Documenting the Loan

Documenting a loan is work. You know what is happening so why take the time to write it down when there are applicants to be helped?

There are many reasons why information about a loan application should be written down.

These include faulty memories and the statute of frauds. (When it comes to real property, it must be written down to be provable.) But the most important reason is the examiners.

Examiners evaluate your loan decisions. They don't do this to amuse themselves or be difficult. They do this because they have to. And they don't know what is stored in your head. They have to go by what is down on paper. The current rule of thumb is: if it isn't documented, you didn't do it.

There are several important reasons why documentation is important. First, customer service is best when you know and have a record of what the customer wants. Second, good documentation explains your decision. Finally, consistent documentation makes it much more possible to prepare and file data reports for HMDA and CRA.

What you must document (and why):

Date of application
You need this to establish the time it took to process the application and make a decision. Date stamp all applications as they come into the bank - not when you give them to the applicant to take home and fill out.

Borrowers
You need to know who is applying for the loan. The sooner you establish this - and whether it is individual or joint credit - the less likely you are to make a Reg B mistake.

Loan purpose
Have the customer tell you what the loan will be for (purchase, refinance, home improvement, college tuition). That way you not only have the purpose properly documented, but you can also make sure that you discuss the appropriate products with the customer.

Occupancy
Begin by knowing whether the customer will live in the house. Not only is this important for purposes of rescission, it will determine whether this is a consumer or an investment loan.

Loan type
Know from the beginning what kind of loan type the customer wants. Document this, and document any changes that are made along the way.

Loan amount
The amount the customer wants to borrow, and the loan to value ratio, are important for providing the right service to the customer - and for determining whether related products, such as mortgage insurance, will be needed.

Refinancings
Find out and document the status of the loan, including the relationship of the borrower to the property. In addition to reporting this, this will help you determine whether the loan is subject to rescission.

Lien position
Document the lien position you will have. This is important, not only for HMDA reporting, but also to be sure that the correct procedures are followed to file the security interest.

Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 7, No. 1, 2/02