By Josh Weinberg
Among the many challenges of implementing the TILA-RESPA Integrated Disclosure (TRID) Rule (Rule), the change to the definition of ‘application’ is one of the most daunting. This change not only requires systems changes for loan operating systems (LOS), but policy and procedure revisions as well. It’s in the details of those policy revisions that differences and complications implementing procedures emerge.
As lenders, we have an obligation to ensure we follow the technical requirements of regulations, but we must also take into account the purpose behind the regulations to ensure the intended public policy goals are achieved. So, to properly implement this new definition of application, we need to go beyond just the material minimum compliance requirements of when to send initial disclosures and look to the purpose for that requirement.
It is in that light that the implementation implications of this change need to be analyzed. Currently, there are essentially five regulations that individually provide a definition of application or similar guidance and have importance to the mortgage industry:
Real Estate Settlement Procedures Act (RESPA);
Truth in Lending Act (TILA);
Home Mortgage Disclosure Act (HMDA);
Equal Credit Opportunity Act (ECOA); and
Fair Credit Reporting Act (FCRA).
The National Mortgage Licensing System (NMLS) has recently proposed another definition of application, but has delayed finalizing that definition for some time, so we’re going to leave that aside for now, but will address it briefly later.
The benefit of today’s regulatory definitions is that they permit a lender to conduct business and construe policies to comply with all of the regulatory requirements under a single definition of application. The myriad benefits to both lenders and regulators are numerous, but the bright-line separation between files that are applications and those that are not is just one of the more significant. Perhaps the most significant distinction however, is the fact that a unified definition of application permits the industry to meet both the statutory obligations and the policy intentions behind the regulations.
Similar, But Different, Definitions
Looking at the definitions and policy goals behind those regulations helps illustrate how the change to the definition of application under the TRID Rule may pose challenges to lenders in complying with that rule’s requirements, while continuing to meet the policy goals of all of the regulations.
HMDA, ECOA, and TRID
The Consumer Financial Protection Bureau’s (CFPB) proposed HMDA rule states:
“As originally adopted, HMDA identifies its purposes as providing the public and public officials with information to help determine whether financial institutions are serving the housing needs of the communities in which they are located, and to assist public officials in their determination of the distribution of public sector investments in a manner designed to improve the private investment environment. Congress later expanded HMDA to, among other things, require financial institutions to report racial characteristics, gender, and income information on applicants and borrowers.13 In light of these amendments, the Board of Governors of the Federal Reserve System (Board) subsequently recognized a third HMDA purpose of identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes, which now appears with HMDA’s other purposes in Regulation C.”
Under HMDA (§1003.2(1)) Application is defined as:
“In general. Application means an oral or written request for a home purchase loan, a home improvement loan, or a refinancing that is made in accordance with procedures used by a financial institution for the type of credit requested.”
The CFPB’s Examination Manual regarding ECOA states:
“The statute provides that its purpose is to require financial institutions and other firms engaged in the extension of credit to “make credit equally available to all creditworthy customers without regard to sex or marital status.” Moreover, the statute makes it unlawful for “any creditor to discriminate against any applicant with respect to any aspect of a credit transaction… [on a prohibited basis].”
Under ECOA (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. The term application 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.”
So, to paraphrase, the public policy purposes behind HMDA and ECOA are fairly aligned in the efforts to promote fair, equal, and inclusionary housing and to track, monitor, and enforce that lenders are meeting those requirements. In addition, both regulations emphasize the importance of distinguishing between initial requests and complete applications, so that the accuracy and completeness of the information can be tracked, reported, and analyzed.
FCRA and TRID
Under the FCRA, the definition of application is important, because lenders rely on the permissible purpose to pull credit for a consumer, based on their request for an extension of credit from that lender. FRCA requires a notice of written adverse action when an application is denied, similar to the requirements under ECOA. Essentially, if a consumer is denied credit, the fact that there is something to deny is predicated on the fact that there must have been an application. Therefore, even if a lender’s definition of application hasn’t been met, if credit is denied, that means there must have been an application to deny and therefore the written notice is required. This is also similar to the logic under HMDA that requests for pre-approvals that are denied must be reported, even though pre-approvals are not typically applications, because they lack a property address.
Among the primary purposes of FCRA is to protect a consumer’s privacy and ensure the information in their credit profiles is accurate and reported truthfully. It can be said that FCRA cares less about the treatment of the consumer and more about the treatment of the consumer’s information.
In contrast however, the CFPB points out in the preamble of the TRID (page 23-24):
“With respect to RESPA’s disclosure requirements, the Act’s purpose is to provide “more effective advance disclosure to home buyers and sellers of settlement costs.” 12 U.S.C. 24 2601(b)(1). In addition to providing consumers with appropriate disclosures, the purposes of RESPA include, but are not limited to, effecting certain changes in the settlement process for residential real estate that will result in (1) the elimination of kickbacks or referral fees that Congress found to increase unnecessarily the costs of certain settlement services; and (2) a reduction in the amounts home buyers are required to place in escrow accounts established to insure the payment of real estate taxes and insurance. 12 U.S.C. 2601(b). In 1990, Congress amended RESPA by adding a new section 6 covering persons responsible for servicing mortgage loans and amending statutory provisions related to mortgage servicers’ administration of borrowers’ escrow accounts.”
And on page 27:
“15 U.S.C. 1601(a). One of the purposes of TILA is to provide meaningful disclosure of credit terms to enable consumers to compare credit terms available in the marketplace more readily and avoid the uninformed use of credit. Id. TILA’s disclosures differ depending on whether credit is an open-end (revolving) plan or a closed-end (installment) loan. TILA also contains procedural and substantive protections for consumers.”
The definition of application (§ 1026.2(a)(3)) under the TRID is simple:
“An application means the submission of a consumer’s financial information for purposes of obtaining an extension of credit. For transactions subject to § 1026.19(e), (f), or (g), an application consists of the submission of the following six pieces of information:
The consumer’s name;
The consumer’s income;
The consumer’s social security number to obtain a credit report;
The property address;
An estimate of the value of the property; and
The mortgage loan amount sought.
An application may be submitted in written or electronic format, and includes a written record of an oral application. (Comment 2(a)(3)-1)”
So, again to paraphrase, important public policy goals of RESPA and TILA are to protect consumers and encourage the informed use of credit by requiring early, accurate, and meaningful disclosures of fees and terms of credit; ensuring that fees charged are bona fide, reasonable, and permissible; and that loans are serviced appropriately and fairly.
By drafting the definition of application so specifically under the TRID, it will be nearly impossible for lenders to use the same definition of application under each of the regulations. Far more transactions will be considered applications under the TRID than under ECOA or HMDA, because the six pieces of information are insufficient to make a credit decision or report the loan accurately under HMDA. This raises a set of questions and concerns that have not so far been addressed.
What is the potential impact?
Will examiners understand and/or be concerned with the fact that the number of loans reported on a loan log under TRID will not match the number of loans listed on the HMDA loan application register (LAR)? How will examiners view a significantly higher number of transactions that are considered applications under the TRID, but have no record or documentation of the action taken or any notifications required under ECOA, as the definition of application under ECOA may not have been triggered, because the file never progressed beyond lead stage (see “prequalification” under 1003.2(b)(2))?
What stands out in this contrast is the fact that, not only do the definitions of applications under these regulations vary, but so do their public purposes. If there are transactions that are applications under TRID, but not tracked or reported, are the public policy goals under ECOA or HMDA being fulfilled? It is that contrast that makes it difficult for lenders to consistently implement procedures around these requirements using a unified approach.
Interestingly, these thoughts and concerns were considered by CFPB in the HMDA Proposed Rule, as well as in the Preamble of the TRID.
“The Bureau is not proposing other changes to the definition of application at this time.
When the Bureau’s 2011 Regulation C Restatement was published, industry trade associations asked the Bureau to align key definitions among various regulations, including the definition of application. The commenters noted the difference between the definition of application in Regulation C and Regulation X, for example. The Bureau responded to similar comments in the Bureau’s 2013 TILA-RESPA Final Rule.174 During the Small Business Review Panel process, small entity representatives also suggested that the Regulation C definition of application be aligned with the definition used in the Bureau’s 2013 TILA-RESPA Final Rule.175 As discussed in the Bureau’s 2013 TILA-RESPA Final Rule, the definition in that rule serves a different purpose from the definition in Regulation C, and the Bureau did not expand that definition to regulations that implement ECOA, FCRA, and HMDA.176 Consistent with the Bureau’s determination in the TILA-RESPA rulemaking, the Bureau is not proposing to align the Regulation C definition with the definition adopted in the Bureau’s 2013 TILA-RESPA Final Rule. While the Bureau is not proposing to make any changes to the Regulation C definition for alignment purposes at this time, the Bureau will continue to consider the comments received on this topic as it evaluates further follow up to the Bureau’s 2011 Streamlining Notice and other comments received.”
CFPB’s Proposed HMDA Rule P.55-56 also states:
“The Bureau recognizes the potential benefits of a single definition of application, including reduced regulatory burden. However, the definition of application in this final rule determines when consumers must be given disclosures that enable them to shop for and compare different loan and settlement cost options. The definition of application in this final rule serves a different purpose than the definition of application in Regulations B and C. “Application” as defined by this final rule triggers a creditor’s obligation to provide disclosures to aid consumers in shopping for and understanding the cost of credit and settlement. On the other hand, a creditor’s receipt of an application under Regulation B triggers a creditor’s duty to make a credit decision and notify the borrower within a specified time frame. Under Regulation C, receipt of an application triggers a duty to collect and report information on the disposition of that application and on other aspects of the transaction as well as the applicant’s characteristics. Accordingly, the Bureau is not expanding the definition of application adopted in this final rule to regulations that implement ECOA, FCRA, and HMDA, or vice versa.”
NMLS Proposal
Ironically, the NMLS Proposed Changes to Call Reports that was issued in October of 2014 tackles this issue by creating a definition of application so comprehensive that it would cover all of the applicable regulations, but there are problems with that definition as well. Chief among them, it does not replace the other regulatory definitions of application, but instead creates yet another version of definition of application to follow. There are also additional types of transactions that would need to be reported that are currently outside even HMDA reporting requirements, such as loans on trailers or houseboats, as they would be considered “residential property.”
“I. Definition of “application”
State regulators recognize that various definitions of “application” exist in state and federal law. These various definitions may present challenges when collecting loan origination information and comparing the different reporting requirements and interpretations of what constitutes an “application” for purposes of state, federal, and MCR purposes. This definition will be applicable to all MCR filers – Expanded and Standard. To address these issues, the MCR Working Group (Addendum A) has been working on a new, more encompassing definition summarized below:
What is an Application?
An application is an oral or written request for an extension of credit encumbering a 1-4 family residential property. Exclude any commercial/business/investment purpose encumbrances from reporting. Include inquiries or Pre-Qualification requests that result in denial of credit.
What Application date is to be used for reporting?
The date on the initial 1003 with the borrower’s signature
The date of an oral request for extension of credit, with deference to the initial1003
Inquiries and Pre-Qualification requests, if declined, should use the denial date”
Conclusion
When the regulations and compliance expectations are so varied (and also varied among regulators), it becomes an increasingly difficult challenge for lenders to effectively and consistently manage. While it took the U.S. Department of Housing and Urban Development (HUD) and the Federal Reserve Board of Governors (FRB) over 20 years to merge RESPA and TILA, they ended up leaving the job unfinished and turning it over to CFPB. CFPB took over two years before issuing their final Rule, and the home stretch of this marathon is up to us as lenders to implement. Despite these challenges, the clock is ticking, and we truly only have a few more months to figure out how we’re going to make it all come together.
To get it right, we need to be sure our policies on each of the regulations spell out the definition of application being used. We need to ensure those policies are reinforced using automation and technology solutions built into daily procedures so they are consistently applied. We need to effectively train our staff and make sure there are methods to help them retain what they’ve learned. We need to monitor and track for discrepancies and defects and find ways to take corrective action and remediate those errors. And we need to continue to work with our regulators to ensure our interpretations and implementation is in line with their expectations of compliance.
Joshua Weinberg is Senior Vice President of Compliance for First Choice Loan Services Inc., and Director of Compliance for First Choice Bank. Josh can be reached at: jweinberg@fcbmtg.com
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