When Does An Oral Inquiry Become An App

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Question:

At what point does an oral inquiry for a loan become an application, thereby requiring an adverse action letter if denied? For example: 1. Bob asks about the bank’s car rates and terms for a 5 year old automobile. When he is answered he decides not to proceed. Was this an application that requires an Adverse Action Notice? 2. Sue calls and says she wants to talk about a Home Equity LOC. But the banker explains that it does not offer that loan product. Has Sue applied for a HELOC and required to get an Adverse Action Notice, or was it simply an inquiry that requires no further action by the bank? 3. John says he wants a loan to start up his own business, but mentions he does not have a job currently and filed bankruptcy last year. The loan officer tells John that he won’t be able to help him out. Has John applied for a loan and an Adverse Action notice is required, or did John simply inquire about a loan and no further action is necessary by the bank? 4. Peggy asks for the rate and terms of an automobile loan. The loan officer provides her with the information, then asks how her credit looks. If she tells him it’s not good, and the officer says he wouldn’t be able to make the loan, has Peggy applied and is she due an Adverse Action notice?

Answer:

Answer by Jim Bedsole:

1. It depends on how he was answered. If he was only given rates and terms offered, then no, it wasn't an application.
2. No application.
3. Yes, enough information was collected and John's response amount to a denial. If John has said instead, "Our bank credit standards exclude borrowers with recent bankruptcies, but for an official determination you'd need to complete a loan application", then you would not have an adverse action requirement.
4. Yes. See #3 above.

All of this presumes that your bank has defined what it considers to be an application, as allowed under Reg B. This includes stipulating how applications will be taken, such as "All applications must be completed on an application form provided either in person or online, or by telephone.application interview documented on an application form". Doing this helps mitigate the risk that applications could be considered through other methods.

Answer:

Answer by David Dickinson:

Here is what Reg B says about this topic in the Commentary to §1002.2(f) #3:

A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the [adverse action] notification requirements under Section 1002.9. Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks.

The Commentary to §1002.2(f) #4 also give several examples of inquiries you should review.