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A Tip of the Hat to My Favorite Columnist, Mike Royko

Apr 30, 2017

Recently I was having lunch with my old pal Slats Grobnick, Jr., you know the one who got all huffy about the Fair Credit Reporting Act.  Slats has been promoted to chief lending officer overseeing commercial and consumer lending.  He was bemoaning all of the rules relating to notifying loan applicants about the decision.  Each sentence started out, “When I was a commercial lender . . . .”  We are really good friends, so I bit my tongue and proceeded to give him my elevator speech on Regulation B.   

You may think discussing Regulation B seems basic and boring since this rule has been in place for over 40 years.  However, a lot of us, including me, are having difficulty navigating today’s lending world and staying in compliance with Regulation B. 

In general, Regulation B {12 CFR 1002.9(a)} requires a lender to “NOTIFY” the applicant within 30 days of receiving a “COMPLETED” application.  The capital letters are not a goof but a way for me to draw attention to the critical words notify and completed.  In my discussion with Slats, he rolled his eyes, especially when I said, “You know words have specific meaning, especially in regulations.”

So I started with the word completed and addressed what a completed application means.

The definition section in Regulation B {12 CFR 1002.2(f)} defines application and completed application as follows:

  • Application means 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 requested.  The term application does not include the use of an account or line of credit to obtain an amount of credit that is within a previously established credit limit.
  • 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.

The definition provides a lender some latitude in defining what a completed application is.  For example, in certain real estate transactions, you may need an appraisal to make a full decision to approve or deny or even present a counteroffer of loan terms, and an appraisal may take 45 days to obtain from the time you order the appraisal.  The 30-day clock would start counting when you receive the appraisal.  Keep in mind this does not mean you can procrastinate in getting information.  That could lead to fair lending risk.

Let’s say we have a completed application.  Now what?  How we NOTIFY depends on the decision.

  • Approved loan applications.  This is the easy one.  You generally call the applicant and advise them that they have been approved, and you set up a loan closing date.
  • Denied loan applications.  This one is also fairly easy; you send a written adverse action notice to the applicants that conforms to FCRA and Regulation B requirements.
  • Incomplete applications.  This is a tricky one because we often rely on verbal or email communication.  However, there are specific requirements within Regulation B.  Within 30 days after receiving an application that is incomplete, the lender must either notify the applicant that the application is denied or send a written notice to the applicant specifying the information needed, designating a reasonable period of time for the applicant to provide the information, and informing the applicant that failure to provide the information requested will result in no further consideration being given to the application.  The lender shall have no further obligation under this section if the applicant fails to respond within the designated time period.  If the applicant supplies the requested information within the designated time period, the lender shall take action on the application and notify the applicant if the application is approved, denied, or a counteroffer is given.
  • Counteroffer.  This is another type of action that is often misunderstood.  This occurs when the lender decides an application cannot be approved on the original terms sought but comes up with terms that could be approved.  In this case, the lender has two paths to take.  The first one is to send a written counteroffer notice, and if the applicant does not expressly accept the counteroffer, the lender then sends an adverse action notice as a denial.  The other path is a combined counteroffer/adverse action notice; this way there is no second notice to send.
  • Withdrawn applications.  These should be documented indicating when the applicant withdrew the application.  IMPORTANT NOTE: HMDA has specific definitions for withdrawn applications.

“What about commercial applications?” Slats asked.  “We always called the applicant and only sometimes we sent them an adverse action notice.”  Well, I hated to break his heart, but commercial applications ARE subject to Regulation B notification requirements.  Here, again, there are two paths to take, both driven by the gross annual revenues of the applicant.

  • Gross annual revenues $1 million or less.  The lender has two choices for denials.  First, you can send an adverse action notice as you would for a consumer loan application.  The second choice is to provide the applicant the notices orally, provided that at the time of application, you gave the applicant the ECOA notice specifically required in Regulation B and a disclosure of the applicant's right to a statement of reasons for denial.
  • Gross annual revenues in excess of $1 million.  A lender may provide the applicant the notification orally or in writing.  The lender must provide the applicant a written statement of specific reasons for the adverse action if a written request is received from the applicant within 60 days of the lender’s notice to the applicant.

Slats looked a little relieved and stated, “You know, I may have been doing things correctly because the ones I send notices to are the small businesses.  The ones that I just call are the bigger businesses.” 

He asked me one final question before we left.  “John, what about guarantors?  Do they get adverse action notices?  That has bugged me for a long time.”  Well, a guarantor is an interesting issue and looking into the definition section of Regulation B, I found an 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.  So for adverse action purposes, a guarantor is not an applicant and an adverse action notice is not required to be sent to a guarantor.

“Whew!” Slats exclaimed.  “So, same time next month for lunch John?”