You're right. This is an area of great chaos - one in which I've been lobbying the ABA to talk with the CFPB about. You bring up the exact reasons. However, for now, we have to play by the rules and Reg B & C have different rules. Here's a draft of an article I'm writing on this for our clients:
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In August 2011, we wrote an article about Regulation B Notification Requirements and discussed what to do when a loan is not made. Regulation B has five possible outcomes for an application:
1. Make the loan;
2. Deny the application;
3. Counter-offer the request;
4. Close the file for incompleteness; or
5. The customer withdraws the request.
When it comes to HMDA, there are also five possible outcomes for an application, but they are different than Regulation B:
1. Originate the loan;
2. Approve the loan, but the applicant does not accept it;
3. Deny the application;
4. The customer withdraws the request; or
5. Close the file for incompleteness
To make this more confusing, Regulation B and C don’t have to line up exactly. For instance, you might send an applicant a denial but code it as “Approved, Not Accepted†on your HMDA Loan Application Register (LAR). Other times, you might send a denial or a Notice of Incompleteness (NOI) for Regulation B; yet code it as a withdrawal on your HMDA LAR. Allow us to explain and provide you with several examples to reduce the confusion.
It might be helpful to revisit our March 2016 article entitled, “HMDA Action Take Codes Revisitedâ€, where we defined the different underwriting terminology used in HMDA and clarified the Action Taken Codes. Also, we addressed Regulation B’s adverse action notification requirements in detail in our August 2011 Newsletter. Lastly, we explained how a denial (under Regulation B) must sometimes be classified as “Approved, Not Accepted†for HMDA in our May 2016 Newsletter.
Imagine you haven’t made a credit decision and need tax returns from an applicant to verify income. Let’s assume you send the applicant a Notice of Incomplete (specifying what you need and the date you need it by), but the:
1) Applicant doesn’t reply. Regulation B is satisfied (a NOI was sent); Regulation C would be coded Closed for Incompleteness.
2) Applicant calls and withdraws. Regulation B is satisfied (a NOI was sent) but this would be coded as “Withdrawn†on the HMDA LAR.
But more commonly, a loan officer doesn’t send a NOI initially. Instead, the lender calls or emails the applicant and states the things needed to proceed so the lender can make a credit decision. What if the applicant says, “forget itâ€. For Regulation B, the lender must either send a denial or a NOI, listing the items needed. For Regulation C it would be coded as “Withdrawnâ€. This is the one that will trip up most people. Let us clarify why this is the correct HMDA Action Taken Code.
As we stated in the March 2016 Newsletter, you must clearly understand two terms in HMDA to get this area right. They are “customary commitment or closing conditions†and “underwriting or creditworthiness conditionsâ€.
Customary Commitment or Closing Conditions [Commentary to §1003.4(a)(8)(i) #13(ii)] pertain primarily to the property, not the applicant(s). These include, but are not limited to:
• A Clear Title Requirement
• An Acceptable Property Survey
• Subordination Agreement (from another lender)
• Acceptable Title Insurance Binder
• Clear Termite Inspection
• Settlement Statement
• A verification of adequate proceeds from the sale of a previous home when used to purchase another.
Underwriting or Creditworthiness Conditions [Commentary to §1003.4(a)(8)(i) #13(iii)] pertain to the applicant(s), their creditworthiness and whether they can meet underwriting requirements. These include, but are not limited to:
• A Counteroffer (such as requesting a higher down payment)
• Satisfactory Debt-To-Income or Loan- To-Value Ratios
• PMI Determination
• Satisfactory Appraisal
• Verifications (in whatever form the institution requires) that the applicant meet underwriting conditions concerning creditworthiness. Such as verification of income or assets.
Think back to the scenario where the loan officer calls the applicant and asks for tax returns. The lender has not approved the application at this point. If the applicant decides they don’t want to proceed with the application process and communicates this to the lender, it is coded as “Withdrawn†on the HMDA LAR.
A financial institution also reports application withdrawn if the financial institution provides a conditional approval specifying underwriting or creditworthiness conditions… and the application is expressly withdrawn by the applicant before the applicant satisfies all specified underwriting or creditworthiness conditions. [Commentary to §1003.4(a)(8)(i) #5]
However; for Regulation B, the lender either needs to send a denial or a NOI. Because the lender requested tax returns, the lender can’t simply say the customer withdrew.
At its option, a creditor may inform the applicant orally of the need for additional information. If the application remains incomplete, the creditor shall send a notice in accordance with paragraph (c)(1) of this section (an adverse action notice). [§1002.9(c)(3)].
The other alternative is to send a NOI as supported in §1002.9(c)(2) of Regulation B:
If additional information is needed from an applicant, the creditor shall send a written notice to the applicant specifying the information needed, designating a reasonable period of time for the applicant to provide the information and informing the applicant that failure to provide the information requested will result in no further consideration being given to the application. The creditor shall have no further obligation under this section if the applicant fails to respond within the designated time period. If the applicant supplies the requested information within the designated time period, the creditor shall take action on the application and notify the applicant in accordance with paragraph (a) of this section. To further support our position on this, the CFPB issued a HMDA Small Entity Compliance Guide in October 2017. Attachment B to the Guide (beginning on page 117) provides various scenarios and the correct Action Taken. The Guide provides this one as a similar comparison:
Financial Institution provided conditional approval specifying underwriting or creditworthiness conditions, and the Application was expressly withdrawn by the applicant before the applicant satisfied all specified underwriting or creditworthiness conditions and before the Financial Institution denied the loan or closed the file for incompleteness. Comments 4(a)(8)(i)-5 and 4(a)(8)(ii)-3.
But what if the lender doesn’t actually speak to the applicant? Instead, they sent an email or left a voicemail and the applicant doesn’t respond to the lender’s request? In this case, the lender cannot consider it withdrawn and must send a NOI (or deny the request and send a denial form). As §1002.9(c)(2) tells us oral notification from the lender is not sufficient. If the applicant still doesn’t respond, then Regulation B is satisfied (the NOI was sent) and the application is coded as “Closed for Incompleteness†on the HMDA LAR. The CFPB’s Guide provides this illustration:
Applicant had not satisfied all underwriting or creditworthiness conditions, Financial Institution sent written notice of incompleteness under Regulation B, and the applicant did not respond to the request for additional information within the period of time specified in the notice. Comments 4(a)(8)(i)-6 and 4(a)(8)(ii)-2. Summary:
Think of it this way: “HMDA wants to know how you treated the applicant(s), not how you handled the application.†This slight twist often results in a difference between Regulation B and C action taken requirements / codes.
Be sure to carefully read the definitions of Customary Commitment or Closing Conditions and Underwriting or Creditworthiness Conditions. Also read through our previous articles on this topic and study Appendix B of the CFPB’s Small Entity Compliance Guide. Last, carefully review your LAR entries with an Action Taken Code of “2†(Approved but not Accepted), “3†(Denied), “4†(Application Withdrawn) and “5†(Closed for Incompleteness). This is not new for 2018, so it applies to your 2017 LAR entries as well. There’s bound to be some entries that weren’t coded correctly.
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When you have a situation like I described in the above article, I do know that you would need to code it ANA on your HMDA LAR and you do need to a denial notice. I don't have an answer for you about how to "indicate in your LOS" that the loan is ANA for HMDA & yet denied for Reg B.
Let me make this more foggy: The HMDA sources I quoted all say "if the institution provides a
conditional approval . . ." Can anyone define that term for me? This is a topic I've been battling for 2-3 years. The CFPB won't define that term, yet all of these action taken differences hinge on this term.
I'm with you HMDA Warrior. We need to get clarification and it would be great to have consistency!
(stepping off my soapbox now).