I agree that it would be fun to have this conversation around a table.

To me, the quality/sufficiency of the property (i.e. appraisal) is part of underwriting. An LTV in and of itself is based on collateral, and without the collateral, you wouldn't do the loan or even have an LTV. So if the collateral is unacceptable (such as an earth-home, Yurt, or even manufactured home), you aren't going to do the loan because - regardless of the LTV - your collateral isn't sufficient. To me, that's underwriting.

I know you say that customary commitment/closing conditions relate to the property and underwriting/creditworthiness conditions relate to the applicant, but I don't think that works 100% of the time. For example, one of the commitment/closing conditions listed in the commentary is proof of funds from the sale of a house when using those funds for a downpayment. Proof of funds don't relate to the property the same way the other examples do. In addition, the underwriting/creditworthiness conditions typically relate to the applicant, except for "an acceptable appraisal" which relates to the property.

I'm wondering if it would be better to describe it this way: commitment/closing conditions are verification documents where underwriting/credit worthiness are underwriting documents. For example:

1) a "clear title requirement" is verification that the lien will stand up
2) an acceptable property survey is verification that the property is where they thought it was
3) acceptable title insurance binder is verification of proof of insurance (i.e. protection of collateral)
4) clear termite inspection - who knows why they through this one in there.... (see below)
5) a subordination agreement is verification of lien position
6) a settlement statement is proof of funds

On the other hand, the examples of underwriting/closing conditions:
1) counter offer conditions like a higher down-payment is underwriting
2) DTI & LTV are underwriting
3) Need for PMI is underwriting
4) Satisfactory appraisal - again, I see this as underwriting (see above)
5) Verification of any of these things is also underwriting when you plug in the actual numbers to make your credit decision

Now again, I can see both camps on this. I get that a termite inspection and an appraisal aren't that far apart in this discussion, but the commentary clearly draws the line in the middle putting one in each part. While I see both sides to this coin, I'm in Dan's camp for 2 reasons. 1) The commentary clearly includes as an underwriting/creditworthiness condition "a satisfactory appraisal requirement." The commentary doesn't break out different parts of an unsatisfactory appraisal requirement, so I feel more comfortable hanging my hat in this camp. 2) I can't imagine trying to train staff to do and "if this do this, but if that do this" with the appraisal conditions. It is much cleaner to say "any time we deny because of the appraisal, its a denial for HMDA."

As always, I appreciate the conversation, Dave - even if it isn't around a table with a beer. Cheers.

I think there is a pretty big difference (both practically speaking and in the regs) between denied for a property condition, and approved for everything except a property condition. Underwriters don't approve files accept for what they are denying them for. In my experience, files go into underwriting and either come out with a denial, an approval, or conditions. If it never comes out with conditions solely related to Customary Commitment or Closing Conditions and is denied, then in my opinion it can't be ANA. Maybe this is just how our shop works though.



I mean subject to the appraisal coming in there not being anything in the appraisal the bank would deny for. Generally, something like "subject to a satisfactory appraisal." As has been discussed pretty thouroughly, there can be both underwriting and closing conditions in an appraisal.



The reg says "the financial institution made a credit decision approving the application before closing or account opening, subject solely to outstanding conditions that are customary commitment or closing conditions."

It does not say denied for conditions that are customary commitment or closing conditions, or even denied soley for conditions that are customary commitment or closing conditions (which isn't how denials work). It says a credit decision approving ... subject solely to conditions that are customary commitment or closing conditions.

I think the guidance that muddies the waters is "If all underwriting and creditworthiness conditions have been met, and the outstanding conditions are solely customary commitment or closing conditions and the applicant expressly withdraws before the covered loan is originated, the institution reports the action taken as application approved but not accepted." This is the only section that says an actual approval isn't required, and notably it only refers to expressly withdrawn applications.

The number of actual applications we would disagree on is probably very small, but the processes and training your reading would require would be burdensome and subject to all sorts of errors. I don't think it's rare for shops to have a process for conditional approvals where if it is approved subject only to closing conditions, it's flagged differently than those subject to underwriting conditions. If it's denied with that flag, then it's an ANA. If denied without it, then it's a denial I think the reg udnerstood that and supports it.

To respond to Adam's comments:
To me, the quality/sufficiency of the property (i.e. appraisal) is part of underwriting. An LTV in and of itself is based on collateral, and without the collateral, you wouldn't do the loan or even have an LTV. So if the collateral is unacceptable (such as an earth-home, Yurt, or even manufactured home), you aren't going to do the loan because - regardless of the LTV - your collateral isn't sufficient. To me, that's underwriting.
I agree that an appraisal is typically an underwriting verification document. I've said that many times in this discussion. I'm bringing up the rare occasion where you learn of something - from the appraisal - about the property that has nothing to do with the applicant. I disagree that property issues are underwriting issues, however.

I know you say that customary commitment/closing conditions relate to the property and underwriting/creditworthiness conditions relate to the applicant, but I don't think that works 100% of the time.
I agree. I'm trying to keep things simple and in Plain English. Not everything fits nicely when you do that. In fact, in our training manuals we state "these pertain primarily] to the ..." (applicant or property). I like your approach about verification vs. underwriting documents. I still believe "HMDA wants to know how you treated the applicants" is a good slogan to adopt to think about these two categories. If you've fully satisfied applicant (underwriting) issues, the applicants are Approved. If the loan falls through after that, you code the application as ANA - not as a denial. That's the root of this discussion.

This is what we do at Bankers Compliance Consulting: thought leadership. We try to turn complicated regulations into Plain English and make things simple to understand. Anytime you do that, you are bound to have some technical exceptions where things don't fit nicely. However, we never want to mislead or be inaccurate.

Adam also stated: 1) The commentary clearly includes as an underwriting/creditworthiness condition "a satisfactory appraisal requirement." The commentary doesn't break out different parts of an unsatisfactory appraisal requirement, so I feel more comfortable hanging my hat in this camp.
How does the appraisal pointing out there is lead based paint, termites, a hole in the roof or that the residence is an earth home not make it "a satisfactory appraisal requirement?" I believe this means the lender will need to get a licensed or certified appraisal subject to USPAP standards (or not) or two, etc. It doesn't mean the appraisal won't reveal things about the property. I've seen appraisals bring up issues about property lines (maybe a fence or shed is on the neighbor's property) or the owners aren't exactly sure where the property line is. Is that a "unsatisfactory" appraisal? If this triggers a need for a survey and the borrower's back out because the owners don't want to pay for the survey, is that still an applicant/underwriting issue in your mind? I would think this would clearly be a property / verification issue that was triggered (or discovered) by the appraisal.

2) I can't imagine trying to train staff to do and "if this do this, but if that do this" with the appraisal conditions. It is much cleaner to say "any time we deny because of the appraisal, its a denial for HMDA."
That would be clearer and easier, but I don't think it's accurate. I actually don't think it's that hard. We've been successfully teaching people for 2 years on this by training "if it's an applicant issue, it's a denial. If it's a property issue, it could be ANA." That's the whole point.

I appreciate the development in this thought process too. Cheers!

Now to respond to Inherent_Risk who said:
I think there is a pretty big difference (both practically speaking and in the regs) between denied for a property condition, and approved for everything except a property condition. Underwriters don't approve files accept for what they are denying them for. In my experience, files go into underwriting and either come out with a denial, an approval, or conditions. If it never comes out with conditions solely related to Customary Commitment or Closing Conditions and is denied, then in my opinion it can't be ANA. Maybe this is just how our shop works though.
I don't disagree that's how it works in your shop and in many shops, but the CFPB has made it clear that they want applicants coded ANA when applicant/underwriting conditions are FULLY met. They give numerous examples in the Action Taken Tables in Appendix B about this. Assume everything is great except the termite inspection comes back negative. If the applicants back out at this point, we are required by HMDA to call it "ANA". You should not call it a withdrawal or a denial. That's very clear if you read through the Action Taken tables. I hate it, but it's a tricky nuance of this reg.

As has been discussed pretty thouroughly, there can be both underwriting and closing conditions in an appraisal.
THAT'S MY POINT EXACTLY!

The reg says "the financial institution made a credit decision approving the application before closing or account opening, subject solely to outstanding conditions that are customary commitment or closing conditions." It does not say denied for conditions that are customary commitment or closing conditions, or even denied soley for conditions that are customary commitment or closing conditions (which isn't how denials work). It says a credit decision approving ... subject solely to conditions that are customary commitment or closing conditions.
Many lenders will say "this looks good" or "we should be able to do this" but then add "assuming all of the verifications work out" (insert your lender's way of saying there are conditions to satisfy). The point is the CFPB wants to know how you treated the people. This is a fair lending regulation. If you fully approved them, then the CFPB wants you to call them approved - even if the loan isn't closed. That's what the numerous examples in the Action Taken Chart point to. If you haven't studies them, please do. Explain to me how the 5 ANA examples differ if they were all about an fully approved application that was later withdrawn or rescinded.


This does muddy the water - and is what made me dig into this BUT there's more than just the withdrawal scenario you mention.
The 1st scenario is:
Financial Institution made a credit decision approving an Application before loan closing or account opening, all conditions were satisfied, Financial Institution agreed to extend credit, but a Covered Loan was not originated. Comments 4(a)(8)(i)-3, 4(a)(8)(i)-13, and 4(a)(8)(ii)-4.

The 2nd scenario is:
Financial Institution made a credit decision approving an Application subject to conditions that are solely customary commitment or closing conditions,23 and the conditions were not all met. Comments 4(a)(8)(i)- 13 and 4(a)(8)(ii)-4.

The 3rd scenario is:
Financial Institution made a credit decision approving an Application, subject solely to outstanding conditions that are customary commitment or closing conditions, but applicant failed to respond or a Covered Loan was not originated. Comments 4(a)(8)(i)-3 and 4(a)(8)(ii)- 4.

The 4th scenario is the withdrawal you mention and the 5th scenario is about a rescinded loan. Why did the CFPB give these other 3 scenarios?

The number of actual applications we would disagree on is probably very small, but the processes and training your reading would require would be burdensome and subject to all sorts of errors. I agree. We're talking about very few applications for very little benefit. This is not something I had planned to discuss in this much detail! But it's an interesting dialogue.

Again. Cheers!

I think this is where the disconnect is. I don't think an applicant is "fully approved" until the bank specifically says they are. Just because they are getting denied for a closing condition, does not mean they are approved for everything else.

None of the scenarios you list say, anything about denial reasons on a denial. They all talk about the conditions on a "credit decision approving." A credit decision approving, at least in our shop, is a specific thing. It's clearly noted in the file. A denial doesn't say, approved for everything except for. If an appraisal comes in saying the property won't work and it's denied, the underwriter doesn't have to calculate an LTV. Where I think we disagree, is even if they calculated the LTV and it was ok, they still never approved the loan.

To take it out of appraisal world, let's say the bank approves conditioned on termite inspection and verification of income. Both items come in. Loan is denied for termites. Does the bank need a process in place to determine whether the income was verified and the DTI was ok (Neither the bank nor the applicant care). Is it ANA because the underwriter looked at the income docs 1st? What if it was just a preliminary look? What if the DTI is now high, but if it weren't for the termites the bank probably could have worked something out? The file is not going to be very clear as to which of these situations (or others) has occurred. And none of them are a credit decision approving, imo.

This IS the disconnect. But you don't get to write the definitions or change what HMDA says. The CFPB gives 5 scenarios that say (in my plain English) "if the applicants have met these requirements, but not other requirements, you still code it ANA." It doesn't matter that your institution didn't call it approved. If the applicants met all underwriting (applicant/verification) conditions, they are approved. Why? Because Reg C says so.

To take it out of appraisal world, let's say the bank approves conditioned on termite inspection and verification of income. Both items come in. Loan is denied for termites. Does the bank need a process in place to determine whether the income was verified and the DTI was ok (Neither the bank nor the applicant care).
No. The bank doesn't need to verify income in this scenario. The applicants were not fully approved because you were waiting on a verification of income. The termite inspection led to the denial and the applicants are not fully approved. Therefore, it's a Denial for Reg B and HMDA. If the DTI was verified and everything pertaining to the applicants was fully a "go", and THEN you got the termite inspection that led to the (Reg B) denial, you would call it ANA for HMDA. That's what the Action Taken Code scenarios tell us.

You can argue that this is hard (I don't disagree), but you can't say you're not to do it because you don't like it or it doesn't fit your system. Sometimes we have to make our systems fit the regulatory requirement.

What is the trigger is for meeting an underwriting requirement if not approval? In the example I gave, the bank had the income verification docs. It had everything it needed to make a credit decision.

Just jumping back a few posts (and I haven't had time to read all this thread) I feel the need to point something out because we are nit pickers. A VA appraisal as an example will not check for lead paint. They may see paint chips and require it be tested, just like Dan's "fix the hole" requirement.

I recall years ago I contacted an appraiser because of his identification of the flood zone and I asked about his source as it disagreed with our vendor. His comment was that the VA didn't even require that field be completed so accuracy was not an issue. Personally I thought that was a stupid philosophy but at the time we were short on appraisers and I was nothing to him so I kept my mouth shut as he'd already said ignore that on his work.

Anyway, I checked on a few things and if they don't really look up flood zones, I figured they don't test for lead paint and research confirms this. That isn't really David's point, but mine is, the appraiser will deliver his product because he wants to be paid, and he may indicate there are things to be checked, but that may not be the end-all, it might just take you one more step.

Now, back to B & C.

Good point Andy. I'm being theoretical but possibly not practical.

Inherent_Risk: I don't follow your last post. I've also asked you to explain why you think the CFPB gave those 5 scenarios that differentiate between property and applicant conditions if you don't think it matters that an applicant can be approved but a property is not.

I don't think I've said that. I've just been saying that an explicit approval of the applicant is required for ANA if they are denied. I also generally side with others on here about whether "property" condition is an totally accurate description of "customary commitment or closing conditions," but that's beside the point that I'm making.

Using your short hand, if there is an approval with a "property" condition AND an "applicant" condition, and the loan is denied for the "property" condition without a subsequent approval, then I'm saying it is denied for HMDA. I don't think anything in HMDA requires a bank to look any further into that file (or document it differently) to determine what happened with the underwriting condition. A subsequent approval with only "property" conditions is required on a denial to be ANA.

Now if an institution has an underwriting system that has underwriters check off conditions as they review them, then I can see the argument that when they check something off, then they are approving the file with one less condition, and the issue I'm raising becomes moot. My point is that is not how all (most?) bank's operate. Conditions are not generally approved, whole files are. I don't think HMDA requires that banks document what conditions have been approved.

I'll tell you what I'm concerned about. Let's say you're auditing a file marked as a denial for HMDA, and there's an approval with a "property" condition and a VOE as the only outstanding conditions. File was then denied for the property condition with no other approvals in file. During the audit, you find there is a VOE in the file. Would you consider that action code 3 is in error? Does it depend on something?

Again, I don't follow your first sentence IR (I don't think I've said that.") I'm not sure what "that" is. I also continue to ask you why you think the CFPB gives the 5 scenarios but you don't believe they need to be followed or don't think they will happen in your world.

You said: Using your short hand, if there is an approval with a "property" condition AND an "applicant" condition, and the loan is denied for the "property" condition without a subsequent approval, then I'm saying it is denied for HMDA.
I agree. There are still applicant conditions not met, so the applicant is not fully approved. It can't be ANA.

A subsequent approval with only "property" conditions is required on a denial to be ANA.
I'm not exactly sure what you mean by this, but if you are saying there are only property conditions left, that tells me the applicants are fully approved. That would mean that if the loan is not closed, it would be recorded as ANA.

Would you consider that action code 3 is in error? Does it depend on something?
If the applicants are fully approved (all verifications are in and satisfactory) and you're denying them for a property issue, I believe it should not be action taken code 3 (denial). It should have been a "2" (ANA).

I think we've beat this to death, yet we haven't really resolved it. What we've demonstrated is that there is confusion on this issue. We've tried to tell the CFPB this many times and have included it in our HMDA comment letter pertaining to the Advance Notice of Proposed Rulemaking (Docket No. CFPB-2019-0020). I encourage everyone to write them. You don't have to address everything. You can simply address one thing - like this issue.

I really wish we could sit around a table and discuss this (with a cold drink, of course). Cheers!

Last thing I'll say on the approval/UW condition met issue. I do think the bank has to follow the 5 scenarios. I just disagree with (or more likely just misunderstand) what you're saying they mean. I think we could probably hash this out in about 10-20 minutes at a table depending on the quality of the cold beverages. It'll probably take another 2 pages of forums space though, and it's kind of a tangent to the original post. I'm sorry for hijacking the thread. The separate debate between you and others is much more salient.

For what it's worth, I agree with Adam that property conditions are generally underwriting conditions. My reasoning is simply that you can discriminate on property conditions and HMDA wants to detect discrimination. A bank could either:

1) Create property conditions that are in themselves discriminatory. For example, a policy against lending on property with X condition when minority homes generally have that condition and white non-hispanic homes do not. An extreme example would be property location (redlining).

2) Originate loans to some borrowers with a property condition and not to others. (i.e. You approved all 5 loans with holes in the roof to white borrowers, but denied these 5 black borrowers for having a hole in the roof.)

I can't belive that the CFPB wanted these types of discrimination to be hidden in ANA. I think the focus as for what constitutes a customary commitment/closing conditions should be on customary. These are things that happen at the end of the process, that banks (at large) don't lend on, and are pretty black and white. There's very little room for discretion (and therefore discrimination) on these items. I'd argue that the scope of these items should be very small to ensure that they don't hide any of the discrimination that I mention above.

Good discussion. I like how you explained the potential discrimination examples and agree with you.

We should get together for that cold beverage! Until then . . . cheers!