Declining Loan When Conditions of Approval Have Not Been Fulfilled
Issue/Inquiry
The Bank approved a commercial loan for the refinance of a commercial property on September 15, then received a title search revealing a judgment against the customer and certain information the customer had not disclosed on October 21. An e-mail declining the loan was sent to the customer on November 28, but no formal adverse action notice was sent. Is there a timeframe for notifying the customer under these circumstances? If the Bank has exceeded that timeframe, how should it be documented in the file?
Response Summary
The requirements of Regulation B for notifying an applicant of the action taken on an application depend on the receipt of a completed application. If the Bank notified the applicant of the approval in a timely manner after receiving the application, it fulfilled the requirements of the regulation, regardless of subsequent events concerning the fulfillment or verification of terms of the approval.
Response Detail
The timing requirements of Regulation B for notifying an applicant of the action taken on an application are as follows:
- 30 days after receiving a completed application concerning the creditor's approval of, counteroffer to, or adverse action on the application
- 30 days after taking adverse action on an incomplete application, unless notice is provided in accordance with paragraph (c) of this section
- 30 days after taking adverse action on an existing account
- 90 days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered
If the applicant is a business applicant with gross annual revenues exceeding $1 million in the preceding fiscal year, the applicant can be notified in a “reasonable time” of the action taken. 12 CFR §1002.9(a).
These are the sole notification requirements specified by Regulation B. It does not address notification when a condition of an approval cannot be fulfilled or verified. Consequently, if the Bank notified the applicant of the approval in a timely manner after receiving the application, it fulfilled the requirements of Regulation B, regardless of circumstances occurring subsequent to that notification.
We would recommend that the Bank document the notification of approval and its reasons for subsequently declining to consummate the loan. In this case, it appears that notification by the Bank within 35 days of receiving the information on which it based its decision was reasonable, as it is close to Regulation B’s notification requirements for notifying an applicant of the action taken on an application.
In reviewing comments on the Internet and especially those in the BankersOnline forum, we noticed a divergence of opinions on whether Regulation B requires a particular kind of notification when a credit request that was initially approved is subsequently declined. For example, there is support for the idea that if a lender approves a loan and notifies the applicant within the timeframe required by the regulation, it has fulfilled its obligations, but if the loan subsequently becomes unfeasible and is not made, the lender must issue a denial within 30 days from the date it reached that conclusion. However, we note that sending an adverse action notice at this stage of the credit process is not a requirement of the regulation and does not appear in the Official Interpretations of the regulatory requirements. The notification requirement of Regulation B turns exclusively upon the application and not upon events subsequent to the notification of a loan approval. If it were otherwise, the approval would be, in effect, a conditional approval, with special notification requirements. However, Regulation B does not recognize “conditional approvals,” or specify any notification requirements regarding such approvals.
Some insight was given by an FDIC round table discussion in which it was considered how applicants are notified of declines under Regulation B, which gives effect to the Equal Credit Opportunity Act (“ECOA”), and how such declines are reported in the HMDA Loan Application Register:
A conditional approval is an approval under HMDA guidelines. Conditional approvals are communicated to the customer via a commitment letter. However, if the customer does not meet the underwriting conditions, the bank must report the application as a denial. ECOA does not have an option similar to HMDA for conditional approvals. ECOA allows only for an approval or denial under Section 202.9(a). Therefore, there is a question as to whether or not the commitment letter satisfies the notification requirements under ECOA and is interpreted as an approval. If the commitment letter satisfies the notification requirements under ECOA, and the customer subsequently does not meet the conditions and is sent an adverse action notice, then there would be an ECOA approval along with a HMDA denial. This would confuse the customer. A suggested remedy would be to include a paragraph in the ECOA that addresses conditional approvals or to specifically state that it is an approval under ECOA and the customer should be notified accordingly. FDIC, Financial Services Roundtable, April 20, 2004.
In a sense, however, all credit approvals are conditional approvals, as all depend upon the conditions of the approval being fulfilled. In any case, the suggested revisions to the ECOA were not made, so that the current requirements remain in effect.