Private banking customers often demand more service in less time - though private banking products and services are the most heavily regulated under consumer lending laws.
The process of making a private banking loan now often requires "compliance underwriting" as well as credit underwriting.
The first step toward efficient and simple customer service is to understand what the compliance issues will be for a transaction requested by your customer.
Here are some key consumer compliance issues that arise in private banking. Generally Applicable Regs
Regulation B, Equal Credit Opportunity, limits a creditor's right to require a spouse's guaranty if the primary borrower is sufficiently creditworthy to support the credit alone.
Even if collateral such as a second mortgage or a pledge of securities is required, Reg B may limit you to a pledge or a spouse's waiver of rights in the collateral where the spouse's income or assets are not necessary for repayment of the loan.
It also prohibits making adverse credit decisions based on "prohibited classifications" such as sex, race, national origin, and disability, and requires you to give certain notices to applicants if you decline an application or take other "adverse action." What many lenders don't know is that Reg B applies to commercial-purpose loans as well as consumer-purpose loans. Personal Loans
Because many private banking loans are made for personal, family, or household purposes, they will often be covered by Regulation Z, Truth-in- Lending.
Reg Z governs all consumer-purpose loans secured by real estate, as well as those up to $25,000 that are not.
If a loan (other than one to acquire or initially construct it) is secured by a borrower or guarantor's principal dwelling, Reg Z also gives a right to cancel the loan for a period of three days after the loan has been made and all the disclosures have been given.
These "rescission rights" must be disclosed by the time the loan is made and will force a delay in funding. Loans Secured by Mortgages
Recent legal changes require a loan secured by a mortgage on residential real estate to comply with the Real Estate Settlement Procedures Act, whether or not the mortgage is a first lien, and whether or not the purpose of the loan is to acquire the property.
Respa also applies to refinancings and certain assumptions and modifications.
If Respa applies, banks must comply with these basic requirements:
*Banks may not give or receive special consideration for the referral of a residential mortgage loan under the "anti-kickback" rules.
*Banks must provide a "Good Faith Estimate of Settlement Costs," on a prescribed form, within three days after receiving a loan application.
*If certain "settlement services" are required by a lender that the customer is paying for, such as an appraisal, the creditor is required to disclose the actual or estimated fees.
*If a bank has business relationships with a required service provider, it must disclose the relationships and, in some cases, offer the borrower an opportunity to choose from a number of possible settlement service providers.
*At closing a bank must disclose to the borrower the actual settlement charges on a prescribed form. If the applicable interest rate has changed by more than 1/8 of 1% since the time of the initial disclosures, the bank is required to update all original disclosures.
*Banks must disclose to the borrower whether it intends to assign the loan or its servicing to a third party, and must give disclosures later if the servicing of the loan is transferred. Adjustable-Rate Mortgages
Additional ARM disclosure rules apply if the mortgage on a principal dwelling secures a loan that has a maturity greater than one year and bears interest at a rate that may increase during the term of the loan.
The documents must specify a maximum interest rate for the loan, and, as under Respa, the bank must make some disclosures within three business days after receiving the borrower's loan application or request.
Information that must be disclosed includes the index and margin used to determine the interest rate, fees applicable to the loan, and the movement of the loan interest rate index and its assumed effect on loan payments over a 15-year period. Appraisals and Lines of Credit
Under federal regulations, if a mortgage is taken other than out of an "abundance of caution" for a loan greater than $250,000, FDIC-insured lenders must obtain an appraisal meeting certain stringent requirements from a certified or licensed appraiser.
Lines of credit for personal purposes are subject to most of the consumer regulations outlined above. However, the regulations often apply in special and surprising ways to credit lines, and it is important to coordinate with your compliance officer in this area.
For example, a credit line secured by a principal dwelling is subject to additional disclosures like those required for adjustable rate mortgages. In addition, there are substantive restrictions on what home equity credit line documents may provide. Therefore, often special "standard" forms must be used for this type of credit.
Mr. Scranton is a partner with Stradley, Ronon, Stevens & Young, a law firm in Philadelphia.