Why Haven’t Loan Officers Been Told These Facts?
Regulation B Notice Requirements for Mortgage Brokers
Recently, an enterprising Loan Officer School customer asked us, “Are there any special Reg B notice requirements for brokers?”
MLOs and brokers rightly comprehend that the person making the credit decision is responsible for satisfying the notice requirements. Yet, it is permissible for a third party, similar to the TRID Loan Estimate delivery, to fulfill the Regulation B notice requirements.
However, many stakeholders could benefit from a more precise notion of what transactions are subject to the notice requirements and what constitutes a completed application necessitating a Regulation B notice, especially when the loan does not close.
Brokers will sometimes assert that since they do not make any final credit decisions, they have no obligation to deliver the written notice according to Regulation B. That is a severe ECOA misunderstanding that will likely lead to violations.
For example, Pat Prospect contacts Blake Broker about a purchase money mortgage for the type of financing that Blake regularly arranges. Blake determines that Pat’s representative credit score is 531. Pat also had a Chapter 7 bankruptcy discharge 13 months ago. Blake tells Pat that Pat must wait two years from the date of the bankruptcy discharge before Blake can conceivably approve Pat for a mortgage. Pat does not deliver a written adverse action notice to Pat. Blake’s failure to provide the adverse action notice within 30 days of application is a probable ECOA violation.
Generally, brokers don’t forward transactions to lenders for credit decisions or funding that, on the surface, will not close. If the application of the person making credit inquiry is not advanced by the broker, or if the broker otherwise takes the person off “the path of assistance” because of the prospect’s inability to qualify, it is probable that an application and adverse action have occurred.
Preapprovals are applications under Regulation B. Prequalifications are not. However, under the regulation, the difference between pre-qualification and pre-approval is nuanced. Yet one thing is plain, the Regulation states that an application occurs when a creditor informs a prospect that they could not or would not approve the loan due to information collected from or about the prospect. The regulation does not mention the authority of a person to take adverse action or their qualifications to make credit decisions. Generally, when a person facilitating the credit process tells a person they do not qualify for financing on a covered transaction, you have an application.
Under Regulation B, generally, when a “creditor” takes an application (which, as previously noted, includes pre-approvals), the creditor must satisfy the notice requirements within 30 calendar days. Furthermore, for owner-occupied transactions, the person must create a written record of the application. The requirement for written application is incumbent on the creditor to satisfy. When the deal fails to advance because of a broker’s adverse action – the broker is the creditor. The Regulation also clarifies that telephone applications are applications for the purpose of Regulation B.
12 CFR § 1002.2(f) 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.
§ 1002.4(c) Written applications. A creditor shall take written applications . . . for credit primarily for the purchase or refinancing of a dwelling occupied or to be occupied by the applicant as a principal residence, where the extension of credit will be secured by the dwelling.
Official Interpretation of 12 CFR 1002.4(c)
1. Requirement for written applications. Model application forms are provided in Appendix B to the regulation, although using a printed form is not required. A creditor will satisfy the requirement by writing down the information it normally considers when making a credit decision. The creditor may complete an application on behalf of an applicant and need not require the applicant to sign the application.
2. Telephone applications. A creditor that accepts applications by telephone for dwelling-related credit covered by § 1002.13 (for credit primarily for the purchase or refinancing of a dwelling occupied or to be occupied by the applicant as a principal residence) can meet the requirement for written applications by writing down pertinent information that is provided by the applicant.
3. Computerized entry. Information entered directly into and retained by a computerized system qualifies as a written application under Regulation B.
Mortgage Brokers Are Subject to Regulation B and ECOA
12 CFR § 1002.2(l)(l) Creditor means a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit.
Regulation B does not state expressly that a mortgage broker is a creditor. However, by implication, brokers may be a creditor. “Setting the terms of the credit” is a primary broker function. The statutory language expands the definition. Between the regulation and statute, the applicability to brokers becomes clearly comprehensible.
The statute states 15 USC §1691a. (e) “The term “creditor” means any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.”
The Congressional intent to include brokers is apparent. Any person who regularly arranges for the extension of credit or is instrumental in setting the terms of the credit would include a mortgage broker. Otherwise, if brokers are not covered, why would Congress exempt brokers when brokers collectively represent such significant numbers of residential originations? Unless one posits that under the ECOA, only direct lenders are prohibited from unlawful mortgage discrimination, brokers are subject to the statutory demands.
Generally, the reason brokers don’t get busted under the Act is because, pragmatically, they make poor legal targets. Regulators must prioritize their anti-discrimination efforts due to finite resources. They have bigger fish to fry than mortgage brokers. However, when they get a complaint or referral, state or federal regulators may call. Higher-volume brokers have greater examination risks.
When is the Notice Due
§ 1002.9(a)(1) Once a creditor has obtained all the information it normally considers in making a credit decision, the application is complete and the creditor has 30 days in which to notify the applicant of the credit decision. Notification occurs when a creditor delivers or mails a notice to the applicant’s last known address or, in the case of an oral notification, when the creditor communicates the credit decision to the applicant.
Oral notifications by small-volume creditors.
In the case of a creditor that did not receive more than 150 applications during the preceding calendar year, the requirements of this section (including statements of specific reasons) are satisfied by oral notifications.
When Does An Application Occur
Comment 2(f)-3 A creditor is encouraged to provide consumers with information about loan
terms. However, if in giving information 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.
Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks.
The creditor’s obligation to provide a notice of action taken for a prequalification request depends on the creditor’s response to the request. For instance, a creditor may treat the request as an inquiry if the creditor evaluates specific information about the consumer and tells the consumer the loan amount, rate, and other terms of credit the consumer could qualify for under various loan programs, explaining the process the consumer must follow to submit a mortgage application and the information the creditor will analyze in reaching a credit decision. On the other hand, a creditor has treated a request as an application, and is subject to the adverse action notice requirements if, after evaluating information, the creditor decides that it will not approve the request and communicates that decision to the consumer. For example, if the creditor tells the consumer that it would not approve an application for a mortgage because of a bankruptcy in the consumer’s record, the creditor has denied an application for credit.
Reg B has special rules for third-party notice (brokers) options when submitting to multiple creditors.
Reg B § 1002.9(g) Applications submitted through a third party. When an application is made on behalf of an applicant to more than one creditor and the applicant expressly accepts or uses credit offered by one of the creditors, notification of action taken by any of the other creditors is not required.
If no credit is offered or if the applicant does not expressly accept or use the credit offered, each creditor taking adverse action must comply with this section, directly or through a third party.
A notice given by a third party shall disclose the identity of each creditor on whose behalf the notice is given.
1. Third parties. The notification of adverse action may be given by one of the creditors to whom an application was submitted, or by a noncreditor third party. If one notification is provided on behalf of multiple creditors, the notice must contain the name and address of each creditor. The notice must either disclose the applicant’s right to a statement of specific reasons within 30 days, or give the primary reasons each creditor relied upon in taking the adverse action – clearly indicating which reasons relate to which creditor.
2. Third party notice – enforcement agency. If a single adverse action notice is being provided to an applicant on behalf of several creditors and they are under the jurisdiction of different Federal enforcement agencies, the notice need not name each agency; disclosure of any one of them will suffice.
Some areas of ECOA compliance are less than crystal clear. When in doubt, seek appropriate legal counsel.
Do you have a great value proposition you’d like to get in front of thousands of loan officers? Are you looking for talent?
BEHIND THE SCENES – CFPB Details the agency’s responsibility to consumers with limited English proficiency (LEP)
Excerpted from the CFPB’s November LEP Report
More than 67 million people, or about 22 percent of the U.S. population over the age of five, speak a language other than English at home. Of this, more than 26 million people in the United States have limited proficiency in English. Spanish is the most widely spoken non-English language with approximately 40 million speakers, and it constitutes the largest share of the LEP population, followed by Chinese, Vietnamese, Korean, and Tagalog speakers. These five languages are spoken by more than 78 percent of LEP individuals. Studies by federal agencies and other stakeholders show that information in consumers’ native languages critical to improved financial well-being.
Household members who speak English as a second language, or who cannot read English, are particularly disadvantaged in their ability to review and understand financial documents and other important notifications. In 2022, the CFPB conducted research on the financial education needs of immigrants and LEP consumers. One of the identified challenges was that many of the technical terms commonly used in the U.S. financial system either do not have equivalent terms in non-English languages or have translations that are confusing.
Over the years, the CFPB has encouraged financial institutions to provide fair and transparent access to products and services to people more comfortable using a language other than English.
Providing financial information in multiple languages helps to promote competitive markets and strengthens relationships between financial service providers and their customers. Certain financial rules and regulations require financial services providers to make disclosures that help consumers understand the product and services, as well as their rights and protections.
See the full CFPB Report
See the FHFA Language Page
Tip of the Week – Consider Adding Subprime Offerings
Offering subprime financing is different than offering agency products. There are nuanced requirements similar to those of non-conforming conventional products. Additionally, federal laws dictate special rules for calculating qualifying payments. On top of that, escrows are required at any LTV, and Regulation Z requires second appraisals for certain flipped properties.
How do you argue and document that you have acted in the consumer’s best interest while facilitating subprime financing?
Join us for 2023 Continuing Education classes as we unpack the central themes of acting in the consumer’s interest, the informed use of credit, and conspicuously doing it all.