Impact of Laws on Commercial Lending - Essay Example

Task How Laws Have Impacted Commercial Lending Introduction Over the years commercial lending was practiced with a few laws guiding these businesses. Parties in most cases relied on the goodwill of individuals when engaging in commercial lending. New challenges as a result of economic growth led to awareness of issues concerning equitability of access to financial services. Initially, commercial institutions hindered the realization of financial stability and equity of all citizens. To curb these challenges, several Acts and laws were initiated to guide businesses by promoting good ethics. In relation to this paper, the introduction of The Community Reinvestment Act (CRA-REG BB) and Regulation B (Equal Credit Opportunity Act) altered commercial activities landscape for lending institutions. Brown (3) indicates that Acts have had impacts on business and commercial related activities for the past thirty years since they were established. Part 1 CRA was an Act put to place to ensure equity in access to financial services regardless of individual’s background. This Act lays outs steps necessary when settling commercial lending legal issues. EOA was established to provide guidelines and enforce civil liability on lending institutions that offered services in segregation. This law has ensured accessibility of financial services to all legible citizens (Brown 42). Over the 30 years the introductions of commercial lending laws have altered the business environment. This paper evaluates the impacts of CRA and ECOA on commercial lending institutions and society. CRA and ECOA acts have achieved more positive benefits as opposed to the challenges they have brought. Before these Acts were in place lending institutions targeted the high income market for their services, preferably big business and white collar companies. This shift was realized when policies forced them to provide their services in line with societal demands for their financial rights (Brown 11). CRA and ECOA have also impacted on businesses negatively by reducing their owner’s authority in dealing with fiscal policy matters. There have been conflicts involving the government and lending institution on what is considered ethical when conducting businesses. Imperfect information is obtained by lending institutions from borrowers due to restrictions interfering with record keeping by financial institutions. There was a backlog of legal issues concerning lending institutions and the new clients of commercial banks. According to Brown (10), laws facilitate effective running of business whereby client’s interests are safeguarded when seeking commercial services. These Acts provide clear channels for use when sorting financial disputes.CRA made financial institutions put measures in place that correspond with community’s interests. Institutions have delved on markets initially neglected thus increasing their customer base resulting in healthy business competition. The Acts have led to societal well being by catering for its clients needs. Commercial institutions that tapped on new markets such as the marginalized communities realized growth in their profit margin. Good ethical practices by commercial banks adhering to CRA and ECOA acts have promoted fairness and equity to the world of business. Financial institutions have altered their mode of obtaining information from people of different social backgrounds. Unfortunately prejudices have led to collapse of businesses where clients boycott discriminatory organizations. In the current years commercial banks are being forced to respect the rights of minorities when transacting businesses with them. Banks have expanded the operations venturing into neglected territories when capturing the untapped markets. Part 2 The five essential elements of credit include character, capital, collateral, cash-flow and capacity (Larson & Harms 38). As a commercial lender I will minimize the risks involved safeguarding my business. Banks should seek expertise from other professionals like economists when coming up with business decisions. In this case all the elements of credit will be critically examined so as to give or deny credit on fair grounds. Interest rates and other charges will be subject to evaluation in line with the economic conditions at a given period. Contingency plans should be enacted since business activities are unpredictable. My organization will provide all the necessary details of the contract to the lender before committing them to credit services. It is a responsibility for commercial lending institutions and their clients to observe the Acts in place when conducting businesses. The company “Maine seafood restaurant” is requesting for a $500,000 commercial real estate loan to expand its operations. From the past they are experiencing good businesses in terms of cash flow received by the restaurant. Under current economic conditions the company meets the requirements to access credit facilities and services (Larson & Harms 42). Credit information shows a situation where Maine seafood restaurant borrowed money and repaid it five years earlier, their cash flow satisfies the income debt balance. The restaurant can fulfill its demands while settling other financial issues like clearing their debts without any contradictions. This means the restaurant has the ability to break-even their operations despite the challenging business environment. Another element of credit that Maine seafood restaurant fulfills is capacity (Larson & Harms 38). The company will be able to clear these debts since they have cleared huge amounts previously. However, there are shortcomings where the company’s total assets value is not known for liquidation purposes. For Maine seafood restaurant to receive $500,000, their Capital should be clearly known in terms of value in order to access the funds (Larson & Harms 40). The case states that Maine seafood restaurant has been successful in its operations; it can settle down its dues as may be required by a commercial lending facility. Basing on analysis of Maine seafood restaurant business, its stock levels can be calculated to surmount their total assets when assessing credit services. It is stated the company wants to expand, this shows the high level of asset that will be put to the business thus increasing its property base. The entity has been working successfully proving its ability in terms of business experience. Challenges arise when companies do not to settle their finances on time but for this case Maine seafood restaurant has a good record. Collateral as an essential element of credit has not been illustrated clearly by Maine seafood restaurant records. However, it can be concluded that the company meets the conditions when critically analyzed in details. The building they plan to expand on is theirs; it has not been in operation for six months; furthermore, there is a possibility that the said setting experienced turbulent times economically. Providing credit to Maine seafood restaurant may not be of much risk since another organization at the place where they plan to expand had made layoffs but now has high chances of succeeding in its operations. The economic conditions seemed to have affected businesses in the area because Maine seafood restaurant was successful in a different location but was not operating at the proposed city for the past six months. The collateral is in the form of the building owned by Maine seafood restaurant. The company in this case will pledge their revenues from the other business when seeking financial assistance (Larson & Harms 39). There are high chances Maine seafood restaurant will settle their debts from primary income sources. Alternatively, secondary sources can settle their debts and other forms of liability issues (Brown 31). The character of management is positive from its past reputation according to the stated situation. They intend to invest where they already experienced challenges and were out of operations for six months. The company receives credentials for being in the business for a long period despite the shifted changes in economic status of their restaurant business. Managing the business for ten years while realizing profitability shows that there is good leadership in the company. The strategies put to place in running operations are effectively functioning resulting to profitability. Management has put to check the companies balance sheet by clearing debts in time. They have a proven to maintain a good business record and publicity for years. Conclusion Commercial lending institutions always analyze a business prior to issuing credit services in line with the business Acts (Larson & Harms 48). CRA and ECOA are preventing any biased practices that may affects individuals financial rights. In this report the lender had to check on the company’s past records before making a decision. Current economic conditions must be examined first before issuing Maine seafood restaurant a commercial real estate loan of $ 500,000. The government has put to place regulations that control financial institutions practices. Fairness in business practices results to sustainability in profits and additional benefits realized in operations. Works Cited Brown, Orice. Fair Lending: Data Limitations and the Fragmented U. S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts. Washington, DC: Diane Publishing, 2010. Print Larson, Aaron. & Harms, Steven. Credit & Collections Kit for Dummies. New Jersey, NJ: John Wiley & Sons, 2009. Print Read More