What Should a Bank Do When it Receives an Application for Terms it does not Offer?

Issue/Inquiry

When a customer submits an application requesting terms the Bank does not offer (e.g., the application is for a seven year-term loan when the Bank offers only five years), can the branch manager who receives the application be allowed to inform the customer that the Bank does not offer this term, and request the customer to revise the application before it is formally accepted and date-stamped as having been received? If the branch manager does not review the application but date stamps it and sends it forward for a credit decision to be made, can the Bank make a counteroffer for a five-year term? Or must it decline the application because it does not offer the seven-year term requested, and wait for the customer to submit a new application requesting a five-year term?

Response Summary

While the Bank has latitude in establishing its application procedures, its actual practice is the determining factor. If one of its representatives informs the applicant that the Bank does not offer the terms requested, the applicant can revise the application to request terms the Bank does offer. However, the Bank must be aware that in providing this information to the applicant, it has, in effect, accepted the application and made a respective credit decision. Consequently, the Bank must be prepared to provide the appropriate notification of action taken in the event that the applicant does not submit a revised application. If the Bank receives an application for terms it does not offer, it can decline the loan request, but is not required to. The Bank could also make a counteroffer.

Response Detail

Under Regulation B, 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. A creditor has latitude to establish its own application process and what information it will request, but its actual practice is the determining factor. For example, if a creditor’s stated policy is to require all applications to be in writing on the application form, but it also makes credit decisions based on oral requests, the creditor's procedures are to accept both oral and written applications. 12 CFR §1002.2(f); Official Interpretations, ¶1002.2(f) – 1,2.

In the first example, when the applicant is requesting terms not offered, the Bank would want to be able to have the application changed before it is “formally” accepted by being date-stamped.

The official commentary to Regulation B states that when an applicant applies for credit and the creditor does not offer the credit terms requested by the applicant (e.g., the interest rate, length of maturity, collateral, or amount of down payment), a denial of the application for that reason is adverse action (unless the creditor makes a counteroffer that is accepted by the applicant) and the applicant is entitled to notification of the action taken. Official Interpretations, ¶1002.2(c)(2)(v) – 1.

If a representative of the Bank informs the applicant that the Bank does not offer the terms requested, there is no reason why the applicant cannot revise the application to request terms the Bank does offer. The applicant will have, in effect, withdrawn the original application and submitted a new application. The notification requirements of Regulation B do not apply to expressly withdrawn applications. Official Interpretations, ¶1002.9 – 2.

What the Bank must be aware of, however, is that it in informing the applicant that the Bank does not offer the terms requested, it has, in effect, accepted the application and made a credit decision on it, whatever its stated policy may require and whether or not the application has been date stamped. Consequently, it must be prepared to provide the appropriate notification in the event that the applicant does not submit a revised application.

With respect to the second example, when the application is forwarded unchanged, even though it requests terms not offered, the Bank could take adverse action on the application, but it could also make a counteroffer, as indicated by the official commentary concerning applications for terms not offered by a creditor.

A counteroffer would be subject to specific notification requirements if it was not accepted by the applicant:

• The counteroffer would be provided no later than 30 days after receiving the completed application
• If the applicant did not expressly accept the counteroffer, the Bank would notify the applicant of the action taken 90 days after making the counteroffer

If the Bank gives the applicant a combined counteroffer and adverse action notice, it does not have to send a second adverse action notice if the applicant does not accept the counteroffer. 12 CFR §1002.9(a)(1);Official Interpretations, ¶1002.9(a)(1) – 6.

 

This entry was posted on Monday, August 1st, 2016 at 3:00 pm.