I'm stuck in a vicious cycle, and my brain won't let me rest! Someone please help me bury this!
An applicant comes in, completes and gives us a full application to purchase an investment property with 90-100% financing. Our LO tells the applicant that our product will only finance investment properties up to 65%; the LO then does a quick calculation of what 65% of the $ amount on the application is to show her what we would be looking at instead. If she then withdraws her application because we communicated that we would not be able to give her the financing on the term she is requesting, for HMDA, is it a withdrawn application because no credit decision was made? Or denied because we communicated that our products' limit is less than her requested terms? My confusion lies in the definition of Adverse Action in Regulation B that tells us
(c) Adverse action. (1) The term means:
(i) A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered;

(2) The term does not include:
(v) A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested.

Common sense says that we have no credit decision to make in this case (unless we're attempting to extend a counteroffer) because perfect credit, DTI, etc doesn't change the limit our product is set at. So I understand that we haven't denied the applicant on the bases of credit, but has our product denied the applicant because of the terms we set it at?

I apologize if this is a dumb question.

If the LO just mentioned the bank's underwriting guidelines without any additional comments, IMHO it would be a withdrawal. If the LO did calculations and indicated that the loan would not fit within the parameters, it would be an adverse action. Although the following indicates inquiry and prequal, I look at the guidance in your situation in a similar manner (except you have an application). Note this ECOA - not HMDA.

From Commentary 1002.2(f)
3. When an inquiry or prequalification request becomes an application. A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the notification requirements under §1002.9. Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks.

If the person making the inquiry was encouraged to apply so that the bank could evaluate the entire situation, for Reg B purposes you do not have adverse action. You want to keep that "inquiry" floating down the conveyor belt to avoid adverse action.

Encouragement to apply is important, like Kathleen mentioned. The situation you mentioned CG is covered by another section in the regulation. It was mentioned a refusal to grant credit because the creditor does not offer the type of credit requested. There may be a difference here. You offer the type - just not the terms the customer wanted.

Paragraph 2(c)(2)(v).

1. Terms of credit versus type of credit offered. When an applicant applies for credit and the creditor does not offer the credit terms requested by the applicant (for example, the interest rate, length of maturity, collateral, or amount of downpayment), a denial of the application for that reason is adverse action (unless the creditor makes a counteroffer that is accepted by the applicant).

If a customer applied for a 10 year unsecured installment loan with a balloon payment for principal and interest, it most likely be an AA. You probably offer unsecured installment loans - just not those terms.

However, if you say to the customer that they should apply because there may be other factors that would compensate for the ltv mentioned (like high liquidity for example, that would only come out in a full evaluation of the situation) you have not denied the customer.

Thank you both so much for your responses! I truly appreciate it! This file is a mess and I wasn't sure which way to go!

OP stated that, “…completes and gives us a full application to purchase an investment property with 90-100% financing”. How can that be treated as an “inquiry”? Or did I misinterpret what the final response was?

A complete application would not be an inquiry, but the 1st response raised the topic of inquiries, to which I responded to clarify.