When is an application really an application? I wish it was easy. Unfortunately, different regulations have different definitions for “application”. And these differing definitions have different implications for mortgage originators and when notices or disclosures are required. The regulations implementing the Real Estate Settlement Procedures Act (RESPA) and the Equal Credit Opportunity Act (ECOA) have markedly different ideas of what constitutes an application.
RESPA via HUD’s Regulation X Section 3500.2 defines application as follows: “Application means the submission of a borrower’s financial information in anticipation of a credit decision, whether written or computer-generated, relating to a federally related mortgage loan. If the submission does not state or identify a specific property, the submission is an application for a pre-qualification and not an application for a federally related mortgage loan under this part. The subsequent addition of an identified property to the submission converts the submission to an application for a federally related mortgage loan.”
Key questions in the RESPA definition are: 1) Did the applicant identify a specific property address? and 2) Does the applicant expect a credit decision based on the applicant’s submission of financial information?
The first question is easy—no property address means no legally required RESPA disclosure requirements. The second question is not so easy since the loan officer must deduce the applicant’s expectations. Obviously, if the applicant provides a complete application and property address, RESPA disclosures (such as GFE/Settlement Cost Booklet) must be provided. But what is the expectation of the applicant that provides only his name, monthly income, and property address? RESPA disclosures could be provided to be safe. However, if the loan officer makes it very clear to the applicant that a credit decision cannot be made until additional information (such as length of employment, assets, liabilities) is provided, then the loan officer has a very good argument that the borrower could not be expecting a credit decision. And the loan officer does not have to provide the RESPA disclosures.
For RESPA, the application date is the latter of 1) the date a property address is identified and 2) the date that the applicant expects a credit decision based on submitted financial information.
The Equal Credit Opportunity Act (ECOA) via Regulation B Section 202.2 defines application as follows: “Application means an oral or written request for an extension of credit that is made in accordance with procedures established by a creditor for the type of credit requested. The term does not include the use of an account or line of credit to obtain an amount of credit that is within a previously established credit limit. A completed application means an application in connection with which a creditor has received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested (including, but not limited to, credit reports, any additional information requested from the applicant, and any approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure, or provide security for the credit or collateral). The creditor shall exercise reasonable diligence in obtaining such information.”
In the ECOA definition there are two key issues to consider. First, an “application” is a request made in accordance with procedures established by the creditor. Procedures might be that the application must be provided in writing or by the internet. Second, a “completed application” contains all the information that the creditor regularly obtains in evaluating applications.
Different creditors may make loan decisions based on different criteria. It is important for each creditor to define what information constitutes an application and to consistently follow the definition. (Ideally, this definition should be defined in a written policy.) For example, High Doc Mortgage Inc. may make loan decisions based on a complete 1003, VOE, and credit report while Low Doc Lending Company may only require name, monthly income, and credit report. The same information might be a completed application for Low Doc Lending but not a completed application for High Doc Mortgage. In turn, the ECOA disclosures (such as a denial notice) required by
Low Doc Lending will not be required by High Doc Mortgage since High Doc Mortgage has not technically received a completed application.
For ECOA, the application date is the date by which the creditor has obtained enough information to make a credit decision and the application has been submitted in a format normally used by the creditor.
Question: Does it matter if the missing information necessary to complete the application is missing due to the applicant or is missing due to a third party? Answer: It does not matter why the missing information is not available to the creditor. An incomplete application is an incomplete application. However, if the application is incomplete and it is not due to the applicant, then the creditor shall exercise reasonable diligence in obtaining such information from the third party. (See actual ECOA definition above.)
What is the Bottom Line?
With regard to disclosures required by RESPA (such as the GFE/Settlement Cost Booklet), a loan officer does not need to provide these disclosures until a property address is known. Even if a property address is known, a loan officer does not need to provide the applicable disclosures until the applicant has submitted financial information in expectation of a credit decision.
With regard to notices required by ECOA (such as a denial notice or other notice of action taken), notices are not required until the creditor obtains the information the creditor regularly uses to make a credit decision. (However, an ECOA notice of incomplete application may be required.)
- Loan officers should be trained on the definition of “application” for the various regulations.
- Loan officers should be trained on how to respond to applicants so that the applicants will not be expecting a credit decision until all necessary financial information is received.
- Loan officers should be trained on when the “application date” occurs for the various regulations to insure timely delivery of disclosures.