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Financial Outsourcing Solutions

Professional Group of HR People

FOS Blog

03 Nov
2017

WHEN DO I HAVE AN APPLICATION?

WHEN DO I HAVE AN APPLICATION?

 This is a frequently asked question in compliance circles and the answer is the elusive “It depends!”  There are different definitions of “application” in various regulations depending on the context of the regulation.

For instance, under ECOA (Equal Credit Opportunity Act – Regulation B), Application means “an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested.” {1002.2(f)}   A Completed Application means “an application in connection with which a creditor has received all information (emphasis added) that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested.” {1002.2(f)}  Commentary further clarifies that a creditor has latitude in establishing its application process and that “procedures” actually refer to actual practices the creditor follows.  Have you reduced to writing what you consider an “application” for consumer, mortgage, or business purposes as those circumstances probably vary by your institution’s organizational structure?

 What if a customer begins asking questions about loan products and terms and the conversation ultimately turns toward “Would I qualify?” – Is that an application?  It depends!  If the lender is non-specific and simply states that he/she would need to take a written application to determine eligibility, then “no.”  If the lender makes a credit decision by saying something like, “With your credit score (debt load, lack of collateral, etc.), probably not,” then potentially “yes.”  Remember that application definitions in ECOA point toward fair lending practices.

Under the old HMDA rules, the definition for “application” related only to HMDA purposes – “an oral or written request for a home purchase loan, a home improvement loan, or a refinancing that is made in accordance with procedures used by a financial institution for the type of credit requested.”  Under the new definition effective 1/1/18, “covered loan” replaces the specific HMDA purposes.  It’s under the HMDA regulation that we get into “preapprovals” and “pre-qualifications.”  A preapproval has to be issued under a formal preapproval program – a written commitment that has considered the creditworthiness of the applicant (ex: credit score, DTI) but for which a property is yet unknown.  It is a conditional approval.  A pre-qualification is similar but is not issued in accordance with a standard program – it’s simply a request for a preliminary determination on whether a prospective applicant would likely qualify for credit.  Examples of when it might be used is someone going to a public auction or someone just beginning a property search trying to understand for what price range they would most likely qualify.  In either case, an application used for a preapproval or a prequalification can either be used to continue the application process once a property is identified or an institution can start the process anew with a new application.  The definition of “application” for HMDA purposes points to when did the decision-making process actually begin – a starting point – and what were the outcomes.

But the most significant definition for consumer purpose loans is found in Truth in Lending and RESPA and is identical:  An application means the “the submission of a consumer’s financial information for the purposes of obtaining an extension of credit.  It consists of name; consumer’s income; social security number to obtain a credit report; property address; an estimate of the value of the property; and the mortgage loan amount sought.  Quite different than our prior definitions!  The purpose of this definition is for determining when early disclosures must be issued.  So, in the case of a preapproval or pre-qualification, if a property has not been identified, then a Loan Estimate is not required and would not be required until those elements are satisfied.  But once a creditor has those 6 pieces of information, whether obtained orally, in writing, or by electronic communication, and regardless of any other information they might also request (ex: employment), they have an application and disclosures must be issued within 3 business days.

So, how do I write loan policy?  We recommend you write a definition of what your institution considers an “application” for each of your business units – the definition could be different for each.  For instance, for consumer and mortgage loans, the TILA/RESPA definition is the most conservative.  But criteria would be different for residentially secured loans versus an unsecured loan.  Mortgage investors could also have additional requirements.  For commercial loans, it takes time to develop relationship and gather information.  Written applications are recommended but not required.  What minimum information does your bank require to make a credit decision?  Identification of guarantors? Identification of beneficial owners? Proof of clear title to assets? Commercial loan requirements are not subject to the same standards as TILA/RESPA.  It is important that you consider these different definitions and loan products and answer those questions accordingly.  Reducing your standards to writing makes the criteria clear for lenders and examiners alike.

Article compiled by Evelyn Dehmey, for additional information please visit our contact us page.

 

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