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#2151452 - 10/27/17 04:26 PM Conditional approvals
Bville Offline
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The Small Entity Guide's Attachment B (Action Taken Chart) states that a credit decision approving an application, subject solely to outstanding conditions that are customary commitment or closing conditions, is reported as Approved but not accepted if the loan doesn't originate for a variety of reasons.

Does Reg B follow the same rule in that the application could be considered withdrawn, or are these denials under Reg B?

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#2151459 - 10/27/17 04:32 PM Re: Conditional approvals Bville
Dan Persfull Offline
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If the consumer cannot get clear title you will not make the loan. Under Reg. C that would be an approved but not accepted. Under Reg. B it would be a denial due to collateral.
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#2151582 - 10/27/17 10:29 PM Re: Conditional approvals Bville
Bville Offline
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That's what I thought, thanks. Sorry it has to be so confusing.

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#2162311 - 01/29/18 10:20 PM Re: Conditional approvals Bville
HMDA Warrior Offline
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A couple of months behind here, but I'm reading through various threads looking for guidance on Action Taken.

How would you indicate in your LOS or loan file that the loan would be ANA for HMDA, but Denied for Reg B? Also, how would you argue your stance with an examiner that you reported ANA on the LAR, but the file contains an AAN that was sent to the borrower showing that their loan application was denied?

I thought the Reg C definitions for Action Taken and guidance were confusing enough, but throw Reg B into it, which you have to do, and it's so much worse!

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#2162397 - 01/30/18 04:33 PM Re: Conditional approvals Bville
David Dickinson Offline
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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:

-------------------------
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 Revisited”, 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 it”. 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 “Withdrawn”. 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 conditions”.

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.

-------------------------------- (end of article)

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). smile
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David Dickinson
http://www.bankerscompliance.com

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#2162402 - 01/30/18 04:53 PM Re: Conditional approvals Bville
Adam Witmer Offline
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Great article and explanation, David.
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All statements are my opinion, not those of my employer, and should not be taken as legal advice.
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#2162442 - 01/30/18 07:47 PM Re: Conditional approvals Bville
HMDA Warrior Offline
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Posts: 53
Thank you David. It's going to take some time for me to process this, but I think it is a perfect example of the dilemma.

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#2162472 - 01/30/18 09:38 PM Re: Conditional approvals Bville
HMDA Warrior Offline
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Posts: 53
David,

Would you be able and/or willing to share the two articles referred to in your article above?

The HMDA Action Taken Codes Revisited from March 2016 and the August 2011 Newsletter addressing the Reg B adverse action requirements.

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#2162493 - 01/31/18 12:46 AM Re: Conditional approvals Bville
David Dickinson Offline
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I can't post them to this thread, but if you're interested, contact our office. My contact info is in my signature line.
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#2166166 - 02/28/18 05:25 PM Re: Conditional approvals Bville
Likes to Comply Offline
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I'd like to muddy the waters a bit but we do combined decline/counteroffers.

We provide a decline/counteroffer to an applicant (who was very close to qualifying on their own) that indicates the denial reason is excessive obligations to income and counteroffer that we could consider the request with a qualifying co applicant. The applicant brings in a co-applicant, which we must now underwrite. Before we can make a credit decision, the applicants withdraw the request. Do we report it as a denial, since it was a combined denial/counteroffer originally (and report the info only on the original applicant) or do we report it as withdrawn since no credit decision had been made for the "revised" request, with the information from the two applicants?
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#2166188 - 02/28/18 06:42 PM Re: Conditional approvals Bville
Tracey, CRCM Offline
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Gorham, ME
I would report as a denial based on the original application
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#2166240 - 02/28/18 09:39 PM Re: Conditional approvals Bville
David Dickinson Offline
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Central City, NE
I'm not so sure this is a denial. I think it's should be coded as a withdrawal for HMDA. The Commentary to §1003.4(a)(8)(i) #9 states:
If the applicant agrees to proceed with consideration of the financial institution’s counteroffer, the financial institution reports the action taken… based on the terms of the counteroffer.

You countered with "we need a qualified co-applicant." They accepted your counter offer by bringing in a co-applicant. That starts the application "over". Then they withdrew.

Also, look at the Commentary to §1003.4(a)(8)(i) #5:

A financial institution reports that the application was withdrawn when the application is expressly withdrawn by the applicant before the financial institution makes a credit decision denying the application, before the financial institution makes a credit decision approving the application, or before the file is closed for incompleteness. A financial institution also reports application withdrawn if the financial institution provides a conditional approval specifying underwriting or creditworthiness conditions, pursuant to comment 4(a)(8)(i)-13, and the application is expressly withdrawn by the applicant before the applicant satisfies all specified underwriting or creditworthiness conditions. A preapproval request that is withdrawn is not reportable under HMDA. See §1003.4(a).
Last edited by David Dickinson; 02/28/18 09:54 PM.
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#2166242 - 02/28/18 09:44 PM Re: Conditional approvals Bville
David Dickinson Offline
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Central City, NE
Comment #9 to 1003.4(a)(8)(i) also

9. Action taken—counteroffers. If a financial institution makes a counteroffer to lend on terms different from the applicant's initial request (for example, for a shorter loan maturity, with a different interest rate, or in a different amount) and the applicant declines to proceed with the counteroffer or fails to respond, the institution reports the action taken as a denial on the original terms requested by the applicant. If the applicant agrees to proceed with consideration of the financial institution's counteroffer, the financial institution reports the action taken as the disposition of the application based on the terms of the counteroffer. For example, assume a financial institution makes a counteroffer, the applicant agrees to proceed with the terms of the counteroffer, and the financial institution then makes a credit decision approving the application conditional on satisfying underwriting or creditworthiness conditions, and 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 financial institution reports that the action taken as application withdrawn in accordance with comment 4(a)(8)(i)- 13.i. Similarly, assume a financial institution makes a counteroffer, the applicant agrees to proceed with consideration of the counteroffer, and the financial institution provides a conditional approval stating the conditions to be met to originate the counteroffer. The financial institution reports the action taken on the application in accordance with comment 4(a)(8)(i)-13 regarding conditional approvals.
Last edited by David Dickinson; 02/28/18 10:00 PM.
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#2166358 - 03/01/18 06:06 PM Re: Conditional approvals Bville
Tracey, CRCM Offline
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Gorham, ME
I get your point David, thank you. Interestingly enough, I had 2 examiners tell me that these types of situations should be reported as denials (I have this in writing from them in case it comes back to bite me).
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#2166444 - 03/01/18 10:08 PM Re: Conditional approvals Bville
David Dickinson Offline
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I don't doubt you had 2 examiners tell you this. It's been an evolution for me too. The CFPB changed this in their Aug 2017 Final Rule. It's likely the examiners didn't catch it (I didn't originally). That doesn't mean they won't have it right when they come in for your next exam.
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#2174298 - 04/19/18 05:31 PM Re: Conditional approvals Bville
MFlea Offline
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I have a file conditionally approved. The applicant emailed us the following:

Please be advised that I have submitted a cancellation notice for the transaction. This is based on circumstances whereby I feel the 40% deposit by me will now not be available and I cannot proceed in good faith. Please take no further action on the loan process until further notice.

For Reg. B we processed as a withdraw but now during a secondary review are wondering if perhaps it should have been a denial?

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#2174304 - 04/19/18 05:42 PM Re: Conditional approvals Bville
David Dickinson Offline
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I think "withdrawal" is correct. I'm assuming the customer offered 40% down and now is saying they can't come up with it. In other words, this was not a condition the lender put on the applicant (a counter-offer).
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#2174355 - 04/19/18 07:07 PM Re: Conditional approvals Bville
MFlea Offline
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Just to make sure you have the full picture:

The application was for a purchase. Conditionally approved at 60% LTV. Applicant would have had pay the other 40% to escrow in order to make the purchase. One of the pending conditions was bank statements to verify sufficient funds for closing. Conditional approval was good until June however applicant sent the above email 3/29/18. Is this still a withdraw?

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#2174466 - 04/20/18 04:01 PM Re: Conditional approvals Bville
Truffle Royale Offline

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How long the approval was good for has nothing to do with it.
The applicant said stop on 3/29. That's the date he withdrew his application.

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#2174472 - 04/20/18 04:17 PM Re: Conditional approvals Bville
David Dickinson Offline
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I agree. I'm currently writing an article on HMDA Action Taken Codes for our monthly newsletter. HEre's part of it pertaining to this topic:

Code 4 - Application Withdrawn by Applicant
This code should only to be used if the applicant expressly withdrawns the application before all applicant conditions are satisfied. Remember, conditional approvals don’t count when more information is needed to approve an applicant. Once all applicant conditions are met, it’s an approval. Thus, for an application to be reported as “Application Withdrawn by Applicant”, the applicant must expressly withdraw the application before the application is denied, the applicant is fully approved or the file is closed for incompleteness.

This is from the CFPB's Small Entity Compliance Guide - pertaining to Code 4 (withdrawn):
2. 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.

And here's my plain English explanation of the same:
Additional information is requested to satisfy applicant conditions. Prior to the application being denied or the file closed for incompleteness, the applicants notify the creditor they no longer wish to proceed.
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#2175558 - 04/27/18 02:32 PM Re: Conditional approvals Bville
Ree Offline
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Posts: 56
I would like to add another question to this topic that I'm getting hung up on because the Action taken chart for HMDA reporting conflicts with Reg B. We have a preapproval program. Because of this, some of our preapproval transactions I feel have thrown us into a gray area for this chart. Here is the scenario I'm getting stuck on.

We have an application that was preapproved. Property has been identified. Customer then withdraws application because of a bad home inspection. The application never got to the next stage of approval clearing the appraisal requirement. Therefore a creditworthy/underwriting requirement is not met. I'm getting hung up on how to report or if I should even report at all. Should I report as "Preapproved but not accepted" or since it is past the preapproval stage, would this now be considered a withdrawn application? Also, if the loan is now considered withdrawn because it is now out of the preapproval stage, should I report at all? If its considered withdrawn and is reported on the LAR, I still have to report that a preapproval was requested. However, that would produce a validity edit of V613.

The Action Taken Chart appears to provide examples for when you are in different stages of an application. This is very apparent with the descriptions given on how to report counter-offers which were previously discussed in this post. However, not very clear with the different stages of a preapproval. It feels very wrong not to report this application though. At this point I'm likely going to report this application as Preapproved but not accepted. Just fearful that I'll get kick back from an examiner down the road because we are now out of the preapproval stage (already had this happen in a previous exam for a similar situation).

Any feed back would be greatly appreciated.

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#2175596 - 04/27/18 03:37 PM Re: Conditional approvals Bville
Dan Persfull Offline
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Property has been identified.

It's no longer a preapproval therefore none of the pre-approval action taken codes would be applicable.
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#2175603 - 04/27/18 03:49 PM Re: Conditional approvals Bville
Ree Offline
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Posts: 56
So then would this loan not be reportable? If it is now out of the preapproval phase and is now considered a withdrawn application, I can't report an action taken of 4 with a preapproval code of 1. This would give a validity edit of V613. I can't see changing the preapproval code to 2 because the preapproval was requested and had the loan become and originated loan, I would have reported a preapproval code of 1. Also, the same validity edit supports reporting a preapproval code of 1 with action taken codes of 1 and 2.

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#2175615 - 04/27/18 04:20 PM Re: Conditional approvals Bville
Dan Persfull Offline
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We don't do preapprovals and I just looked at the V613 error. Appears another conflict between the regulation and the FIG.

Whether the applicant requested a pre-approval at the beginning of the application process should have no bearing on your action taken reporting other than for codes 7 & 8.

Looks like you will need to contact the CFPB.

Let me add that a withdrawn preapproval is not reportable but once the applicant identified a property it is no longer a preapproval. It is now an application and the action taken on that application is reportable.
Last edited by Dan Persfull; 04/27/18 04:24 PM.
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#2175625 - 04/27/18 04:46 PM Re: Conditional approvals Bville
Ree Offline
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Posts: 56
Agreed and that's what I was afraid of. It feels wrong not to report. But also feels wrong to report with an action code of 8.

We had to defend ourselves on a similar topic on our most recent exam of our 2017 LAR. We had a file that began as a preapproval then a borrower identified a property before we could even get to the point of issuing an approval. Then chose to withdraw the loan. We didn't report on our LAR because that would have been a situation of a withdrawn preapproval on the LAR. Our examiner thought it was ok to report a preapproval code of 1 and an action taken code of 4 since the applicant was out of the preapproval phase of the application. They backed off once we pointed the part of the Reg that says withdrawn preapprovals cannot be reported on the LAR and the lead examiner agreed with us.

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