Applications: Why does it have to be so hard?

It’s both surprising—and not surprising—that after so many years, applications continue to be such a major problem area in compliance audits.

At least that’s been my experience. The application is the trigger for the entire loan process.

For example, the bulk of Equal Credit Opportunity Act and Regulation B, which has been around for over 40 years, revolves around handling credit applications properly and fairly. All the way up to right now and what is the latest definition of an application for a closed-end mortgage loan.

Core of the process

Most of our favorite credit compliance laws and regulations (Regulation B, HMDA, RESPA, Regulation Z, Fair Credit Reporting Act) significantly impact the loan application.

No wonder it’s become arguably the most complicated step in the loan process.

I would venture to guess that it is extremely difficult to get through a loan compliance audit without identifying errors or weaknesses in the loan application process.

Consider all the different regulatory implications we have to think about:

• What is an application?

• When is an application received?

• When is an application completed?

• How is an application taken?

• Is an application an application or something else, such as an inquiry or a prequalification or a preapproval?

But that’s just the beginning.

Don’t forget … applications have a business purpose!

Each line of business and every product have different needs relating to applications.

Some circumstances require that the application be in a written form, such as for loans to purchase or refinance a dwelling (Regulation B). Some creditors permit informal verbal applications only in the commercial loan department.

Compliance and credit law are never far away. Application procedures are so important because the exact moment an application is received in a completed form determines:

• When the clock starts to run for timing of notification to be provided to the applicant of the loan decision.

• When the clock starts to run for the timing of notification to be provided to the applicant of the need for any additional information needed to complete the application.

Then, there’s an “application” for purposes of disclosures for closed-end mortgage loans. Ugh!

Not staying inside the lines

A big problem still remains.

You’ll find this even if a creditor could write policies and procedures that clearly spell out all the definitions and rules for completing, taking, documenting, and processing applications for every type of loan request for every loan product that it offers.

Even if you could keep them current and understandable to every employee in the institution.

And, that problem is … the consumer.

People just don’t like to follow the institution’s procedures.

Think about it.

Consumers don’t follow the bank’s time deadlines.

Sometimes they change their mind about the type of loan they want between the time they originally submit an application and the time the bank makes the credit decision.

They sometimes decide to have their spouse sign on the loan at the last minute—even though the spouse didn’t sign the original application.

Sometimes consumers sign the application with the wrong date.

They sometimes don’t provide requested information in a timely manner to complete a loan request.

On occasion they provide incorrect information.

And then there’s the “no box fits me” puzzle: The type of loan product the consumer wants doesn’t neatly fit into one of the four loan purposes that the regulators have invented.

It’s no wonder there is a high frequency of errors found in the documentation of receipt of applications, receipt of completed applications, exceeding the 30-day time limit between receipt of a completed application and the notification of action taken (Regulation B requirement); 12-month record retention of any “application” received; correct date the application is received for HMDA reporting, etc.

And, we haven’t begun to identify any problems relating to the application associated with the new TRID rules.

Process stymied by the key ingredient

So, to repeat my opening question, why does the first step in the loan process have to be so complex?  It’s largely because there is a consumer involved.

If we could just eliminate the consumer from the consumer compliance regulatory environment, life would be a lot easier and it would help cut down on the compliance audit exceptions.

Of course, who then would banks be making the consumer loans to?