HMDA, Regulation B, and Declined Commercial Loan Application

ISSUE/QUESTION

The Board of Directors of the Bank has denied a loan request for a commercial loan that is HMDA-reportable. The loan officer continues to work on the loan and the applicants are looking for a guarantor. No notice, action taken or counteroffer has yet been sent. The Bank asks whether it must issue its denial within 30 days of the Board’s decision or start up a new file if a guarantor is found. Should the Bank list the loan on the HMDA/LAR as a decline for 2014, and should the date be the date of the Board of Director’s decision? If the loan closes during 2014, would only the origination be reported or would the decline? If the applicant asks that the loan request be reconsidered, would a memo on file be sufficient documentation?

RESPONSE SUMMARY

For business credit requests from applicants with annual gross revenues of $1 million or less, the Bank must notify the applicant of the action taken within 30 days of receiving a completed application. The notice can be either of the denial, a counteroffer, or a combined counteroffer and denial. If the applicant has annual gross revenues of more than $1 million, the notification can be within a reasonable time of receiving the completed application. The denial will be reported on the HMDA/LAR unless the applicant requested reconsideration. In such case, if the Bank granted the request, it could treat it as either a continuation of the original loan request or a new loan request. If the Bank made a counteroffer which was accepted, the loan application date would be the date reported for the original application. If a loan closing results, the date of action taken would be the date of the settlement or closing.

RESPONSE DETAIL

Regulation B

For business credit applicants with annual gross revenues of less than $1 million, Regulation B requires a creditor to provide notification of the action taken within 30 days after receiving a completed application. An application is deemed complete when the creditor has obtained all the information it normally considers in making a credit decision [12 CFR §1002.9(a)(1)(i); Official Interpretations, ¶9(a)(1)-1].

In this case, the Board of Directors has declined the loan and, for the purpose of our response, we’ll assume that this decision complies with the Bank’s credit policy. The Bank should, therefore, provide the applicant with the required notice of action taken. The timing of the notice, however, is not within 30 days of the Board’s decision, but 30 days after the application was considered complete.

It appears that the loan officer and borrower are attempting to address the reason for the adverse action by obtaining a guarantor. The Bank would have a certain degree of leeway in determining how the action taken will be treated, either as an:

• Adverse action on the application, or
• Counteroffer to the application.

If the Bank provided an adverse action notice and the applicant subsequently obtained a guarantor, the applicant could reapply for the loan. A new notice of action taken would have to be provided within 30 days after the Bank received the completed application.

If the Bank notifies the applicant of a counteroffer, it must provide a notice of adverse action if the applicant does not accept the counteroffer within 90 days [12 CFR §1002.9(a)(1)(iv)].

In the alternative, the counteroffer can be combined with an adverse action notice. If the combined notice is used and the applicant does not accept the counteroffer, it will not be necessary to send a second adverse action notice [Official Interpretations, ¶9(a)(1)-6].

The timing requirements are different if the applicant had gross revenues of more than $1 million in the preceding fiscal year. In such case, the Bank is required to notify the applicant within a reasonable time of receiving the completed application [12 CFR §1002.9(a)(2)(iii)].

HMDA

For the purposes of the HMDA Loan Application Register (“HMDA/LAR”), if a loan closes, the date of action taken is the closing or settlement date. If the application does not result in a loan approval, the date of the action taken would be when the application was denied or the notice of action taken was sent to the applicant [FFIEC, A Guide to HMDA Reporting, Date of Action Taken, page 13]. In this case, the Bank would use the date of the Board’s decision or the date of notification, whichever was consistent with its practice.

If the loan closed in 2014, the date of settlement or closing would be the date of action taken. The date of the application would be determined by whether a counteroffer was made and accepted or whether the applicant requested reconsideration of the denial, and the Bank either treated the request as a continuation of the original request or a new request.

Ordinarily, when a loan request is denied, it would be reported as such in 2014. However, if the applicant asks the Bank to reconsider the application during the same calendar year, the Bank can either treat that request as a continuation of the earlier transaction or as a new transaction.  If it treats the application as a continuation, there would be no denial reported and the application date would be that reported for the original application. If it treats the request as a new application, the date of the request for reconsideration would be the application date. [Staff Commentary to Regulation C, ¶4(a)(1)-3].

Regulation C does not specify whether the request should be in writing or can be made orally, but as a matter of best practice, the request should be documented in some way, whether by a written request from the applicant or a memorandum for the file. NOTE: Regulation C defers to Regulation B in some respects, but Regulation B would require a written application for a dwelling-related loan only if the dwelling was to be the primary residence of the applicant [12 CFR §1002.13(a)]. This would not be the case for a commercial loan.

“If the Bank made a counteroffer which was accepted by the applicant, the application date would be the date of the application or the date the application was received. The date of action taken would be the settlement or closing date. [Staff Commentary to Regulation C, ¶4(a)(1)-1; FFIEC, A Guide to HMDA Reporting, Date of Action Taken, page 13].”

A FURTHER NOTE: Where Regulation C is ambiguous in its requirements or when options are provided by it, as in this case, we would advise the Bank to determine the correct approach, document the reasons for its determination, and be consistent in using this approach.

This entry was posted on Friday, December 19th, 2014 at 9:01 pm.