We recently had a Home Equity closed-end loan that was approved, the borrower signed the loan documents, then withdrew because he changed his mind. The loan officer marked the loan as withdrawn within our loan system for the final credit (Reg. B) decision. The loan was reported on the HMDA LAR as withdrawn based on this information.

The question the loan department is trying to resolve or seek best practices on is the gathering and reporting of HMDA data and the difference in definition for Reg B “loan decisioning” purposes versus HMDA reporting purposes for approved loans not completed by borrowers. Our loan syatem does not code for HMDA and all LAr data is enetered manually based on the loan officers worksheet.

I know this is confusing, but we were wondering what other banks do.

Based on what you have stated this should have been reported as Approved but not accepted on your HMDA LAR. Once the bank approves the loan, then withdrawn can no longer be used.

If you presented a counteroffer to the customer's original request and they did not accept it then it would be reported as denied.

Added: What loan documents are you referring to that they signed?

You should have very few HMDA files marked "withdrawn." Bankers Compliance Consulting published a very good article on this subject....can't share because I think you have to have a subscription (paid for) to access the articles....though there ARE a multitude of free stuff on the website. But anyway, the article argues that if the bank issues early disclosures, the loan is in a temporary "conditional" state of approval. Because to have provided "meaningful" disclosures, the bank will have had to analyze all the facts as presented (though unverified) and at that point, have no reason to deny...thus a "conditional" approval. If withdrawn at that point, the application would be considered "approved but not accepted." If the bank has accessed the applicant's credit report and it's bad, but before the bank can issue an adverse action notice, the customer withdraws, it's still a denial and an adverse action must be provided. If the customer withdraws before the bank has a chance to analyze anything (1st three days)....only then would the application be coded as "withdrawn" for HMDA.

This is just my opinion. But in any event, if you utilize the above method as your procedure, the analyzing process is way narrowed down so that similar applications will be treated and reported in the same manner.

If the borrower signed loan documents, wouldn't this be a rescinded loan?

From Appendix D of GIR:

2.
Action taken—rescinded transactions. If a borrower rescinds a transaction after closing, the institution may report the transaction either as an origination or as an application that was approved but not accepted

But anyway, the article argues that if the bank issues early disclosures, the loan is in a temporary "conditional" state of approval. Because to have provided "meaningful" disclosures, the bank will have had to analyze all the facts as presented (though unverified) and at that point, have no reason to deny...thus a "conditional" approval. If withdrawn at that point, the application would be considered "approved but not accepted."

Just be aware that this is a minority opinion in the compliance world and many HMDA and other compliance experts do not agree with BCC on this stance.

So, how would you define it? At my prior bank, a loan wasn't a go until the FINAL secondary market underwriter approved it....which was usually only a week or so prior to closing. Until then, it wasn't DEFINITELY approved. So that bank defined approved but not accepted as only occurring subsequent to that event. And since the possibility of someone withdrawing at that point is slim next to none, the bank had zero approved but not accepted and scores of withdrawn applications. Both the internal auditors and the firm that assessed fair lending frowned on the numbers.

At my new bank, we haven't adopted BCC's method but are thinking about it. When you audit, what do you look for to confirm withdrawal or approved but not accepted?

For a withdrawal, I look for a documented express withdrawal of the application by the applicant prior to loan approval.

For approved but not accepted, I follow the guidance in the HMDA FAQs, which includes an approval subject to customary loan-commitment or loan-closing conditions.

Customary loan-commitment or loan-closing conditions include clear-title requirements, acceptable property survey, acceptable title insurance binder, clear termite inspection, and, where the applicant plans to use the proceeds from the sale of one home to purchase another, a settlement statement showing adequate proceeds from the sale. See comments 2(b)-3 and 4(a)(8)-4. An applicant's failure to meet one of those conditions, or an analogous condition, causes the application to be coded "approved but not accepted." Customary loan-commitment and loan-closing conditions do not include (1) conditions that constitute a counter-offer, such as a demand for a higher down-payment; (2) underwriting conditions concerning the borrower's creditworthiness, including satisfactory debt-to-income and loan-to-value ratios; or (3) verification or confirmation, in whatever form the lender ordinarily requires, that the borrower meets underwriting conditions concerning borrower creditworthiness.

I'm not going to start this argument again, there is a very long series of posts regarding this issue. This clearly states that an applicant cannot be "approved but not accepted" if the lender still requires: "verification or confirmation, in whatever form the lender ordinarily requires, that the borrower meets underwriting conditions concerning borrower creditworthiness."

I would not adopt the BCC approach; if you really are considering it, have a long heart to heart with legal counsel about what issuing disclosures means vs "approving" an application.

We recently had a Home Equity closed-end loan that was approved, the borrower signed the loan documents, then withdrew because he changed his mind.

So, how would you define it?

I have to assume that since this was a HE loan the borrower exercised their ROR. Hopefully the bank properly treated the "withdrawal" as a rescission since the loan documents were executed.

The FI has the option to report a rescinded loan either as an approved but not accepted or as an origination. Withdrawn is not an option.

Thank you both for your valuable input! This will help me outline definitions for my bank. Based on the above, an approved but not accepted applications will be few and far between, but I guess it is what it is. File documentation will support the labels.

I will search for the other posts.

GIR - Page D-8:

2. Action taken—rescinded transactions. If a borrower rescinds a transaction after closing, the institution may report the transaction either as an origination or as an application that was approved but not accepted.

I've been gone from BOL for the past 3 weeks so I'm catching up past threads. As swiggles reports, we had an article in our July newsletter that basically stemmed off of several BOL discussions from March & April about early disclosures and the correlation to making a conditional approval. The article is 7 pages long, so I won't post it here.

Randy states Just be aware that this is a minority opinion in the compliance world and many HMDA and other compliance experts do not agree with BCC on this stance. and KB states I would not adopt the BCC approach; if you really are considering it, have a long heart to heart with legal counsel about what issuing disclosures means vs "approving" an application.

While I'm not certain I want to open this can of worms again, I will tell you that we ran this article by numerous compliance professionals, legal experts, the ABA and lots of regulators before issuing it to our clients. While it is true that some disagreed (Randy was one), most did not. Therefore, I don't think it's accurate to say this is a "minority opinion". Also, not one regulator disagreed. However, several said they wouldn't cite a bank for a different stance, if they could support it.

Here's how the article closed. If you disagree, you need to consider this:
Our position is really a “bright line test”. If you accept this position, you can’t go wrong. An examiner is not going to cite a bank for saying, “when we issue preliminary disclosures, we believe we have made a conditional approval. Therefore, if the applicant doesn’t proceed or wants to withdraw after this action but prior to an intent to proceed, we code it ‘approved, not accepted”. We believe it is a clear and consistent approach and is well documented and supported.

If you don't believe issuing preliminary disclosures requires a decision, ask yourself “when do we make a decision and how do we document when that decision is made?” HMDA requires all information on the LAR to be supported. How would you support the date of “withdrawal” or “approved not accepted” consistently if you don’t have a way to clearly substantiate when that occurs? Examiners could (and many have) cite your bank for incorrect action codes.

If you accept this position, you’ll have fewer withdrawals on the HMDA-LAR and it’s common knowledge that withdrawals are a “red flag” for fair lending exams. To say you approved an application and then the applicant withdrew shows a proactive approach from the lender. Numerous withdrawals make examiners dig to find out if the bank is discouraging applicants.

While many may see this as a “gray” area, there’s no risk to accepting this position. We feel there is risk to not accepting it.

Yup - makes sense to me. I apply for a mortgage loan, you give me the early disclosures, I don't like your pricing and say I am going to go down the street and you code the application as approved not accepted.

Those that adopt this approach, I wish the best of luck.

Manipulation of whatever logic you are using to reduce the number of withdrawn applications because "withdrawals are a "red flag" for fair lending exams" is a much more dangerous practice (the CFPB stated that withdrawals made up 7 percent of all applications in 2000 in the latest HMDA proposal). The disposition of applications are what they are. If you have a higher number of withdrawals than the national average, then I suggest you figure out why and not try to hide them.

I have yet to see one other person put the support for this approach in writing for all to see. The only support that I would accept prior to informing my clients that they should think about adopting this approach is a written opinion from the CFPB.

That is likely not to happen as the CFPB has already stated their position quite clearly in the proposal of the new HMDA regulations which exactly mirrors the FFIEC FAQs which have been out there for years:

"If the applicant expressly withdraws before satisfying all underwriting or creditworthiness conditions and before the institution denies the application or closes the file for incompleteness, the institution reports the action taken as application withdrawn. If all underwriting and creditworthiness conditions have been met, and the conditions are solely customary commitment or closing conditions and the applicant expressly withdraws before the covered loan is originated, the institution would report the action taken as application approved but not accepted."

So what you are really saying is that by issuing the early disclosures, the applicant has met "all underwriting and creditworthiness conditions" of the creditor. In that case, can we also eliminate the "file closed for incompleteness" category since they have met all of the documentation requirements for meeting "all underwriting and creditworthiness conditions"?

There are plenty of other examples in the proposal. If the CFPB felt that issuing early disclosures were the equivalent of saying the application was approved but not accepted they sure wasted a lot of time discussing how to the report on withdrawn applications.

Basically, what you have proposed is that an application would have to be expressly withdrawn by the applicant prior to the creditor getting around to issuing early disclosures but possibly after obtaining a credit score and calculating the applicant's DTI, which I believe is part of your "conditional approval" argument? If that is the case, then why did the CFPB bother with the following?

Regarding credit scores: "They also include a code to use if more than one credit scoring model was used in developing the credit score, as well as a code for any other credit scoring model that is not listed, a code for purchased loans, and a code for use if the financial institution did not rely on a credit score in making the credit decision or if a file was closed for incompleteness or an application was withdrawn before a credit decision was made."

"Similarly, if an application was expressly withdrawn by the applicant before a credit decision was made, the financial institution complies with § 1003.4(a)(23) by reporting that no credit decision was made, even if the financial institution had calculated the applicant’s DTI ratio."

But you are correct that neither your or my opinion matters much, it is up the CFPB and the prudential regulators. All I am saying is that if someone wants to take this approach, then they need to be absolutely sure that it is correct.

David, I have to agree with Randy. You are taking a specific situation that happened with banks in your area who were taking specific actions and trying to extrapolate that to the entire industry.

Issuing early disclosures is NOT a credit decision unless in the three days that banks has actually underwritten the application. In many many (if not most) situations, no one with any authority to make a credit decision is even aware that an application is in house.

All that is in good faith is that you are providing fee estimates with a level of due diligence behind those fees, not fees that have been pulled out of the air to complete a form. That has nothing to do with whether or not a credit decision has been made.

I think it's best not to open this topic again. Therefore, I'm not going to write a response to each of your points. We obviously don't agree. I'm not trying to force anything. I've written a position paper that is well supported. If you don't agree, I recommend you determine when your institution does make a conditional approval. My experience with this is that most banks don't have a definitive point in the application process that they can point to. That's a problem.

The point I was trying to make in my last point is that this isn't a "minority" view. Many people have signed off on this approach and agree with it including Carl Pry, Patti Blenden, several at the American Bankers Association & numerous regulators. In fact, the only people to disagree have been the vocal majority here on the BOL threads. Dan can speak for himself, but he told me his regulators agreed with my position too, so this isn't just regulators in my area. I've also spoken with regulators from around the country about this issue. At the ABA Regulatory Compliance Conference in June, this topic came up in the HMDA session I taught (not by me), another session on Fair Lending and at the FDIC break out session I attended. Rick Freer (from the ABA) said they've had several banks report being cited for not taking the position I represent. Mark Kruhm (who answers most calls on HMDA for the ABA hotline) also said this has been a highly debated topic and has lit up his phone in the past few months. During the FDIC break out session, a FDIC representative made a response that supported exactly our position and added (paraphrasing) "if you're issuing early disclosures without underwriting the loan previously, you're risking UDAAP issues as you'd better be able to live by everything you stated in your disclosures."

My hope is that our position paper will drive the examiners to take an official stance on this confusing area. Several of our local examiners asked me to put this in writing so they could formally push it up the chain to D.C. level. I hope that occurs so we can put this to rest.

"if you're issuing early disclosures without underwriting the loan previously, you're risking UDAAP issues as you'd better be able to live by everything you stated in your disclosures."


From the GFE:

This GFE gives you an estimate of your settlement charges and loan terms if you are approved for
this loan.

I say 90% or more of ours are nowhere near approved within 3 days of walking through the door.

UDAAP? Let the arguments begin...that's plain crazy.

Exactly. There are so many variances between A LOT of issues from application package to application package. If it's hard for me as a compliance professional, to draw the line between approved-but-not-accepted and withdrawn, how in the world can I train a bunch of lenders located all across the state, in different markets, how to tell the difference?

Is it when we're confident enough of an approval to order an appraisal? Is it when we have verification of financials and employment (when, according to lenders, some applicant bring financial information with them to initial application ). As with my former bank, is it when the secondary market underwriter examines the entire package and says, "yes, we can close next week?" It just seems like there are so many variables, it's hard to make sure that all aps are reported in a like manner.

I have always struggled with this and so have enjoyed this discussion.....though, the discussion still does not provide me with a definitive answer. David's method makes more sense in that using that method, it's easy to decide how to report each application.

And I don't think it's "hiding" withdrawn applications. Our policy would state what we do....how we decide....and then the files are there for examiners/auditors, etc to look at.

In any event, I am not the Compliance Officer here, so it's not up to me to chose a method. I don't know what we will do.

If we see a file marked 'withdrawn', we question it for HMDA purposes. Out of the few of those we have, most are actually approved-not accepted.

All of my years as a lender, we never had a hard time knowing what stage we were at. We were never confused....whether in commercial lending, or consumer.

So what were your guidelines....what did you typically see in the file?

The fact is, many are unable to define when they've given conditional approval. So here's the bottom line question KB: When does a lender make a conditional approval?

If you recall, that's what started this entire discussion.

Not KB but I'll give you our definitions as hammered out with our FRB examiners.

Up to the time a loan is underwritten AND the decision is communicated to the borrower via a commitment to lend letter, the loan can be withdrawn by the borrower.

Once that commitment to lend is delivered, if the borrower says 'no thanks' it's approved but not accepted.

Seeing the discussion here, I'm truly grateful that we have no 'conditional approval' situation here.

At my former bank, we called it approved but not accepted when the file documentation contained documents that cost money such as an appraisal and a flood cert....because why would a lender order those if the loan wasn't in at least a conditional approval status? We also looked for tax returns, financial statements, etc because this meant that the lender had more than likely analyzed the financial portion of the file and saw no reason to deny. Still....though.....if the final underwriter nixed the deal, it could still be denied....which would mean it could not have been fully approved.....so confusing.

So such thing as commitment letter here......just file documentation to look at.

What happens when a borrower walks in, gives you all 6 points of information, you pull credit and disclose. The only thing you know is their credit score qualifies. How can that be a conditional approval if nothing is verified?

In this situation, "all underwriting or creditworthiness conditions" have not been satisfied but you have disclosed. So based on the FAQs Randy posted above, this cannot be approved/not accepted.

We have numerous applications where the credit scores are right on the borderline of acceptable, so we disclose and have to do more research into program requirements. If disclosing equates to "all underwriting and creditworthiness conditions" being satisfied, can we deny based on credit later?

BCC's approach makes no sense to me, as it seems to fly in the face of the FAQs.