1 Application Rules Regulatory Requirements for Real Estate Transactions subject to ECOA and Regulation B

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Application Rules

Regulatory Requirements for Real Estate Transactions subject to ECOA and Regulation

B

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Objectives

• Review the requirements of Regulation B as they relate to real estate lending

• Identify the regulatory requirements during the application process

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Key Provisions• Regulation B & ECOA:

– Shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.

– Limitations on requesting information (applications), evaluating information, & extending credit

– Notify applicants of action taken on their applications;

– Report credit history in the names of both spouses on an account;

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Key Provisions

• Regulation B & ECOA:

– Collect monitoring information about the applicant's race and other personal characteristics in applications to purchase or refinance a dwelling.

– Provide applicants with copies of appraisal reports used in connection with credit transactions that is to be secured by a lien on a dwelling.

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Discrimination

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Discrimination

• General Rule

• A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.

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Discrimination

• Creditor – – means a person who, in the ordinary

course of business, regularly participates in a credit decision, including setting the terms of the credit.

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Discrimination

• Discriminate against an applicant – means to treat an applicant less favorably

than other applicants.

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Discrimination• Applicant

– any person who requests or who received an extension of credit from a creditor and includes any person who is or may become contractually liable regarding an extension of credit.

– Includes both business and consumer credit

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Discrimination

• What does “prohibited basis” means?

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Discrimination

• Prohibited Basis means – race– color– religion– national origin– sex– marital status– age (provided that the

applicant has the capacity to enter into a binding contract);

– the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act

– the fact that all or part of the applicant's income derives from any public

assistance program

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Discrimination

• Credit Transaction

– means every aspect of an applicant’s dealings with a creditor regarding an application for credit or an existing extension of credit and includes information requirements, furnishing of credit information and collection procedures

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The Application Process

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Requesting Applicant Information

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• When does the application process begin?– Shopping

• Discuss the basics of the product– Rates, terms, amounts, etc

• Do not get personal

– Applying• Draw the line between shopping

information and application information

• Place the ball in the applicants court with a simple question

– Would you like to apply for credit?• If yes, Now you can get personal

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• Do banks use these terms?– Prequalification– Pre-application– Inquiry– Short-form Application– Long-form Application

• They can all be considered applications under Regulation B and would trigger various disclosure requirements

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• Definition – Application– means 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 completed application means 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

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Requesting Applicant Information• When is an inquiry or prequalification request

an application?– If in giving information about the product to the

consumer,• the creditor also evaluates information about the

consumer, • decides to decline the request, and communicates

this to the consumer, • the creditor has treated the inquiry or

prequalification request as an application and must then comply with the notification requirements under section 202.9. (Adverse Action)

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Requesting Applicant Information• When is an inquiry or prequalification

request an application?

– Whether the inquiry/prequalification becomes an application depends on how the creditor responds to the consumer information.

• Keep it simple– Once you start gathering personal

information you have crossed the road to the application process

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• What can you discuss during the application process?

– Banks can not make oral or written statements to applicants that would discourage on a prohibited basis from making or pursuing an application

– Limitations when requesting information about:• The spouse

• Marital status

• Alimony income

• Gender

• Childbearing

• Race, color, religion, national origin

• Permanent-residency and immigration status

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• Evidence of joint application. – A person's intent to be a joint applicant must

be evidenced at the time of application. • Signatures on a promissory note may not be

used to show intent to apply for joint credit.

• On the other hand, signatures or initials on a credit application affirming applicants' intent to apply for joint credit may be used to establish intent to apply for joint credit. (See appendix B).

– The method used to establish intent must be distinct from the means used by individuals to affirm the accuracy of information.

• For example, signatures on a joint financial statement affirming the veracity of information are not sufficient to establish intent to apply for joint credit.

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Evaluating Applicant Information

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• How should you evaluate the applicant’s information?

– Banks shall not take a prohibited basis into account in any system of evaluating the creditworthiness of applicants.

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• Limitations when evaluating information about:

• Age• Marital Status• Childbearing• Race, color, religion, national origin• Immigration status• Telephone Listing• Income

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• What if the evaluation goes sour?

• Regulation B has specific rule for providing disclosures to applicants when credit is denied– They call it “Adverse Action”

• Specific Time limits• Disclosure must be in Writing• Specific Disclosure information

– Regulatory Notice– Specific Reasons or– Can Request Reasons

– Rules for Incomplete applications– Rules for withdrawn applications– Rules for multiple applicants– Rules for applications submitted through a third-party

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Special Rules for Real Estate

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Special Real Estate Rules

• Special rules for real estate:

– A written application form

– Collection of Government Monitoring Information

– Delivery of appraisal or notice

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Application Form

• When a written application form is required: – A creditor shall take written applications for credit

primarily for the purchase or refinancing of the applicant’s principal residence, where the extension of credit will be secured by the dwelling,

• If application is taken by phone, creditor may write down pertinent information provided by applicant(s).

• Sample forms are provided in Appendix B of Regulation B.– 1003-Link

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Government Monitoring Information

• Banks must ask applicants specific profile information when the credit request is for:

– The purchase or refinancing of the applicant’s principal residence where the loan is secured by the dwelling.

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• What information should be collected?– Ethnicity

• using categories Hispanic or Latino, and Not Hispanic or Latino (New)

– Race • using the categories American Indian or Alaskan Native;

Asian; Black or African American; Native Hawaiian or Other Pacific Islander, and White;

– Sex– Marital status

• using the categories Married, Unmarried, and Separated; and

– Age

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• How do banks collect the information?– On the application form, or

– On a separate form that refers to the application.

– The applicant(s) shall be asked but are not required to supply the requested information.

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• What are banks required to tell applicants?– The bank must first inform the applicant(s) that the

information is requested by federal government for purpose of monitoring compliance with federal law.

– The bank must also inform the applicant(s) that if the applicant(s) chooses not to provide the information, it will be noted but collected by the bank based on visual observation or surname.

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• Biggest Problem!

– Loan officers forgetting to request the information at the time of application or make a visual observation, if necessary

– Data is important for HMDA data collection

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Appraisals

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Appraisals• Appraisal Report is required to be provided to

customers in connection with an application for credit that is to be secured by a lien on a dwelling.

– Appraisal Report• The document(s) relied upon by the bank in evaluating the

value of the dwelling.

– Dwelling• A residential structure (1 – 4 units) whether or not that

structure is attached to real property

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Appraisals

• Two Delivery Options:

– Routinely provide a copy of the appraisal report to an applicant (whether credit is granted or denied or the application is withdrawn)

– Upon request by applicant(s).

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Appraisals• Upon Request.

– Notification • Written Form • State applicant’s right to receive a copy of an appraisal

report. • State that the applicant's request be in writing• Provide the bank's mailing address• Provide times for customer request.

– Within 90 days of action taken or withdrawal

– Timing • Given at any time during the application process

– Promptly (generally within 30 days) of the request

• Not later than the adverse action notice.

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Appraisals

• Multiple Applicants

– If more than one applicant, the notice about the appraisal report need only be given to the primary applicant.

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Summary for Real Estate• General Requirements

– Real estate transactions are subject to all of the general requirements of Reg B for:

• requesting information• evaluating information • Making and denying credit

• Special Rules– In addition, there are requirements unique to real

estate transactions requiring:• Written applications• Collection of Government Monitoring

Information• Copies of the appraisal report

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Questions????

Thanks for your time

Documents

1 Application Rules Regulatory Requirements for Real Estate Transactions subject to ECOA and Regulation B