Adverse Actions- Time is NOT on your side!   

One the most prominent parts of the Equal Credit Opportunity Act is section 202.9 AKA the notifications section.   It is this section that requires that within 30 days of receiving a completed application, a bank will send notice of action taken.  Put in other terms, a bank has 30 days from the time they receive enough information to make a credit decision to tell an applicant that their loan is being declined.  Of course a Bank can make a counter offer rather than an outright decline, but the time limitation is the same.  

On phenomenon that we are seeing is a tendency for banks to draw out this equation.  Reg. B allows a bank to go beyond the 30 day limitation if there is ongoing contact with the borrower.  For example, in the case where a borrower is missing financial information, the Bank can notify the borrower and ask for the missing information.  While the Bank is waiting for the customer to respond the 30 day clock stops ticking.  And while this provision of the regulation can be used to the advantage of both the borrower and the bank, there are potential concerns with extending the application process.  

Keeping the Home Fires Burning

For commercial lending in particular, it is often the case that a deal develops slowly.  A potential borrower may be unsure of what she actually wants or needs in terms of a financial product for her business.   In the meantime, the ever vigilant commercial loan or business development officer doesn’t want to lose the client to another institution be appearing to be uninterested.   The result is that an “application” that is not truly an application will be taken by a bank.  Minimal information is often taken to open a file, but as time goes on, the loan officer will make a series of requests for information to stop the 30 day clock from running out and to keep the prospect active.  Using this process a bank could theoretically keep a loan application open in perpetuity and not violate Reg. B.  

When is an application an application? 

One of the ongoing questions that vex banks and financial institutions about Reg. B is “when is an application a complete application for purposes of the regulation?” Our advice on this question is that once there is enough information to say “no” the application is complete!  For example, after a credit report on a business is run and the report shows an unacceptable record, you know enough to make a credit decision.  This is not to say that an optimistic loan officer may not attempt to work around poor or questionable credit.  It simply means that she has to do so expeditiously!   Unfortunately, what happens in many situations we see is that the officer continues to ask for additional information from the customer, stops the 30 day clock and eventually- 90 days later- sends an adverse action based upon the poor credit report.   The truth is that the bank could and should have closed the account and sent the notification much earlier. 

 The compliance concern with keeping an application open

So what’s the big deal? Is there really a problem or concern with keep loan applications open for time period longer than 30 days?  In a word, YES!   There are several concerns with this practice.  The two largest concerns center on fair lending.  

First, leaving accounts open and eventually denying the application or allowing the applicant to withdraw after a long period of time, can give the impression of discouragement.  Consider a situation where a loan officer is attempting to work with a group of borrowers form a traditionally underserved community.  In an attempt to accommodate unsophisticated borrowers, the officer makes a habit of keep applications open and requesting information on a step by step basis.  As a result of this practice about 25% of the applicants withdraw their loans after 45 days.  Moreover, another 40% of the applicants are denied, after an average wait of 60 days.   In this case, the bank’s regulators can (and did!) make the argument that the bank was in the practice of discouraging borrowers in protected classes.  The regulators’ concerns were heightened when they compared the average time for completion of loan applications for persons in non-protected classes, which was 20 days.   In this particular case, even though the motive was a good one, the outcome was very negative.     

The potential for complaints from the borrower that lead investigations from regulatory agencies is also a concern.  Consider an applicant that receives a notice of adverse action after 60 days; the reason for the denial is “lack of credit history”.  If the applicant is bank savvy they will realize that the credit report is part of the very early stages of processing an applicant. They will know that the bank had this reason for denial within days of the initial application.  We have seen complaints to regulators based upon the idea that the Bank was “stringing me along”.  These are the sort of complaints that can also lead to fair lending investigations and orders from the regulator to do a file search!   

The longer a file stays open, the greater the likelihood that it can be overlooked.  We have seen several cases when a file has been kept open for additional financial information and for various reasons; the loan officer overlooks that file.  In one extreme case, a file was open for an entire year with ne resolution due a re –assignment of officers!  

For compliance purposes, it is always better to bring an application to its conclusion as soon as possible.  If the bank will be unable to loan to the applicant, then that idea should be communicated at the first possible chance.   

Some suggestions for balance

So how do you balance the desire to keep a client relationship open with the need to protect the bank from compliance issues?  A best practice is to give the borrower a specific number of days to respond to the request for information.  Language in the communication requesting information should indicate to the customer that if the information is not received by the stated date, the Bank will consider the matter closed.  

Further, it is more effective to have a member of compliance staff review the files that have information requests and to work with loan officers to determine whether the requested information will truly enhance the possibility of an applicant to be completed successfully.  Working together, compliance and business development can effectively balance the interests of both departments.