Each day, lenders receive and process hundreds of credit applications and the supporting documentation for mortgage loan requests. The Uniform Residential Loan Application (Form 1003), in particular, remains the primary documentation for the file. Whether the application is ultimately approved, denied, or withdrawn, creditors are obligated to maintain file documentation to ‘tell the story.’
Approved Loans
Although this application outcome might seem the easiest to satisfy, recent regulatory requirements, like ability-to-repay (ATR), have put more pressure on lenders to fully and accurately document files for approved mortgage loans. A rigorous underwriting process gives the applicants the best chance for a loan that fits their needs, and helps lenders avoid defaults and loan buybacks. Particular applicant information must be maintained for specific loan programs under the Federal Housing Administration (FHA), FannieMae, the Veterans Administration, and the like.
The general categories of application documentation fall into three “buckets.”
Bucket 1
Complete and accurate information on the Form 1003. Have all of the applicable fields been completed? What about the applicants’ sex, race, and ethnicity for Home Mortgage Disclosure Act (HMDA) recordkeeping and reporting, or, for the Regulation B – Equal Credit Opportunity Act (ECOA) government monitoring information? Is the date clearly documented, and, in particular, the date the completed application was received – which is crucial to demonstrate a good faith effort to handle the transaction expeditiously and to meet the Regulation B requirement to make a credit decision within 30 days of receipt?
Be sure to document the date a completed application was received, even if the date the applicant filled out the form is filled in! Regulation B defines a completed application as “an application [for] 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.”
Bucket 2 –
Supporting information in the file for the fields on the Form 1003. Most of the information provided by the applicant(s) on the Form 1003 should also be supported by file documentation – for instance, pay stubs to show income, statements to show liquid or other assets, credit reports, and confirmation of the applicants’ other debts.
Bucket 3 –
Documentation to fulfill the creditor’s loan policy requirements or lending procedures. Regulatory requirements aside, each creditor has set out in some manner what is required to meet institutional guidelines for its loans and what information the creditor needs to see to consider the application. If the lender’s policy requires six months’ bank statements, the file should include all six. Exceptions to policy always need to be accurately and completely described, and, in most cases, should include show the approval of the exception to policy.
Denied Loan Applications
When a creditor considers a mortgage loan application and decides the request for credit must be denied, the three buckets will still apply. In the case of a denied application, the creditor needs to show that the pertinent information was considered and that it was not sufficient to approve the request for credit. Sometimes, a credit decision may be made before each and every piece of information is received; however, creditors should be careful to document the file as fully as possible to support the reason(s) for denial, to clearly demonstrate fair treatment of the applicant(s), and to show a good faith effort to consider the entire financial picture of the applicant(s) before denying the request for credit.
The documentation for a denied loan application file will also include the notice of action taken (denial notice) required by Regulation B. The notice doesn’t need to be housed with the application file; however, all of the documentation for a credit denial must be maintained and available to support the action. Denied credit applications and their supporting documentation have specific recordkeeping requirements under Section 1012 of Regulation B. For consumer-purpose mortgage loan applications, the creditor must maintain the denial notice and the supporting file information for a period of 25 months after the date that the creditor notified the applicant(s) of the action taken.
The content and timing of the denial notice must meet the requirements of Section 1009 of Regulation B. It is critical that the file demonstrates support for the denial reasons provided to the applicant(s). Regulation B requires that the reasons communicated to the applicant(s) must be specific and indicate the principal reason(s) for the adverse action. In some cases, the creditor may find more than four data points on which a denial might be based, but, the commentary to Section 1009 of Regulation B states, “The regulation does not mandate that a specific number of reasons be disclosed, but disclosure of more than four reasons is not likely to be helpful to the applicant.” The federal regulators generally encourage creditors to show the best four reasons for credit denial.
Just as the completed application receipt date is used to start the clock running on the 30-day window for a credit decision, the date of the credit decision is needed to stop the clock. How does your process work? Is the date on the credit denial the same date that the credit decision was made, or, is it several days after? If someone (like an examiner) opened a denied application file, would that be evident?
Withdrawn Loan Applications
For withdrawn loan applications, the creditor does not make a credit decision, but, the applicant does. During the time that the creditor is gathering information to make a decision on the application, the applicant may notify the creditor that he or she no longer wants to pursue the credit request. That specific scenario is classified as a withdrawn application.
Up to the point that the applicant(s) withdraws the application from further consideration, the three buckets will still apply. When the creditor is notified that the application is being withdrawn, the process stops, and, everything gathered up to that point should be maintained in the file. Additionally, it is important to document the circumstances of the withdrawal. Did the applicant send an email and is a copy of the message in the file? Was it withdrawn during a telephone conversation with the loan officer and has the basic substance of the conversation been documented and added to the file? Is the date of the withdrawal documented to stop the clock on the requirement to make a credit decision within 30 days?
Regardless of the ultimate outcome of a request for a mortgage loan, it is important for creditors to maintain a complete and accurate file. The file documentation should ‘tell the story’ of how the application was processed, what information was available to the creditor to consider, and the circumstances of the ultimate disposition of the credit application.
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