each insider (including his/her related interests) can borrow up to 15% of bank’s unimpaired capital and surplus (plus an additional 10% in the case of loans that are fully secured by readily‐marketable collateral having a market value):

$15 million $25 million (if secured by readily-marketable collateral)

For this category, the term “insider” includes:

Executive officer + related interest Director + related interest Principal shareholder + related interest

AGGREGATE LIMIT

The total of all loans to insiders (and their related interests) cannot exceed the bank’s unimpaired capital and surplus:

$100 million

NOTE FOR SMALL BANKS:

If a bank has deposits of less than $100 million, the board can pass a resolution to increase the aggregate limit to two times the bank’s unimpaired capital and surplus.

ADDITIONAL RESTRICTIONS FOR EXECUTIVE OFFICERS

Loans for the education of the executive officer’s children can be made in any amount, not to exceed the general limit of:


Loans to purchase, construction, maintenance or improvement of the executive officer’s residence can be made in any amount, not to exceed the general limit of:


Loans fully secured by (i) US bonds, notes and treasury bills or (ii) deposit accounts of the lending bank can be made in any amount, not to exceed the general limit of:


Other loans to each executive officer are capped at 2.5% of the bank’s unimpaired capital and surplus, but that amount cannot exceed $100,000:

$2.5 million $100,000

Follow the GENERAL LIMIT shown above


DOCUMENTING BUSINESS ENTITIES

ENTITY TYPE

BIRTH CERTIFICATE

OPERATING RULES

CERTIF OF GOOD STANDING

NOTES

CORPORATION

ARTICLES

OF INCORPORATION

BYLAWS YES

Any resolution older than five years should be re‐executed.

The name must include one of the following terms: Association, Church, Club, Co., College, Company, Corp., Corporation, Foundation, Fund, Inc., Incorporated, Institute, Limited, Ltd., Society, Syndicate, Union or University.

LIMITED

LIABILITY

COMPANY

ARTICLES

OF ORGANIZATION

OPERATING AGREEMENT

YES


LLCs are comprised of “members.” Those members may (but are not required to) designate a “manager” (who does not necessarily have to be a member).

Member‐Managed LLC. Unless the Operating Agreement states otherwise, the members manage the LLC and each member can act on behalf of the LLC.

Manager‐Managed LLC. If the Operating Agreement provides for a manager, the manager will manage the LLC and have the authority to act on its behalf.

The name must include one of the following terms: Limited Liability Company, Limited Company, LLC or LC.

GEN

ERAL

PARTN

ERSH

IP

NONE

PARTNERSHIP AGREEMENT

(IF ONE EXISTS)

NO


A “partnership” is automatically established when two or more persons own a business—even if the persons are husband and wife. If a business has two or more owners and is not a corporation or LLC, it is a partnership—a separate entity.

A general partnership is not registered with the Secretary of State and might not even have a written partnership agreement.

General partnerships are legal entities—separate from the individual partners. The bank will be doing business with the partnership—not the partners.

LIMITED

PARTN

ERSH

IP

CERTIFICATE

OF LIMITED

PARTNERSHIP


YES


Normally, each partner is liable for the partnership debt, but in a limited partnership, the partners agree that one partner is not liable. This type of partnership is more formal than a “general” partnership and is established by a written Partnership Agreement. A limited partnership must file a Certificate of Limited Partnership with the Secretary of State, as well as an Annual Report.

The name must include either Limited Partnership or LP. Further, the name cannot include the name of any limited partner.

LIMITED

LIABILITY

PARTN

ERSH

IP

STATEMENT

OF QUALIFICATION


YES


An LLP is similar to a corporation or LLC—the partners are not liable for the partnership's obligations. An LLP will already have a formal Partnership Agreement and must file both a Statement of Qualification and an Annual Report with the Secretary of State.

The name must include one of the following terms: Registered Limited Liability Partnership, Limited Liability Partnership, RLLP or LLP.


OBTAINING AN EIN In some cases, small business entities—particularly small partnerships—may not have an employer identification number (EIN). Fortunately, the IRS provides an easy fix for this problem and bankers can readily help their customers get a required EIN. The information printed below is copied directly from the IRS website. A person may want to go directly to the website—www.irs.gov—to utilize the various links.

HOW TO APPLY FOR AN EIN

If you are a home‐care service recipient who has a previously assigned EIN either as a sole proprietor or as a household employer, do not apply for a new EIN. Use the EIN previously provided. If you cannot locate your EIN for any reason, follow the instructions on the Misplaced Your EIN? Web page.

Apply Online

The Internet EIN application is the preferred method for customers to apply for and obtain an EIN. Once the

application is completed, the information is validated during the online session, and an EIN is issued

immediately. The online application process is available for all entities whose principal business, office or

agency, or legal residence (in the case of an individual), is located in the United States or U.S. Territories. The

principal officer, general partner, grantor, owner, trustor etc. must have a valid Taxpayer Identification Number

(Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number) in

order to use the online application.

Apply By EIN Toll‐Free Telephone Service

Taxpayers can obtain an EIN immediately by calling the Business & Specialty Tax Line at 800‐829‐4933. The hours of operation are 7:00 a.m. ‐ 10:00 p.m. local time, Monday through Friday. An assistor takes the information, assigns the EIN, and provides the number to an authorized individual over the telephone. Note: International applicants must call (267) 941‐1099 (Not a toll‐free number).

Apply By FAX

Taxpayers can FAX the completed Form SS‐4 (PDF) application to their state FAX number (see Where to File ‐ Business Forms and Filing Addresses), after ensuring that the Form SS‐4 contains all of the required information. If it is determined that the entity needs a new EIN, one will be assigned using the appropriate procedures for the entity type. If the taxpayer's fax number is provided, a fax will be sent back with the EIN within four (4) business days.

Apply By Mail

The processing timeframe for an EIN application received by mail is four weeks. Ensure that the Form SS‐4 (PDF) contains all of the required information. If it is determined that the entity needs a new EIN, one will be assigned using the appropriate procedures for the entity type and mailed to the taxpayer. Find out where to mail Form SS‐4 on the "Where to File Your Taxes" (for Form SS‐4) page.

OTHER IMPORTANT INFORMATION . . .

Responsible Party

In order to identify the correct individuals and entities applying for EINs, language changes have been made to the EIN process. Refer to Responsible Parties and Nominees to learn about these important changes before applying for an EIN.

Third Party Authorization

The Third Party Designee section must be completed at the bottom of the Form SS‐4. The Form SS‐4 must also be signed by the taxpayer for the third party designee authorization to be valid. The Form SS‐4 must be mailed or faxed to the appropriate service center. A third party designee may call for an EIN; however a faxed Form SS‐4, with the taxpayer's signature, is still required. IRS assistors will take the information over the phone from the third party designee and ask the third party to fax the completed Form SS‐4 to them (to the IRS assistor's attention) at an administrative fax number. After receiving the faxed Form SS‐4, the EIN will be assigned and faxed back to the third party designee, or given over the phone. The third party designee's authority terminates at the time the EIN is assigned and released to the designee.


ENVIRONMENTAL RISK GUIDELINES

─ FDIC STATEMENT OF POLICY ─

BACKGROUND The potential adverse effect of environmental contamination on the value of real property and the potential for liability under various environmental laws have become important factors in evaluating real estate transactions and making loans secured by real estate. Environmental contamination, and liability associated with environmental contamination, may have a significant adverse effect on the value of real estate collateral, which may in certain circumstances cause an insured institution to abandon its right to the collateral. It is also possible for an institution to be held directly liable for the environmental cleanup of real property collateral acquired by the institution. The cost of such a cleanup may exceed by many times the amount of the loan made to the borrower. A loan also may be affected adversely by potential environmental liability even where real property is not taken as collateral. For example, a borrower's capacity to make payments on a loan may be threatened by environmental liability to the borrower for the cost of a hazardous contamination cleanup on property unrelated to the loan with the institution.

The potential for environmental liability may arise from a variety of federal and state environmental laws and from common law tort liability. The most significant environmental law establishing liability for the cost of cleaning up hazardous contamination on real property is the Comprehensive Environmental Response, Compensation and Liability Act (also known as "CERCLA" and "Superfund"). CERCLA establishes a broad legal framework that creates potential liability for the cleanup costs of hazardous contamination. Entities that may be potentially liable for these cleanup costs are the current and past owners of the contaminated property, the current and past operators of business on the property, entities that disposed of hazardous substances at the property and entities that transported hazardous substances for disposal to property selected by the transporter. CERCLA provides a secured creditor exemption from liability for banks and other lenders that do not participate in the management of the property. The United States Environmental Protection Agency has issued a rule interpreting the secured creditor exemption under CERCLA, 57 Fed. Reg. 18344 (April 29, 1992). In addition to the federal Superfund law, most states have enacted legislation that establishes similar liability under state law for hazardous contamination cleanup costs.

The other primary federal environmental law relating to hazardous contamination liability is the Resource Conservation and Recovery Act (also known as "RCRA"). RCRA establishes a comprehensive statutory and regulatory framework that governs the generation, transportation, storage, discharge and disposal of solid and hazardous wastes, and, when necessary, the cleanup of hazardous contamination. RCRA also establishes regulations governing the prevention, detection and cleanup of releases from underground storage tanks containing certain hazardous substances or petroleum. Under authorization by Congress, many states establish and administer RCRA programs as part of each state's environmental laws.

Other federal environmental laws that establish environmental liability include, among others, the Clean Water Act, the Clean Air Act and the Toxic Substance Control Act. The states, including the local jurisdictions within each state, have also enacted many other environmental laws and regulations. In addition to federal and state environmental laws, potential environmental liability may result under common law tort suits based on hazardous contamination.

Institutions need to implement an environmental risk program in order to evaluate the potential adverse effect of environmental contamination on the value of real property and the potential environmental liability associated with the real property. The failure of an institution to evaluate potential environmental risks associated with real property may contribute to an institution's inability to collect on its loans and affect the institution's financial condition.

ENVIRONMENTAL RISK PROGRAM

As part of the institution's overall decision‐making process, the environmental risk program should establish procedures for identifying and evaluating potential environmental concerns associated with lending practices and other actions relating to real property. The board of directors should review and approve the program and designate a senior officer knowledgeable in environmental matters responsible for program implementation. The environmental risk program should be tailored to the needs of the lending institution. That is, institutions that have a heavier concentration of loans to higher risk industries or localities of known contamination may require a more elaborate and sophisticated environmental risk program than institutions that lend more to lower risk industries or localities. For example, loans collateralized by 1‐to‐4 family residences normally have less exposure to environmental liability than loans to finance industrial properties. The environmental risk program should provide for staff training, set environmental policy guidelines and procedures, require an environmental review or analysis during the application process, include loan documentation standards, and establish appropriate environmental risk assessment safeguards in loan workout situations and foreclosures.


Training. The environmental risk program should incorporate training sufficient to ensure that the environmental risk program is implemented and followed within the institution and the appropriate personnel have the knowledge and experience to determine and evaluate potential environmental concerns that might affect the institution. Whenever the complexity of the environmental issue is beyond the expertise of the institution's staff, the institution should consult legal counsel, environmental consultants and other qualified experts.

Policies. When appropriate, loan policies, manuals and written procedures should address environmental issues pertinent to the institution's specific lending activities. For example, the lending manual might identify the types of environmental risks associated with industries and real estate in the institution's trade area, provide guidelines for conducting an analysis of potential environmental liability and describe procedures for the resolution of potential environmental concerns. Procedures for the resolution of environmental concerns might also be developed for credit monitoring, loan workout situations and foreclosures.

Environmental Risk Analysis. Prior to making a loan, an initial environmental risk analysis needs to be conducted during the application process. An appropriate analysis may allow the institution to avoid loans that result in substantial losses or liability and provide the institution with information to minimize potential environmental liability on loans that are made. Much of the needed information may be gathered by the account officer when interviewing the loan applicant concerning his or her business activities. In addition, the loan application might be designed to request relevant environmental information, such as the present and past uses of the property and the occurrence of any contacts by federal, state or local governmental agencies about environmental matters. The loan officer or other representative of an institution might visit the site to evaluate whether there is obvious visual evidence of environmental concerns.

Structured Environmental Risk Assessment. Whenever the application, interview, or visitation indicates a possible environmental concern, a more detailed structured investigation by a qualified individual might be appropriate. This assessment might include surveying past ownership and uses of the property, inspecting the site and contiguous parcels of property and reviewing company records for past use or disposal of hazardous materials. A review of public records might include contact with federal and state environmental protection agencies to determine whether the borrower has been cited for violations concerning environmental laws and a review of federal and state lists identifying real property with significant environmental contamination. Loan Documentation. Loan documents should include language to safeguard the institution against potential environmental losses and liabilities. Such language might require that the borrower comply with environmental laws, disclose information about the environmental status of the real property collateral and grant the institution the right to acquire additional information about potential hazardous contamination by inspecting the collateral for environmental concerns. The loan documents might also provide that the institution has the right to call the loan, refuse to extend funds under a line of credit, or foreclose if the hazardous contamination is discovered in the real property collateral. The loan documents might also call for an indemnity of the institution by the borrower and guarantors for environmental liability associated with the real property collateral.

Monitoring. The environmental risk assessment should continue during the life of the loan by monitoring the borrower and the real property collateral for potential environmental concerns. The institution should be aware of changes in the business activities of the borrower that result in a significant increased risk of environmental liability associated with the real property collateral. If there is a potential for the environmental contamination to adversely affect the value of the collateral, the institution might exercise its rights under the loan to require the borrower to resolve the environmental condition and take those actions that are reasonably necessary to protect the value of the real property.

Involvement in the Borrower's Operations. Under the federal Superfund law, CERCLA, the institution may have an exemption from environmental liability as the holder of a security interest in the real property collateral. In monitoring a loan for potential environmental concerns, and resolving those environmental situations as necessary, the institution should evaluate whether its actions may constitute "participating in the management" of the business located on the real property collateral within the meaning of CERCLA. If the actions are considered to be participating in the management, the institution may lose its exemption from liability under CERCLA.

Foreclosure. A lender's exposure to environmental liability may increase significantly if it takes title to real property held as collateral. The institution should evaluate the potential environmental costs and the potential for environmental liability in conjunction with an assessment of the value of the collateral in reaching a decision to take title to the property by foreclosure or other means.

SUPERVISORY POLICY Examiners will review an institution's environmental risk program as part of the examination of its lending and investment activities. When analyzing individual credits, examiners will review the institution's compliance with its own environmental risk program. Failure to establish or comply with an appropriate environmental program will be criticized and corrective action required.

SOURCE: FDIC Financial Institution Letter (FIL‐14‐93), dated February 25, 1993


APPRAISAL AND EVALUATION REQUIREMENTS

LOAN TYPE

APPRAISAL REQUIRED

EVALUATION PERMITTED

IINN LLIIEEUU OOFF APPRAISAL

NO APPRAISAL OR

EEVVAALLUUAATTIIOONN

RREEQQUUIIRREEDD

GENERAL RULES

Loan over $250,000 (but see exceptions below)

Loan of $250,000 or less (but see exceptions below)

SPECIAL BUSINESS RULE

Business loan of $1 million or less –if repayment is not dependent on (i) sale of the real estate or (ii) rental income from real estate (unless exempted below)

SPECIAL REFINANCING

RULE ________

INCLUDES THE ADDITION OF COLLATERAL

WITHOUT A NEW LOAN

Same-lender refinancing/renewal with no new money, even if “material change”—regardless of loan amount

Same-lender refinancing/renewal with no material change, even if new money—regardless of loan amount

Same-lender refinancing or renewal with both new money and a material change:

• Loan over $250,000………………………………. • Loan of $250,000 or less …………………………

…………. ………………

………

SPECIAL

HPML RULE

Higher-priced mortgage loans that are not exempt from the special HPML appraisal requirements

COMPLETELY EXEMPT

FROM APPRAISAL

AND EVALUATION

REQUIREMENTS

Lien taken as abundance of caution (if loan supported by (i) borrower’s income or (ii) other collateral)

Loan not secured by real estate

Lien taken only to protect other collateral

Loans insured/guaranteed by US government agency

Loans that qualify for sale to a US government agency

Loans that have an appraisal conforming to the FNMA or FHLMC appraisal standards

A “material change” occurs when there is an obvious and material change in the market conditions or in the physical aspects of the property that threatens the adequacy of the bank’s collateral protection.


ADVERSE ACTION NOTICES

ACTION

SMALL BUSINESSES

─ GROSS REVENUES OF $1 MILLION 0R LESS ─

LARGE BUSINESSES

─ GROSS REVENUES IN EXCESS OF $1 MILLION ─

APPROVAL OF APPLICATION

Notify applicant within 30 days after completed application—requirement is satisfied when the applicant gets the loan.

Notify applicant within a reasonable time —requirement is satisfied when the applicant gets the loan.

ADVERSE ACTION

REFUSAL TO GRANT OR INCREASE CREDIT REQUESTED IN A COMPLETED APPLICATION

Mail or deliver Notice of Action Taken within 30 days after completed application.

Notify applicant of the adverse action within a reasonable time, either orally or in writing.

If applicant makes a written request for the reasons for the adverse action within 60 days of the notification, mail or deliver a written statement of the reasons.

COUNTEROFFER

Mail or deliver notice of counteroffer (part of the Notice of Action Taken form) within 30 days after receiving the completed application . . . OR

Mail or deliver a combined notice of counteroffer and adverse action (denial of the originally requested loan terms). If this combined notice is given, a second adverse action notice is not required if the applicant does not accept the counteroffer.

Notify applicant of the counteroffer within a reasonable time, either orally or in writing . . . OR

Mail or deliver a combined notice of counteroffer and adverse action (denial of the originally requested loan terms). If this combined notice is given, a second adverse action notice is not required if the applicant does not accept the counteroffer.

APPLICANT FAILS TO ACCEPT COUNTEROFFER

DOES NOT EXPRESSLY ACCEPT COUNTEROFFER OR USE THE CREDIT OFFERED

Mail or deliver a Notice of Action Taken within 90 days after notifying the applicant of the counteroffer.

Notify applicant within a reasonable time, either orally or in writing.

If applicant makes a written request for the reasons for the adverse action within 60 days of the notification, mail or deliver a written statement of the reasons.

INCOMPLETE APPLICATION

Within 30 days after receiving the incomplete application, do one of the following:

Deny loan because of incompleteness and mail or deliver Notice of Action Taken . . . OR

Mail or deliver a Notice of Incompleteness (part of the Notice‐of‐Action‐Taken form). If applicant fails to respond within the designated time, bank has no further obligation.

NOTE: The lender may inform the applicant orally of the need for additional information, but if the application remains incomplete, the lender must mail or deliver one of the above notices.

Notify applicant of incomplete application within a reasonable time after receiving the application, by doing one of the following:

Deny the loan because of incompleteness and notify the applicant of the denial, either orally or in writing. If applicant makes a written request for the reasons for the denial within 60 days of the notification, provide a written statement of the reason . . . OR

Notify the applicant of the incompleteness, either orally or in writing. If applicant fails to respond within the designated time, bank has no further obligation.

WITHDRAWAL OF APPROVED APPLICATION

BANK BELIEVES APPLICANT WILL ASK ABOUT THE APPLICATION’S STATUS, BUT THE APPLICANT FAILS TO INQUIRE WITHIN 30 DAYS AFTER APPLYING

The application is treated as withdrawn and lender is not required to comply with notification requirements.

The application is treated as withdrawn and lender is not required to comply with notification requirements.

APPLICATION EXPRESSLY WITHDRAWN BY APPLICANT

Bank need not comply with notification requirements Bank need not comply with notification requirements

IN THE CASE OF MULTIPLE APPLICANTS, GIVE THE NOTICE TO THE PRIMARY APPLICANT


In October of 2015, the CFPB revised the HMDA reporting rules. Most of the new rules, however, will not become effective until January 1, 2018. The new rules will include these changes:

Financial institutions will generally be required to report all closed‐end loans, open‐end lines of credit, and reverse mortgages secured by dwellings . . . regardless of purpose. Reporting is only required, however, if the institution originated at least 25 "covered loans" (excluding open‐end lines of credit) in the previous calendar year. Note that temporary loans and loans primarily for agricultural purposes will be exempt.

In addition to the currently‐reported data, expect to report:

o Whether loan is insured or guaranteed under certain federal programs

o Whether loan is purchase, home improvement, refinancing or "other"

o Postal address of property

o Age of applicant

o Credit score and name of scoring model

o Interest rate

o Term of prepayment penalty

o Debt‐to‐income ratio

o Loan‐to‐value ratio

o Term of loan in months

o Number of months until the interest rate can change

o Whether the loan contract includes a balloon payment, Interest‐only payments, or negative amortization

o Value of secured property

o If secured property is a manufactured home: Whether it is classified as real or personal property Whether the borrower owns the land or leases the land

o If the property is a multi‐family dwelling, the number of income‐restricted units

o Whether the application was submitted directly to the financial institution

o NMLSR number of the loan originator

o The automated underwriting system used to evaluate the application

o Whether the loan is an open‐end line of credit, and whether it is a HELOC

o Whether the loan is subject to ability‐to‐repay provisions, and whether the loan is a qualified mortgage

Documents

Best-Ever Compliance Checklist for Commercial Loans · Best-Ever Compliance Checklist for Commercial Loans. Program Materials . Use this document to follow along with the live webinar