denied/counteroffer mtg loan application

Hello- if you have a loan application where the co-borrower's credit report doesn't conform to secondary market guidelines- we do a counteroffer that we can do the loan in the borrower's name only and counteroffer is accepted - then we have an approved loan, correct? We are not HMDA but we do a Reg B reporting - we would only show the loan as an approval , correct?
If the counteroffer was not accepted then it would be a denial and monitoring info would be done under the denial. Am I thinking correctly? Thanks so much.

I think you are thinking correctly.

I know I probably sounded nutso explaining this but I thought I was thinking correctly. Thanks so much

This would only be an accepted counteroffer to the applicant the counteroffer was made to. The co-applicant was still denied credit and you would have to follow the AAN requirements for the denied co-applicant.

I was always under the impression that you can add a applicant without a decision, but if one is dropped that would be a decline for that person and an AAN would be required, like Dan said.

Clarification - there are 2 things going on. One is for recording the application - and David is correct. The other is for the applicant. The one who dropped out was in essence denied, and although the loan "can" reflect one disposition, the creditor still owes the initial applicant the appropriate notices.

This discussion is why many financial institutions use a combined adverse action/counter offer form. That way, the denial is done and if the counteroffer is accepted, you move forward.

I agree with Adam's comment about using a combined AAN/Counter-Offer is the best procedure.

I disagree that you must send the co-applicant an AAN if "they" accept the counter-offer to remove the co-applicant. I'm not saying you shouldn't to avoid the potential battle with an examiners, but Reg B doesn't technically state you need to do so. I can see this argument more clearly under the FCRA if you used their credit report to make the counter-offer (the "denied" co-applicant has rights to dispute the accuracy of the report).

David, you are the guru, and I understand what you are saying. I look at it slightly different, hence, my response. There were 2 applicants for the loan. One was denied, however the other continued and the loan was made.

I feel that the applicant who was denied deserves an adverse action letter - (s)he did not get the benefit of the loan that (s)he applied for, and potentially could have been dropped without any direct communication specifically to her/him. For the other party, there was communication, counteroffer, and acceptance. I was looking at from the point of 2 applicants rather than 1 application.

I stand by my comment that Reg B does not trigger an AAN under this scenario. You are approving the application (making a loan). Honestly, I still struggle with the FCRA notification requirement. I think the "denied" (dropped applicant) should get a FCRA notice, but I'm not sure it's technically triggered. Also, if you're going to send the FCRA notice, it's typically combined with the ECOA notice - so you might as well send both.

Rocky: you said "(s)he did not get the benefit of the loan that (s)he applied for, and potentially could have been dropped without any direct communication specifically to her/him." The scenario provided here is a discussion with the applicants, soI don't think the comment about dropping them without communicating fits. However, what if the loan officer talked to the approved applicant and said "we can do it without your spouse" and the approved applicant said "okay". Maybe the dropped applicant would have never been in on the discussion.

Again, the best way to do this is to send a written counter-offer/AAN combined notice. But in the real world, this happens frequently with loan officers. They verbally discuss this with the applicants and one proceeds without the other.

I'm just thinking out loud here and would love to hear others comments. I'm not asking what you think you should do or what your procedures are, but rather what does the regulation technically require.

I appreciate this discussion David and Rocky, and find it intriguing as I have always taken the conservative approach and just provided the AA notice under Reg B (typically the combined denial/counteroffer) rather than taking a deep dive into what is technically required.

First, I agree with David that I think an AA is clearly required under the FCRA. To support this, the 7/15/11 final Reg B rule (for AA Notices) states the following:

In contrast, section 615(a) of the FCRA requires a creditor to provide the disclosures mandated by that section to ``any consumer'' against whom adverse action is taken, if the adverse action is based in whole or in part on information from a consumer report.

Based on this, I think it is pretty clear that an FCRA AA notice must be provided.

For Regulation B, I agree that it isn't as clear but I think we can find some answers in the Reg and commentary. First, I think it is important to start with the notification requirements. As we all know, these are found in 1002.9(a)(1) and have the following requirements:

A creditor shall notify an applicant of action taken within:(i) 30 days after receiving a completed application concerning the creditor's approval of, counteroffer to, or adverse action on the application;" ..... (iv) 90 days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered.

To me, the key piece of this is where the rule says "an applicant" or "the applicant." So, let's review the definition of an applicant:

(e) Applicant means any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit.

When reviewing this definition, I note that all references are singular: they reference "any person." To me, this means that all co-applicants are also an "applicant" by definition, meaning that each is a separate "applicant" subject to the rules.

This singular approach to "applicant" is referenced throughout the reg. For example, the definition of "adverse action" says:

A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered;

Furthermore, the commentary to 1002.9(a)(1) also references a singular applicant in reference to a counteroffer:
6. Counteroffer combined with adverse action notice. A creditor that gives the applicant a combined counteroffer and adverse action notice that complies with §1002.9(a)(2) need not send a second adverse action notice if the applicant does not accept the counteroffer.

So, based on this consistent singular use of "applicant," it appears to me the "dropped" co-applicant (who, by definition is an "applicant') did not get a counteroffer and, therefore, must receive notification within 30/90 days. In other words, I vote that an adverse action notice under Regulation B (as well as FCRA) would be required for the "dropped" applicant on an accepted counteroffer.

All of that said, I could be wrong and I've not been able to locate the original Reg B issuance that may or may not have additional pre-amble that might provide further insight to this. SO, if one of the older/wiser gurus (cough, Randy, cough, cough, John, cough, cough) has a link to the original issuance, I'd love to see it. Again, I appreciate this discussion, David and Rocky.

I can share the 10/22/75 Federal Register with you if you want the "original Reg B issuance", but unfortunately Regulation B did not even have adverse action in it at that time.

I can see what else I have, but I think compared to the preambles that are published now-a-days, you might be sorely disappointed in earlier releases of new or revised regulations. The 1975 Federal Register version of Reg B consisted of about 5 pages for the regulation preceded by an 8 page preamble.

Old Guys Rule

First, "Old Guys Rule" - made me laugh out loud! I'm not able to dig out a 1975 anything, but I do still have memo's, FIL, etc. from 1990 (when I started in compliance) and I often pull out old resources. I've scanned them in to pdf files. My Team often refers to me as "grandpa" when I do this.

Adam: Thanks for your post. My thought is that Reg B is using a singular term (applicant), but is referring to applications. I support that with the lack (zero) of scenarios given like we are discussing. Reg B never brings up a comment about one spouse proceeding while another is denied. It is difficult for me to "argue" the definition of applicant, however.

You say: "it appears to me the "dropped" co-applicant (who, by definition is an "applicant') did not get a counteroffer and, therefore, must receive notification within 30/90 days.". I've got a different twist on this in my head. I'm envisioning the loan officer discussing this with both applicants. When the LO says "we can do this with A, but not with B", then B says "okay, I'll withdraw". Thus, Applicant B got a verbal counter-offer and decided to drop out.

We know that someone can't withdraw after a decision has been made under HMDA, but I don't believe Reg B says that. Also, HMDA doesn't have any scenarios that touch this. Would you report the application denied and then a new application to just Applicant A being approved? I don't think you need to and support that with the Commentary to §1003.4(a)(1)(ii) #3 which allows "reinstatement" of applications. I think there's a consistency between Reg B & C when it comes to applications and action taken (although I'm the first to admit there are some inconsistencies too (like ANA in HMDA, but not Reg B).

This is not uncommon and it surprises me that I've never thought through this thoroughly so I'm glad to have this discussion and am not iron clad on my position. What do others have to say. Again, not what you think is a best practice, but what does Reg B require?

I'm in the camp for sending the AAN to the applicant that was denied (dropped).

"When the LO says "we can do this with A, but not with B", then B says "okay, I'll withdraw". Thus, Applicant B got a verbal counter-offer and decided to drop out. "

Since applicant B didn't accept the counteroffer then would that not fall into the adverse action category requiring the AAN? See Adam's quote for the 90 day notice requirement if the applicant does not accept a verbal counteroffer. Or are you saying Applicant B accepted the terms of the counteroffer by dropping out? I can see that as a possibility but I would have to counter that Applicant B was not offered credit on different terms than applied for. Only Applicant A was offered credit on different terms.

The way I approach this is Reg. B primarily deals with the treatment of the applicants where Reg. C primarily deals with the treatment of the application process. Using this approach if one of the applicants is denied credit (requested to be dropped) they are provided the Reg. B AAN & the FCRA notice if applicable. For HMDA if the one applicant accepts the counteroffer then the application is treated as an accepted counteroffer and will be reported as an origination. Since the accepted counteroffer resulted in an origination there is no other disposition for that application reported.

I know some have stated in past threads that they treat the application as a denial report it as such and then has the one "approved" applicant re-apply. In this scenario there would be a reported declination and origination.

I've never been able to find much beyond the reg/commentary on adverse actions prior to 7/15/11 final rule, so I thought I might bait someone into confirming my thought that I wasn't missing anything. Thanks for taking the bait, Randy (and yes, old guys do rule).

I appreciate this discussion, David, as (for some strange reason) I have a never-ending desire to understand the rules to their fullest and I too have never dug deep into this topic. After reading your response/clarification, I think I now better understand your perspective and think it actually may come down to the last portion of the sentence of 1002.2(c)(1)(i) (from the definition of "adverse action") that says: "unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered.

In your scenario, a counteroffer was made on different terms (without applicant B) and both applicants A and B expressly accepted the new terms. As I'm sure you have as well, I've typically looked at B from the scenario where a bank is denying the loan all together, but the lender is steering the applicant to withdraw instead of providing an adverse action notice. Your situation, however, is different in that both applicants expressly accept the credit offered and credit is ultimately extended.

Therefore (and best practice aside), I think you may be technically correct that a "dropped" applicant who expressly accepts counter offer terms of credit that now exclude them from the loan does not need notification (i.e. AA notice). Again, I appreciate this deep-dive into the rules and am also interested to see what others think regarding what is technically required.

All are good insights and a very good discussion but I would still have to contend Applicant B was not offered credit on different terms. Applicant B was told if you remain on the credit request it will be denied. So what other choice did Applicant B have?

both applicants expressly accept the credit offered

What credit terms were offered to Applicant B (they received no credit)? In other words the lender refused to grant Applicant B credit.

As I said all good insights and a good discussion but my choice will be to provide the AAN to the denied (dropped) applicant on the basis they were not granted credit on any terms.

Adam: You spelled it out perfectly. Yes, that's the scenario I'm playing in my head.

The only problem I have with my scenario and the LO "advising" the applicant's is the LO is not encouraging Applicant B to proceed. The FDIC wrote this in FIL 35-96:
The denial does not have to be explicit in nature and can be construed as any communication that would lead a reasonable person to conclude that an application would receive negative consideration.

Dan: You wrote: "Since applicant B didn't accept the counteroffer then would that not fall into the adverse action category requiring the AAN?" In my scenario, Applicant B DID accept the counteroffer. Maybe I didn't make that clear, but Adam spells it out in his last post - 2nd to last paragraph. Does this change your opinion.

Good stuff, guys!

David, I understood you were implying Applicant B accepted the counteroffer but my contention is there was not a counteroffer of credit on different terms made to Applicant B. Applicant B was told if they remained on the request the request would be denied, so what offer of credit was made to Applicant B? Only Applicant A was offered credit on different terms than applied for. Applicant B was denied credit.

Now, let me throw this in the conversation.

This is dependent on a written counteroffer with the denial reason stated on the notice ( I think Adam made such a reference in one of his earlier posts). Reg. B only requires one applicant to be provided the AAN but it must be provided to the primary applicant where one is identified. If the written counteroffer is provided to the "primary" applicant with the stated reason for denial and outlining the terms of credit being offered to Applicant A then I would agree that would satisfy the notification and accepted counteroffer requirements if Applicant A accepted the counteroffer.

My whole premises in based on the fact the verbal counteroffer made no offer of credit to Applicant B and refusing to grant credit to Applicant B would IMO be AA under Reg. B's definition of AA.

Good point.

I also understand your point about the written counteroffer vs. a verbal one. I can't argue with you Dan. I think this happens frequently and don't see bank's being cited for it. It's likely that examiners can't tell what happened and they see a loan being made, so they don't pursue this like we are.

It's likely that examiners can't tell what happened and they see a loan being made, so they don't pursue this like we are.

I would agree with that statement 100%,

Good conversation. Hopefully it will give others guidance in how they will treat these scenarios.

Thanks David & Adam.

Great discussion Dan & David and I agree that I hope this helps others determine how to proceed in this situation.

I came back on here late- way late - We had examiners and then outside loan review going on and I so appreciate the conversation above. Its Friday night and my brain is dead and I intend to read the above discussion over the weekend.

the counteroffer - the co borrower didn't qualify thru secondary market standards because of job time-
I thought a counteroffer with a date meant if the person didn't accept it then it would be a denial based on the co borrower's job time. But if it was accepted then it was an approved application.

I appreciate you all. Thank you.

I also know that I originally was told it was her credit report but it was time on the job- I just found that out today in a meeting - so it had nothing to do with her credit report.

Saw this post today while doing some adverse action research. Made me look at this process differently, but not sure where I stand on this topic. I tend to agree with Dan - I am definitely conservative, but will try to spread my wings and look at this more closely. Just have to say I love "the old guys" reference and am proud to be a female member of the group. Here's my scenario:

A and B apply for loan jointly. In discussion with lender they are told that (1) A's credit while acceptable would increase the loan interest rate and (2) B's credit was sufficient for a single applicant loan with a lower interest rate. Of course, A withdrew from the loan process and B will proceed with a new application.

IMO, we need adverse action notification. We made a verbal counteroffer which B accepted. As A did not accept the counteroffer A needs an AAN. Please let me know what you think. Thank you.

This is the cleanest way (i.e. most conservative) that will avoid scrutiny. I would just send it and move on.

That said, you could debate this a couple different ways and I'm not sure you would have a definitive answer (based on David's point above). If it were me, I would choose to avoid this potential conversation with an examiner.

Thanks Adam. Appreciate the input.

Im resurrecting this thread as I am having the same question and this was absolutely fantastic to read through.

I have always taken the conservative approach as well. I agree that it is required under FCRA if based on a consumer report - and is debatable whether required under Reg B. I believe that it would be required for a removed (denied) applicant for the reasons others have stated.

Has there been any updates to your opinions the last couple of years? Thanks gurus!

No changes in opinion here. The conservative way that avoids potential criticism is to just send the AA Notice. That said, if you forgot to send one, I think David's points still offer a valid argument (assuming FCRA doesn't also apply) as a Hail Mary to argue with auditors/examiners and potentially avoid a violation/finding.

Thanks Adam. Have always followed the conservative route. Thanks!