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#6310 - 11/06/01 06:21 PM Adverse Action on decline to Purchase a Loan?
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,277
Here is my situation:

A bank is going to purchase a mortgage loan from an affiliate and does its credit review before the affiliate commits to the loan - which is necessary to utilize the 23A 250.250 exemption which allows us to purchase the loans outside of the 23A limits.

The bank declines to purchase the loan - the mortgage company goes ahead with its own process and either grants the loan or declines it. The mortgage company issues an adverse action letter if it declines the loan.

Does the bank - that would have purchased the loan - have any obligation to issue an adverse action letter? Per the HMDA guide, the bank would need to report the loan as a decline on its LAR...but is adverse action notification to the borrowing customer by the BANK required? (I realize that if the mortgage company subsequently does not make the loan they would send an adverse action letter.)

The bank would have purchased the loan post closing.....not made the loan. Can I make the argument that this is different from a dealer shopping a car loan to different banks because those banks will actually be the lender. We will NOT be the lender...we will purchase after the loan is booked. If I had to send an adverse action letter, I can't imagine what it would say...we declined to purchase your loan?

Thanks for any insights.

_________________________
Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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General Discussion
#6311 - 11/06/01 06:37 PM Re: Adverse Action on decline to Purchase a Loan?
Princess Romeo Offline

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Princess Romeo
Joined: Jun 2001
Posts: 8,272
Where the heart is
I'm just going off the top of my head, but I would say that what you're describing is a secondary market transaction.

You are not directly involved with the applicant, and I would not consider this "adverse action" under either Reg B or HMDA because you are not directly involved in the credit decision to grant the loan.

(Note - my opinions are my own, not my employer's and not a legal one.)

[This message has been edited by Bonnie M (edited 11-06-2001).]

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#6312 - 11/07/01 02:55 AM Re: Adverse Action on decline to Purchase a Loan?
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,277
I went back to the HMDA guide and don't like what I read in Appendix D (the review we are doing before the mortgage company commits is to utilize the 23A 250.250 exemption, which allows you to purchase the loan from the affiliate outside of the 23A limitations (up to a certain amount):

Affiliate bank underwriting
(250.250 review). If an institution
makes an independent evaluation
of the creditworthiness of an applicant
(for example, as part of a preclosing
review by an affiliate bank
under 12 CFR 250.250, which
interprets section 23A of the Federal
Reserve Act), the institution is
making a credit decision. If the
institution then acquires the loan,
it reports the loan as an origination
whether the loan closes in the name
of the institution or its affiliate. An
institution that does not acquire the
loan but takes another action
reports that action. (Appendix A of
this part, Paragraphs IV.A. and V.B.)
is not reported. (Appendix A of this
part, Paragraphs IV.A. and V.B.)

Section 203.2óDefinitions
2(b) Application.
1. Consistency with Regulation B.
Board interpretations that appear
in the official staff commentary to
Regulation B (Equal Credit Opportunity,
12 CFR Part 202, Supplement
I) are generally applicable
to the definition of an application
under Regulation C. However,
under Regulation C the definition of
an application does not include prequalification
requests.

This seems to be saying we report it as an approval not a purchase, and - if it is a credit decision - a decline would require an adverse action letter? But what if we decline and the mortgage company approves? They get a decline from someone they never heard of (the bank) and an approval from the mortgage company?

_________________________
Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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#6313 - 11/07/01 02:07 PM Re: Adverse Action on decline to Purchase a Loan?
DuLac71 Offline
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Joined: Nov 2001
Posts: 13
Naperville, IL USA
It is normal procedure in the mortgage banking industry to shop an application to multiple lenders. A mortgage banker may receive three or four Adverse Action Notices on one application and should forward them all to the applicant if no lender accepts the loan. (You should have a written agreement with the mortgage banker on this). Each declining lender reports its credit decision.

If a lender does accept the application, the mortgage banker does not send any of the Adverse Action Notices to the borrower.


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#6314 - 11/08/01 05:03 AM Re: Adverse Action on decline to Purchase a Loan?
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,277
The difference in this situation - and what we have been struggling with - is that we will NOT be the lender. We are approving the loan for purchase AFTER it is closed by the lender (affiliate mortgage company) in their name. Ordinarily a purchaser would not get involved in adverse action...but it seems that because of the special 23A pre-review we have to treat a purchase the same way we would in the situations you described.
_________________________
Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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#6315 - 11/07/01 06:03 PM Re: Adverse Action on decline to Purchase a Loan?
Anonymous
Unregistered

kblanchard: Maybe this will help?

An adverse action notice must be sent to an applicant when a credit request is declined. In your hypo, the Bank never dealt w/an "applicant". It dealt w/a potential lender (its "affiliate") that wanted it to buy the paper after-the fact. The Bank did not decline to extend credit to the "applicant" because it never recv'd a request from the applicant to do so. Therefore, the Bank need not provide an adverse action notice to the applicant.

The only way I see that the Bank would need to provide the adverse action notice is based upon the "affiliate" relationship you reference in your hypo.

Does the "affiliate" shop all of its deals to the Bank or also to other lenders?

If the "affiliate" only shops deals to the Bank (and declines to extend credit if the Bank wont buy the paper after-the-fact), this looks like the Bank and the "affiliate" are basically one and the same (ie. if the Bank wont buy the deal the "affiliate" automatically turns it down; how is this different from the Bank simply refusing to do the deal directly?).

As to the section of HMDA that you mention, it says, basically, that if the Bank decided not to buy the paper after-the-fact because of an independent review of the creditworthiness of the applicant, then it has taken adverse action against the applicant.

In other words, although the actual application was given to someone other than the Bank (ie. the "affiliate"), the Bank accepted and acted upon the application. The fact that the application came from a 3rd party and not directly from the applicant doesnt change the fact that adverse action on the application was taken by the Bank. As such, the Bank must provide the adverse action notice.

Therefore, it seems the answer to your question depends upon why the Bank decided not to buy the paper after-the fact. Was it based upon an independent review of the creditworthiness of the applicant (adverse action notice reqrd) or some other reason (possibly no notice reqrd)?

I AM NOT ENGAGED IN PROVIDING LEGAL ADVICE AND THE VIEWS EXPRESSED ARE NOT THOSE OF MY EMPLOYER


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#6316 - 11/08/01 10:42 PM Re: Adverse Action on decline to Purchase a Loan?
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,277
We have gone back to the affiliate mortgage company and found that in the great majority of cases (almost all) when we declined to PURCHASE the loan, they went ahead and made the loan anyway. There were very few where they did not lend. Therefore, I do not feel our decline to purchase is influencing their decision process at all.

I don't see where I should be involved in adverse action at all in this purchase situation, despite how HMDA wants me to report these loans due to the 23A pre-review situation.

_________________________
Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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#6317 - 11/13/01 12:07 AM Re: Adverse Action on decline to Purchase a Loan?
Lucy Griffin Offline

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Lucy Griffin
Joined: Nov 2000
Posts: 1,544
Check the ECOA and REgulation B definition of creditor. It includes anyone who participates in the credit decision. In making a decision to purchase before the loan is made, you are a creditor making a credit decision. Therefore, even though you don't have direct contact with the applicant, Reg B requires an adverse action notice.

However, you are saved by the multiple creditor provision in 202.9. That provides that if the borrower gets credit from someone, no-one needs to send the notice. So if your affiliate makes the loan anyway, you are off the hook. Howeve, if it is denied, then you and all others who reviewed the application must make sure that a notice goes to the customer. The affiliate can provide a single notice for all creditors.


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#6318 - 11/13/01 03:27 PM Re: Adverse Action on decline to Purchase a Loan?
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,277
After reading and reading every reg around,I had basically reached this decision yesterday.

So 23A forces us into a creditor situation, which then raises FCRA affiliate sharing issues. If I have to let the applicant know (when the mortgage company also declines) that we looked at his loan - and imply that it was for approval of the loan in a decline letter - then it seems we should be giving the applicant the opportunity to opt out of his information being shared with us, which you would not ordinarily do in a purchase situation that occurs post-close!

So the applicant gets to say whether or not we can purchase his loan!!! I haven't found any upside to this.

Thanks for all of the input!

_________________________
Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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