There's a lot to this topic. Please read the post Rocky linked to. Additionally, we wrote 2 related articles in our Feb and March 2017 newsletters on this topic. I have cut/pasted them below. (The formatting doesn't look as pretty when I cut/paste them here, but I hope you can read it fine.)
From our Feb 2017 newsletter:
When Do You Have A Home Loan Application?
This question has been tossed around for years, but lately we’ve noticed a new twist that we’d like to set straight. Some mortgage loan officers claim they don’t have an application until they have the six items triggering Regulation Z’s TRID disclosures [see §1026.2(a)(3)(ii)]. You probably know what we’re referring to, but just in case, the six items include:
1. Name
2. Income
3. SSN
4. PropertyAddress
5. EstimatedValueoftheproperty 6. LoanAmount
While their claim may be true for TRID (Regulation Z), it’s important to remember that both Regulations B (ECOA) and C (HMDA) have different definitions of “applicationâ€. Sticking to only the TRID definition can get you in trouble. It’s common for regulations to define terms differently. “Business day†is another term that suffers the same fate. The key point to remember is you can’t use a Reg Z definition to apply requirements in Reg B or C.
Regulation B’s definition of Application
Imagine an applicant says, “I’d like to buy a home. How much home can I afford?†While discussing this with the person, you might collect a few bits of information. You probably won’t have an application for TRID or HMDA because you don’t have a property address (and possibly you’re missing even more). But, you may have an application for Regulation B (ECOA).
Regulation B defines an application as:
“...any oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested.†[§1002.2(f)]
It’s pretty hard to argue you don’t have a request for credit. You might argue, “but our procedures require . . .â€. You need to be a little careful here. If you look at Comment #2 to this section you’ll discover the term “proceduresâ€:
“... refers to the actual practices followed by a creditor for making credit decisions as well as its stated application procedures. For example, if a creditor’s stated policy is to require all applications to be in writing on the creditor’s application form, but the creditor also makes credit decisions based on oral requests, the creditor’s procedures are to accept both oral and written applications.†[Commentary to §1002.2(f) #2]
While you can say your policy requires certain things, is that what’s really happening all the time? Also, this Commentary addresses how applications are received, not what things you need. That’s made more clear when you look at the definition of “Completed Application†in §1002.2(f):
“...an application in connection with which a creditor has received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested (including, but not limited to, credit reports, any additional information requested from the applicant, and any approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure, or provide security for the credit or collateral). The creditor shall exercise reasonable diligence in obtaining such information.â€
Notice this definition discusses things beyond a request for credit. We’re not discussing whether you have a completed application at this point, but whether you simply have an application.
So let’s get back to our prequalification scenario. Imagine you’ve learned enough to know that this applicant can’t afford a tent, let alone a new home. Your loan officer simply responds by saying “I’m sorry. We can’t help you.†You haven’t crossed the TRID application line yet (nor HMDA), but you certainly owe this applicant an Adverse Action Notice under Regulation B. Thus, the bar is set very low for triggering Regulation B’s application requirement.
Regulation C’s definition of Application
Let’s go a step further and look at the similar definition of “application†in HMDA (Regulation C):
...an oral or written request for a home purchase loan, a home improvement loan, or a refinancing that is made in accordance with procedures used by a financial institution for the type of credit requested. [§1003.2]
The only difference between this and Reg B’s definition is the type of request (home purchase, improvement or refinance). In the scenario described above, you don’t have an application for HMDA as no house has been identified yet. [If your institution has a preapproval program and the application met those requirements, you might – but that’s a whole other story.] In fact, the Commentary to §1003.2 states:
A prequalification request is a request by a prospective loan applicant (other than a request for preapproval) for a preliminary determination on whether the prospective applicant would likely qualify for credit under an institution’s standards or for a determination on the amount of credit for which the prospective applicant would likely qualify...Regulation C does not require an institution to report prequalification requests on the HMDA-LAR, even though these requests may constitute applications under Regulation B...
Did you notice that last sentence? It reinforces the idea that you have an application under Regulation B but not Regulation C.
Assume the applicant can afford a home up to $100,000 and you have prequalified them for this amount. Two weeks later, the prequalified applicant contacts your lender and says, “I found the perfect house!†Now you have jumped over the HMDA application bar. This application now needs to show up on your institution’s Loan Application Register no matter the action taken (denied, withdrawn, closed for incompleteness, etc.). But, we may not have a TRID application yet because you don’t have all of the six items, as defined in Reg Z.
TRID (Reg Z’s) Definition of Application
So your loan officer finally asks the applicant for the missing TRID application information and it is provided. You now have an application subject to TRID.
Some lenders have told us their examiners haven’t brought this up so they don't change. Just because an examiner doesn’t cite your institution for it, doesn’t make it correct. Also, if the examiners do cite you at the next exam, they can make you resubmit 3 years of HMDA-LARs and send Adverse Action Notices to applicants that should have received them previously. That’s a pretty big risk to take just because no one has pointed out this error.
Summary
We don’t think it’s possible to have a TRID application and not already have, or simultaneously have, a Regulation B and/or HMDA application. We also don’t think it’s correct for a lender to say they don’t have an application for Regulation B or HMDA until they have all six pieces of TRID information.
If someone walked in with a request for credit and provides all six pieces of information required by TRID, all three regulations would have the same application date. However, it’s possible to have two or three different application dates, as illustrated in our examples. Make sure you document, document, document.
From our March 2017 newsletter:
When Is an Application Complete?
In our February Newsletter, we tackled when you have a home loan application. We alerted you to the fact that the answer to that question is not always as easy as it may seem. Different definitions in different regulations add to the complexity. This month we are going to clarify another term that is often confused. This month we will tackle when your application is complete under Regulation B!
This is yet another issue that has long been debated. Institutions must know when the application is complete so they can ensure compliance with all the requirements triggered after that point. The difficulty is there are some areas of the regulation that are not completely clear and have led to differing interpretations of what constitutes a completed application. We want to discuss the “gray area†of this topic and give you the pros and cons of various positions you might consider.
Application
Before you can determine if an application is complete you must first determine what an application is. Regulation B defines an application in §1002.2(f) as “...an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requestedâ€. Notice the definition affords some wiggle room with the “procedures used†wording. It is
a little unclear; however, how much leeway you really have. The Commentary to this section states:
“The term “procedures†refers to the actual practices followed by a creditor for making credit decisions as well as its stated application procedures. For example, if a creditor’s stated policy is to require all applications to be in writing on the creditor’s application form, but the creditor also makes credit decisions based on oral requests, the creditor’s procedures are to accept both oral and written applications.†[Commentary to §1002.2(f) #2]
The warning provided in the example is critical because it addresses how lenders can set limitations on how customers can apply for credit. Some lenders may say they only take written applications, but in reality, most accept verbal requests for credit. So the first test is to be sure to do what you say and say what you do! If a verbal request for credit is denied, an adverse action notice is triggered because there was enough information to make a decision.
Do you accept oral applications for credit? How about over the telephone? What about a request for credit through email? LinkedIn? Facebook? What if a customer requested credit from you in a public forum, by tagging your institution on an online billboard? How about a request written on a paper airplane that glided into one of your branches onto the lobby floor? We’re being ridiculous on purpose to prove a simple point: you can put reasonable limitations on exactly how a customer may request credit. For instance, for mortgage loans, you may require a Fannie Mae Form 1003 to be completed by every single applicant before any consideration is made. If that’s the case; however, controls must be in place to make sure your process is consistent.
Once you have decided what an application is, you then have to start managing your process! In many cases, lenders have some kind of back and forth communication with the applicant(s) before making a decision. More often than not the dialogue will continue right up until the loan closes. Since communication is always going back and forth, it is important to determine exactly when an application becomes “completeâ€.
Completed Application
A complete application starts the clock on the 30-day notification requirement under Regulation B, so it is an important concept to understand and to document properly in your files. Defining when an application is complete at your institution is just as important as defining what an application is. Section 1002.2(f) defines a “completed application†as:
“A completed application means an application in connection with which a creditor has
received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested (including, but not limited to, credit reports, any additional information requested from the applicant, and any approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure, or provide security for the credit or collateral). The creditor shall exercise reasonable diligence in obtaining such information.â€
In other words, you need to determine what information your institution “regularly obtains and considers†for the amount and type of credit requested. The good news is you have some leeway here as well. The Commentary confirms this “wiggle room†by stating, “A creditor has the latitude under the regulation to establish its own application process and to decide the type and amount of information it will require from credit applicants.†[§1002.2(f)#1]
A completed application could be different from bank to bank, just as an application can vary by bank. It is important at this point to really take a look at the types of applications you receive, how you obtain information and what your lenders evaluate before making a decision. Keep in mind, whatever information you require, there is also a corresponding requirement to diligently collect the necessary information to complete the application!
Completed application—diligence requirement. The regulation defines a completed application in terms that give a creditor the latitude to establish its own information requirements. Nevertheless, the creditor must act with reasonable diligence to collect information needed to complete the application. For example, the creditor should request information from third parties, such as a credit report, promptly after receiving the application. If additional information is needed from the applicant, such as an address or a telephone number to verify employment, the creditor should contact the applicant promptly. (But see comment 9(a)(1)–3, which discusses the creditor's option to deny an application on the basis of incompleteness.) [§1002.2(f)#6]
Before we go any further, let’s discuss what is required at application vs. what is required when you have a completed application.
What Is Triggered When?
When you have an application for credit, you need to obtain things like joint intent, the Military Lending Act database check, Government Monitoring Information, etc. (as applicable). These requirements are triggered when you have an application (i.e., a request for credit), not when the application is complete. The only thing delayed until the time of a completed application is the “30 day clock†notification requirement. This is explained in the Commentary to §1002.9(a)(1)#1:
Timing of notice—when an application is complete. Once a creditor has obtained all the information it normally considers in making a credit decision, the application is complete and the creditor has 30 days in which to notify the applicant of the credit decision.
Often a lender will want to say they don’t have a “completed application†to avoid starting the “30-day clockâ€. The question we frequently hear is, “how can the clock start if we are still waiting for information from the applicant?†For simplicity’s sake, what if you have everything the applicant can provide verbally or in writing, but you have not verified the information? Do you have a complete application or is it an incomplete application? This brings us to the hottest part of the debate, and there are two approaches you could take:
1. Consider an application complete when you have enough information to make a decision– even if it is unverified information.
2. Consider an application complete once everything has been verified.
Approach #1: The “Conservative Approachâ€
If you have enough information from the customer to make a credit decision, you have a complete application.
Say you tell the applicant, “If everything checks out, I think we can make this loanâ€. You’ve stopped the 30-day clock, because you have notified the applicant of a decision. If verifications come in later that would cause you to change your mind (income isn’t what the applicant stated or the appraisal doesn’t support the collateral’s estimated value), you can adjust your decision accordingly. You could deny the request or possibly give the applicant a counteroffer. The “30 day clock†would start again at that point since you have new information that changed the initial decision. The “30-day clock†requirement does not require you to close a loan within 30 days – only to communicate your decision.
If the application is incomplete and you need more information to make the initial credit decision, you would send a notice of incompleteness [§1002.9(c)]. We will address the Notice of Incompleteness requirements in a future article.
Pros:
1. Since you communicated an approval/denial once you had enough information to make a decision, you stopped the 30-day clock. There is nothing to track or worry about during the verification process, unless something doesn’t check out. If there is a problem, it is communicated to the applicant and the clock starts again.
2. This approach encourages applicants to proceed, which we believe is the intent of Regulation B.
Cons
1. Some think this gives the applicant false hope or could be misleading. That being said, we really don't think being honest with an applicant is ever misleading.
Approach #2: The “Aggressive Approachâ€
Taking the position that you do not have a complete application until all documentation has been submitted and all verifications are received.
Pros:
1. The 30-day clock doesn’t start until everything is verified.
Cons:
1. It can cause confusion and can lead to violations as many lenders don't understand all the finer details of the rule or they don't follow it! (Let’s face it - this stuff can be confusing!)
2. Lenders need to track the process and timing closely and document the day everything is verified because this is also when the clock starts running.
3. Examiners will review this process much more closely to ensure:
a. Your definition of “completed application†is correct; and,
b. You are starting the 30-day clock once the application is complete and you have notified the applicant within 30 days.
Under the “Aggressive Approachâ€, if you have an application, but not a complete application (which is true in many cases), you still have to make sure you are obtaining and documenting joint intent, checking the MLA database for the safe harbor, and managing whether or not you have a HMDA or TRID application, as applicable. As you can see, this is a complicated topic and while there is latitude given to creditors to say what is a complete application, there are some serious concerns you should take into consideration.
Conclusion
Regardless of what position you decide to take (Conservative or Aggressive) there are risks to be assessed. You need to clearly investigate and spell out what your institution will accept as an application AND what will constitute a completed application. Also, keep in mind; the process can be different for all the various credit products you offer. If so, there will need to be a clear definition for every business line, from residential real estate, to automobile financing, to commercial loans. Each area will need to be consistently managed, with requirements communicated to applicants and this is where examiner scrutiny can come in. The trick will be to fully understand the rules of the game and making sure lenders are aware of, and compliant with, whatever procedures you decide to put into place.
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