Because they are not regulated like traditional banks, there is a great deal of confusion surrounding the safeguards in place for commercial lending agencies. It is important to understand where these regulations are currently and where they might head in the future.
Over the past two decades, there has been an increase in regulation and oversight for lenders. While this initially only affected traditional lenders, the Consumer Financial Protection Bureau (CFPB) has the authority to develop and implement regulations that have the potential to impact the commercial lending industry as well. The Dodd-Frank Act that gave the CFPB oversight of traditional lenders, such as banks, also gave the CFPB the power to provide safeguards for non-traditional lenders. As many of the regulatory reigns begin to tighten, it is important to know how this affects non-traditional lending agencies.
One distinct way that the CFPB is clamping down on lenders is through data collection. The major motivation behind this, as outlined in Section 1071 of the Dodd-Frank Act, is to protect the identity of women and minorities from underwriters and, thus, ensuring that they cannot be denied by the sex or ethnicity. While data is still collected about the race, ethnicity and sex of applicants, it is now prohibited by law to pass that information on to underwriters or other employees until the borrower has been properly notified that the commercial lending agency does not discriminate. This is not a game changing regulation, but has the potential to trip up lenders who are not careful to ensure proper disclosure.
Another key aspect of lending regulations that also affects commercial lending practices comes from Regulation B. Essentially, this prohibits any form of discrimination against a potential borrower for any aspect of the application. While this is similar to Section 1071, it is more comprehensive and also applies to applicants who are not minorities. One of the key provisions in Regulation B is that now lenders are prohibited from making it a requirement for a spouse to sign a lending document, simply because they are a spouse of the borrower. This specifically applies to the business side of a spousal relationship, as it is still acceptable to require a spouse to be involved in a personal guarantee against a potential loan. This protection is also extended to business partners or other officers of the business entity.
How is the Consumer Financial Protection Bureau currently enforcing these commercial lending regulations?
Various aspects of the Dodd-Frank Act are being enforced differently. In fact, the CFPB is not really enforcing the data collection aspect of Section 1071 at all currently. One of the reasons for the delay on this is that the regulations are not yet published in a comprehensive manner. This gives lending agencies time to modify their policies and procedures to fall in line with regulations before it becomes a problem and fines are levied. There will come a time when compliance will be mandatory and this will, no doubt, affect many non-traditional lenders.
Dennis Dahlberg Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.