Applications: Still crazy, after all these years

What is an application? When was the application received? When was the application completed?

Compliance managers continue to devote an inordinate amount of time and energy to these seemingly simple questions. I know I do.

It looks like this isn’t going to change, as the industry sails towards a new regulatory effective date.

Longtime debate over what’s what

When a compliance manager is conducting a Home Mortgage Disclosure Act review, the issue of what Application Received Date should be recorded on the loan application register has to be determined.

Is it the date the customer signed the application? Or is it the date stamped “received” on the application form? 

What happens if the customer fills out and dates the application form and then doesn’t get around to bringing it into a bank branch for a week or two? 

When a compliance manager is conducting a Regulation B/Equal Credit Opportunity Act review of adverse action files, determinations have to be made of when a completed application was received in order to know if the notification to the applicant was sent timely.

This is just one illustration of the importance of the answer to the question.

Difference between asking and requesting

One of the hardest concepts to explain and understand (still) is the distinction between an Inquiry and an Application. This distinction is important for purposes of Regulation B because of the notification requirements and for HMDA reporting purposes.

An inquiry would not be an application and subject to the notification requirements of Regulation B and would not be reportable as a HMDA transaction.

Both Regulation B and HMDA have a similar definition of an “application.”

An application is 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.

These regulations leave it to creditors to establish their own procedures and definitions for applications. Then, if a customer request doesn’t meet that definition, it is only an inquiry and not subject to the regulations’ requirements.

Defining an “application” and a “completed application” sounds simple, but is extremely difficult. How do you itemize an all-inclusive list of the information the creditor regularly obtains and considers in evaluating various types of applications? 

If you run across a situation in which you need additional documentation, a delay in obtaining that information could easily cause the loan decision to exceed the 30-day deadline for notification even though you had a “completed application” according to your procedures. If your loan file isn’t clearly documented with reasons for delays and due diligence in resolving those delays, examiners could dispute the timeliness of the notification.

Merger disclosure sets different definition

In the face of the existing confusion, the new Integrated TILA/RESPA disclosures rule (“TRID”) provides another regulatory definition of an application.

The new definition of application in Regulation Z becomes effective Aug. 1, 2015. It is a modification of the definition of application currently in the Real Estate Settlement Procedure Act:

For purposes of consumer credit, an application means the submission of a consumer’s financial information for the purpose of obtaining an extension of credit.

For purposes of a closed-end mortgage loan secured by real estate, an application is the submission of the consumer’s name, income, social security number, property address, estimate of the value of the property, and mortgage loan amount sought.

The seventh catchall item—any other information deemed necessary by the loan originator—is being removed from the definition, because the Consumer Financial Protection Bureau believes that it was being used by loan originators to delay giving consumers good faith estimated disclosures.

The new “TRID” definition of an application triggers the start of the three-day time period when Loan Estimate disclosures must be provided to consumers applying for mortgage loans.

Ball goes back to lenders’ court

While the six-item composition of a mortgage application would appear to provide more specificity to the definition, in reality the definition is back in the hands of creditors.

As CFPB explains in the preamble to its rule, a creditor could restructure its application process to request other information from an applicant prior to requesting the six magical pieces of information specified in the application definition. If the applicant provides other information prior to providing all of the six prescribed pieces of information, an application has not been submitted yet.

It’s no wonder that the questions of what is an application and when is it received continues to monopolize so much of our time and resources.

And, now, with the new TRID approaching in August, we need to be taking a fresh look at our application policies and procedures and forms and making sure that they will comply with Regulation Z as well as harmonize with other regulation compliance rules and procedures.