Regulations: Defining Application

Compliance is scattered across a lot of regulations. There are Reg Z and RESPA governing when and how to give applicants information about a loan. There is Reg B with concerns about how customers are treated and whether they are given equal information. There is HMDA that is concerned with where and to whom the lender is willing to make loans. And there is the Fair Credit Reporting Act to protect when and how information about consumers is used and shared.

Each of these regulations contains its own unique definition of application. The definitions exist to support the goals of each regulation; not to make life easier for compliance managers and lenders.

The challenge to the compliance manager is building these disparate definitions of application into consistent procedures that the lending staff can understand and follow. To accomplish this, it helps to understand why each definition exists and why it contains the triggers or specific provisions that it does.

Regulation B defines application at a point earlier than any other regulation. For purposes of Regulation B, an application exists when a customer first asks about credit from the lender. The purpose of Regulation B's definition is to extend the regulation's protections to individuals at the earliest possible phase of applications because the opportunity to discriminate exists.

Regulation B's definition of application provides protection to applicants who request credit but are discouraged or turned away because of a prohibited basis.

HMDA's definition of application appears similar to that in Regulation B. However, HMDA has a different purpose in defining application. The definition exists to determine what applications will be reported on the Loan Application Register. To contain useful information and minimize duplicate reporting because of credit shopping, HMDA captures applications at a later point in time than ECOA.

HMDA looks at the decisions made by the lender. The definition of application in Regulation C is therefore aimed at the behavior of the lender in making decisions rather than at the consumer and how the lender treats the consumer.

Even with the revisions to Regulation C that will capture pre-approvals, HMDA still enters the arena only when there is an actual request for credit. This usually means that an application form has been filled out and submitted.

Fair Credit Reporting is in a zone by itself. This consumer protection law cares about the privacy of the consumer. The FCRA focuses on how information about the consumer is treated and used; it does not look at how the consumer is treated.

FCRA uses the trigger of "permissible purpose" to determine coverage. This does not always depend on whether a consumer has submitted an application. Instead, it can be triggered by the business purpose of the creditor. The business purpose allowing access to a credit report can include the creditor's intent to offer credit or solicit an application.

Regulation Z and RESPA have much in common when it comes to defining an application. These regulations require disclosures that explain the terms of the loan being applied for. In order for the disclosures to contain useful information, they must be based on the terms of the loan. The lender knows this much later that the point at which Regulation B defines application.

RESPA's Regulation X defines application to include both a property address and the filing of financial information with the creditor. The submission of financial information must also be in anticipation of a credit decision. Although this is somewhat of a back door approach to defining application, it places appropriate emphasis on the fact that both creditor and applicant have put forward enough information to prepare disclosures.

Procedures
For the purposes of making compliance happen, it is not necessary that staff knows and can reiterate each of these definitions. What is important is that staff knows what rules apply to each aspect of dealing with customers and products. In other words, staff must know and follow the intent of the regulations but need not be able to cite chapter and verse.

To implement Regulation B's early definition of application, staff should understand how to treat inquiries and all contacts with consumers with regard to credit. Training should focus on quality service and equal treatment. All customer contact staff should understand the importance of treating each customer with respect and providing help rather than obstacles.

For purposes of the Home Mortgage Disclosure, all applications should be properly documented. Documentation must include information needed for the LAR, such as date of application (the day the written or oral request was formally received by the institution), the loan type and amount, and other information that must be reported. This can be presented as basic, required documentation without getting tangled up in the definition of application. The simple rule could be that if someone date stamped it, it is an application.

Truth in Lending and RESPA don't care about credit shopping (even though that is why both laws exist). TIL and RESPA come into play when there is enough information to generate the early disclosures. You need to have enough information to calculate an APR and prepare a payment schedule.

Regulation Z's 226.19 refers to sending the early disclosures before consummation or within three days of receiving the written application. Functionally, this is very similar to the definition in RESPA. In fact, the two rules are designed to work together and trigger disclosures at the same point in the process. Again, the date stamp (critical for documentation of the file) is the trigger for these two requirements.

Procedurally, there are three rules staff should follow. First, understand equal treatment and the difference between discouraging or encouraging consumers. Second, date stamp everything that comes in from the customer. The date stamp on the application form is the official date of application. Third, everyone should know when and whether they are authorized to request a consumer credit report. Follow these procedures and the definitions can be put on the compliance manager's shelf.

The Definitions
Reg B:
Application means an oral or written request for an extension of credit that is made in accordance with procedures established by a creditor for the type of credit requested?A completed application means an application in connection with which a creditor has received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested?

HMDA:
Application means an oral or written request for a home-purchase or home-improvement loan that is made in accordance with procedures established by a financial institution for the type of credit requested.

FCRA:
a) In general. Subject to subsection (c), any consumer reporting agency may furnish a consumer report under the following circumstances and no other: ?
(2) In accordance with the written instructions of the consumer to whom it relates.
(3) To a person which it has reason to believe (A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer?; or (F) otherwise has a legitimate business need for the information (i) in connection with a business transaction that is initiated by the consumer; or (ii) to review an account to determine whether the consumer continues to meet the terms of the account.
Reg Z:
[Regulation Z does not have a definition of application.]

RESPA:
Application means the submission of a borrower's financial information in anticipation of a credit decision, whether written or computer generated, relating to a federally related mortgage loan. If the submission does not state or identify a specific property, the submission is an application for a prequalification and not an application for a federally related mortgage loan under this part. The subsequent addition of an identified property to the submission converts the submission to an application for a federally related mortgage loan.

ACTION STEPS

Review the process for capturing information on the LAR. Be sure that you are reporting all applications that you should be - and no uncalled for extras.
Listen to front-line staff talk to potential loan customers. Evaluate the compliance with Regulation B and produce guidelines or scripts to help staff.
Check the requests for credit reports and determine whether they are all permissible under FCRA.