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

2 Objectives Review the requirements of Regulation B as they relate to real estate lending Identify the regulatory requirements during the application process

3 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;

4 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.

5 Discrimination

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

7 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.

8 Discrimination Discriminate against an applicant –means to treat an applicant less favorably than other applicants.

9 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

10 Discrimination What does “prohibited basis” means?

11 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

12 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

13 The Application Process

14 Requesting Applicant Information

15 Requesting Applicant Information 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

16 Requesting Applicant Information 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

17 Requesting Applicant Information 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

18 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 (Adverse Action)

19 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

20 Requesting Applicant Information 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

21 Requesting Applicant Information 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.

22 Evaluating Applicant Information

23 Evaluating Applicant Information 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.

24 Evaluating Applicant Information Limitations when evaluating information about: Age Marital Status Childbearing Race, color, religion, national origin Immigration status Telephone Listing Income

25 Evaluating Applicant Information 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

26 Special Rules for Real Estate

27 Special Real Estate Rules Special rules for real estate: –A written application form –Collection of Government Monitoring Information –Delivery of appraisal or notice

28 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-Link1003-Link

29 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.

30 Government Monitoring Information 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

31 Government Monitoring Information 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.

32 Government Monitoring Information 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.

33 Government Monitoring Information 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

34 Appraisals

35 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

36 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).

37 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.

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

39 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

40 Questions???? Thanks for your time