Does Reg B Apply to Commercial Loans?

Regulation B, the Equal Credit Opportunity Act (ECOA), is a federal regulation designed to ensure fair access to credit by prohibiting discrimination in any credit transaction. While often associated with consumer credit, its reach into commercial loans is a common inquiry. This article explores Regulation B’s applicability to commercial lending and outlines lender requirements.

Regulation B and Commercial Credit

Regulation B directly applies to commercial credit transactions, though its application has nuances compared to consumer credit. This broad scope ensures fair access to financing for various entities. The regulation covers a wide array of business credit transactions, including small business loans, lines of credit, and equipment financing. The ECOA defines “applicant” broadly, encompassing individuals, partnerships, corporations, and other entities seeking business credit. Similarly, “creditor” is defined as a person who regularly participates in credit decisions in the ordinary course of business, including brokers, originators, and funders.

Lender Requirements in Business Lending

When extending commercial credit, lenders must adhere to specific compliance requirements under Regulation B. The core non-discrimination provisions apply, meaning lenders cannot discriminate based on an applicant’s race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), or because all or part of an applicant’s income comes from a public assistance program. This extends to all aspects of the credit transaction, from application to repayment.

A key requirement for lenders is the provision of Adverse Action Notices when an application is denied or adverse action is taken on an existing account. For business credit applicants with gross revenues of $1 million or less in the preceding fiscal year, the timing and content requirements for these notices are generally similar to those for consumer credit.

Lenders must notify the applicant of action taken within 30 days after receiving a completed application, or within 30 days after taking adverse action on an incomplete application or an existing account. For these smaller businesses, oral notice of adverse action may suffice, but if the applicant requests the reasons in writing within 60 days, a written statement of reasons must be provided.

For businesses with gross revenues exceeding $1 million, Regulation B requires notification of action taken within a reasonable time, which can be oral or written. A written statement of reasons for adverse action and the ECOA notice are required only if the applicant makes a written request within 60 days of the notification.

The Adverse Action Notice must clearly state the action taken, the lender’s name and address, the ECOA notice, and either specific reasons for the action or the applicant’s right to request those reasons. Lenders are also prohibited from discouraging applications based on prohibited characteristics.

Lenders must also be mindful of limitations on requesting specific information. They generally cannot inquire about an applicant’s marital status unless directly relevant to creditworthiness, such as when relying on jointly owned assets or a spouse’s income.

Record retention requirements for business credit applications differ from consumer credit. Lenders must retain written or recorded information concerning business credit applications for at least 12 months after the date of action taken. This period can be extended to 25 months for consumer transactions or if the lender is subject to an enforcement procedure.

Personal Guarantees

Personal guarantees are often a component of commercial lending, particularly for small businesses or closely held corporations. A personal guarantee obligates an individual, such as a business owner, to repay a business debt if the business defaults. Regulation B places specific restrictions on how lenders can request these guarantees to prevent discrimination.

The “spousal signature rule” under Regulation B is particularly relevant to personal guarantees. A lender generally cannot require the signature of an applicant’s spouse on a credit instrument if the applicant qualifies individually for the credit based on the lender’s standards of creditworthiness. This rule applies even if the spouse is asked to be a guarantor.

There are specific circumstances, however, under which a spouse’s signature on a guarantee may be permissible. If the spouse is a joint applicant or if their income or assets are necessary for the repayment of the loan and the applicant does not qualify individually, their signature may be required. Additionally, if state law requires both spouses to sign to perfect a lien on jointly owned collateral, a lender may require the spouse’s signature on the security instrument, but generally not on the promissory note if the applicant otherwise qualifies.