24 Aug The laws and commercial real estate lending
For a lending institution to operate profitably, efficiently and legally, it must follow best commercial real estate lending practices and, of course, the law. Let’s take a look at a couple of the laws that apply to commercial lenders:
Equal Credit Opportunity ACT (ECOA)
The ECOA may be a consumer protection law, but it applies in commercial lending as well. In fact, new data collection rules may soon require lenders to use commercial credit applications, which have not always been standard practice. The ECOA prohibits credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or dependence on government assistance.
High Volatility Commercial Real Estate (or HVCRE) Lending Capital Requirements
The HVCRE lending requirements kick in when the loan is for the acquisition, development and construction of commercial real estate. Under this rule, lenders must set aside more of the loan’s value than in the past. There are some exceptions to the rule, including loans where the borrower contributes an amount equal to or above 15 percent of the real estate’s “appraised as completed” value before receiving bank funds. Regulations involving HVCRE loans can increase a lender’s costs, which ultimately get passed along to the borrower through higher interest rates or increased fees. Note that development of one- to four-family residential properties is exempt. Banks have found the rules confusing, and are hoping legislation will result in more clarity.
On another front, lenders must remain vigilant concerning environmental risks associated with properties they finance. A client tied up in a hazardous waste clean-up may very well have his cash flow severely affected and find it hard to make any loan payments. Also of concern is the liability risk lenders assume on foreclosed or repossessed properties. A contaminated property may pose a potential risk to the local community and also may lose its resale value.
Barsh & Cohen, P.C. is a boutique law firm specializing in the financial services sector. We can advise lending institutions on the best commercial real estate lending practices, including regulatory requirements and other legal risks. Contact us today to set up a consultation.