Why Haven’t Loan Officers Been Told These Facts? Application Confusion

Achieving adequate consumer disclosure and complying with federal law centers on three key principles, much like how a stool stands on three legs. If any one of these legs is missing or shorter than the others, the stool will not function properly. The same applies to effective and compliant consumer disclosure.

Regulations Z, B, and V are examples of regulations that depend on these three principles for effective consumer disclosure and required compliance, as detailed in various consumer protection statutes and regulations.

The three principles of effective disclosure are based on:

  • Accuracy
  • Clarity or Comprehensibility
  • Timing

Every regulation has specific requirements regarding timing, content, and accuracy standards. One challenge that lenders face in meeting these regulatory timing requirements is that, although the regulations often use similar terminology, they define key triggering events in different ways. For example, the term “application” serves as a common trigger for disclosures. However, the definition of “application” varies significantly across several regulations that govern these disclosure requirements. If a covered person does not apply the correct application definition, the lender may fail to meet the timing requirements.

Application Defined

The definition of an application under each regulation primarily focuses on addressing various consumer risks. For instance, the risk addressed by Regulation Z is the protection against unwise or uninformed credit decisions. Consequently, Regulation Z includes identified property as one of the six essential components of an application. Without an identified property, there is no risk of making a poor mortgage choice; no property means no mortgage obligation.

In contrast, Regulations B and C deal with unlawful discrimination. Credit consumers may encounter the risk of unlawful discrimination even before any property is identified. Lenders have faced penalties for violations of Regulation B, even in situations where no application has been submitted.

Neither the Fair Credit Reporting Act (FCRA) nor its implementing Regulation V defines an application or adverse action for purposes of consumer disclosure. However, the CFPB has concluded that if an adverse action occurs under Regulation B, an adverse action has occurred for purposes of Regulation V. Obviously, an adverse action cannot happen without a credit application.

FCRA Adverse Action

“With regard to credit transactions, the term “adverse action” has the same meaning as used in Section 701(d)(6) [15 U.S.C. 1691(d)(6)] of the Equal Credit Opportunity Act (ECOA), Regulation B, and the official staff commentary. Under the ECOA, it means a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the same amount or on terms substantially similar to those requested. Under the ECOA, the term does not include a refusal to extend additional credit under an existing credit arrangement where the applicant is delinquent or otherwise in default, or where such additional credit would exceed a previously established credit limit.” – CFPB Compliance Manual V.2

The Truth in Lending Act (TILA) and the Fair Credit Reporting Act (FCRA) apply only to consumer loans, whereas Regulation B applies to both consumer and business purpose loans. Regulation B applies to consumer and business credit.

Regulation B 12 CFR § 1003.2(b)

(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.

Comment 2(f)-2. Procedures used. The term “procedures” refers to the actual practices followed by a creditor for making credit decisions as well as its stated application procedures. For example, if a creditor’s stated policy is to require all applications to be in writing on the creditor’s application form, but the creditor also makes credit decisions based on oral requests, the creditor’s procedures are to accept both oral and written applications.

Comment 2(f)-3. When an inquiry or prequalification request becomes an application. 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 under § 1002.9. 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. (See comment 9-5 for further discussion of prequalification requests; see comment 2(f)-5 for a discussion of preapproval requests.)

Comment 9(_)-5. Prequalification requests. Whether a creditor must provide a notice of action taken for a prequalification request depends on the creditor’s response to the request, as discussed in comment 2(f)-3. 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 of § 1002.9 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.

As is evident from Regulation B, the term application differs significantly from that of Regulation Z.

Note how slightly the application definition differs from Regulation B and C (HMDA).

Regulation C 12 CFR § 1003.2(b) Comment 2(b)-1

Regulations B and C are similar in describing when an application occurs, with a notable difference. Under Regulation B, prequalifications that merit an adverse action are applications. This is not the case for HMDA reporting requirements.

1. Consistency with Regulation B. Bureau interpretations that appear in the official commentary to Regulation B (Equal Credit Opportunity Act, 12 CFR part 1002, Supplement I) are generally applicable to the definition of application under Regulation C. However, under Regulation C the definition of an application does not include prequalification requests.

2. Prequalification. A prequalification request is a request by a prospective loan applicant (other than a request for preapproval) for a preliminary determination on whether the prospective loan applicant would likely qualify for credit under an institution’s standards, or for a determination on the amount of credit for which the prospective applicant would likely qualify. Some institutions evaluate prequalification requests through a procedure that is separate from the institution’s normal loan application process; others use the same process. In either case, Regulation C does not require an institution to report prequalification requests on the loan/application register, even though these requests may constitute applications under Regulation B for purposes of adverse action notices.

Regulation B Timing Requirements

The importance of these definitions is significant for the persons they apply to. There are several Regulation B disclosures triggered when an application occurs. Remember, that is the Regulation B definition of an application.

1) Notice of Action

Regulation B 1002.9(a)(1) When notification is required. A creditor shall notify an applicant of action taken within:
(i) 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer to, or adverse action on the application;

2) Right to the Appraisal

Regulation B 12 CFR§ 1002.14(a)(2) Disclosure. For applications subject to paragraph (a)(1) of this section, a creditor shall mail or deliver to an applicant, not later than the third business day after the creditor receives an application for credit that is to be secured by a first lien on a dwelling, a notice in writing of the applicant’s right to receive a copy of all written appraisals developed in connection with the application. In the case of an application for credit that is not to be secured by a first lien on a dwelling at the time of application, if the creditor later determines the credit will be secured by a first lien on a dwelling, the creditor shall mail or deliver the same notice in writing not later than the third business day after the creditor determines that the loan is to be secured by a first lien on a dwelling.

3) Disclosure About Certain Income

Regulation B 12 CFR § 1002.5(d)(2) Disclosure about income from alimony, child support, or separate maintenance. A creditor shall not inquire whether income stated in an application is derived from alimony, child support, or separate maintenance payments unless the creditor discloses to the applicant that such income need not be revealed if the applicant does not want the creditor to consider it in determining the applicant’s creditworthiness.

 

 

BEHIND THE SCENES: Politicians Jockey for Mortgage Legislative Attention

21st Century Mortgage Act of 2025

In one of the many bills introduced this year to address the housing crisis, Wyoming Senator Cynthia Lummis has echoed the call by FHFA Director Bill Pulte to implement a new crypto-underwriting approach for Government-Sponsored Enterprises (GSEs). This new framework aims to develop credit policies that will take cryptocurrency into account during the underwriting process.

The Senator’s goal is to amend the GSE charters that serve as the framework for credit policy by allowing the GSEs to consider crypto reserves without having to liquidate the reserves into acceptable currency. The Bill only mentions crypto-reserves and does not outline any changes for down payment or other cash to close requirements.

(B) DIGITAL ASSETS AS RESERVES

“The corporation [FNMA/FHLMC] shall, in assessing the risk of a single-family mortgage loan, permit the holdings of a borrower in a digital asset, evidenced and maintained pursuant to a qualified custodial arrangement, to be included in the reserves of a borrower without conversion of the digital asset to United States dollars.”

Senator Lummis’ Announcement

Washington, D.C. – U.S. Senator Cynthia Lummis (R-WY) today introduced the 21stCentury Mortgage Act to bring America’s mortgage system into the digital age by requiring government-sponsored enterprises to consider digital assets when assessing single-family mortgage eligibility. This legislation would codify U.S. Federal Housing Finance Agency Director William Pulte’s directive to “consider cryptocurrency as an asset for single-family loans delivered to Fannie Mae and Freddie Mac.”

“The American dream of homeownership is not a reality for many young people,” said Lummis. “This legislation embraces an innovative path to wealth-building keeping in mind the growing number of young Americans who possess digital assets. We’re living in a digital age, and rather than punishing innovation, government agencies must evolve to meet the needs of a modern, forward-thinking generation.”

The legislation would direct the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) to include digital assets recorded on a cryptographically-secured distributed ledger as part of their mortgage risk assessments for single-family home loans. This bill would prohibit forcing the conversion of these assets into dollars, respecting the nature of digital wealth.

Background:
Young Americans face an unprecedented homeownership crisis. According to U.S. Census Bureau data, homeownership for Americans under 35 is 36.6% in the first quarter of 2025, reaching historically low levels since the Housing Vacancy Survey began tracking homeownership by age in 1982.

Simultaneously, this same demographic has embraced digital assets as their primary wealth-building strategy. The 2025 State of the Crypto Holders Report reveals that 21% of U.S. adults now own cryptocurrency, with 67% of crypto owners under age 45.

One Hitch

To qualify as reserves, the Bill requires that an acceptable custodian subject to U.S. laws hold the crypto assets. No problem!

From the Bill “The term ‘qualified custodial arrangement means (i) custody of a digital asset by a third-party custodian who is chartered, licensed, or otherwise regulated under Federal or State law and is subject to the jurisdiction of the courts of the United States; or ‘‘(ii) a multi-party custodial arrangement in which a controlling quorum of any private key, account, or other control component sufficient to authorize a transfer of the digital asset is held by custodians described in clause (i), and the arrangement is subject to an enforceable governing agreement under the laws of the United States.”

Imagine updates from your lender. Here are this week’s additions to approved cryptocurrencies!

GarliCoin
Pepemon Pepeballs
PooCoin
PotCoin
CatCoin
ToiletCoin
CounterfitCoin
BunnyCoin
DirtyCoin
LaundryCoin
FountainCoin

 

 

Tip of the Week – Sign Up for 2025 CE

Expanding your product offerings is an effective way to enhance your business’s vitality. This year, the Loan Officer School is surveying non-government financing options for construction and renovation projects.

The shortage of affordable housing is unlikely to be resolved anytime soon. As affordable, move-in-ready housing solutions remain hard to find, the demand for construction and renovation loans is expected to increase. According to the JCHS, Harvard University, the US remodeling market soared above $600 billion in the wake of the pandemic and, despite recent softening, remains 50 percent above pre-pandemic levels.

Discover how to enhance borrower advantages through construction and renovation financing.

  • Enhanced housing affordability.
  • Housing options for aging or disabled borrowers.
  • Housing solutions for borrowers caring for aging or disabled family members.
  • Multi-generational housing solutions.

For any questions or inquiries regarding state education needs, please feel free to call.

Call Us Today! (866) 314-7586
Sign up for a 2025 CE Webinar

Online self-study classes are available.

Sign up for 2025 Online self-study CE