Why Haven’t Loan Officers Been Told These Facts?

The Journal Responds to MLO Confusion

Recently, the Journal editor received several inquiries regarding confusion surrounding differing definitions of an application related to the ECOA and TILA. Case in point, this email from an MLO who attended a recent Loan Officer School CE class (edited for clarity).

“In the Loan Officer School 2022 CE class on 10/4, I understood that a preapproval technically DOES infer the lender has a loan application under Regulation B. So how can a lender offer preapprovals without having certain necessary elements to tell all parties that the client is qualified to obtain financing?

In the other CE class addressing Regulation Z and the appraisal definition, you said the property address is one of the six items that constitute an application. You then further stated that a preapproval is NOT a loan application under Regulation Z.

Can you please explain? Just a little confused.

Any guidance would be greatly appreciated.

Totally In Awe of Your Beneficence, Magnificence, and All Around Awesomeness”
(The Journal editor made minor edits to the MLO’s closing.)

Missing the Forest For the Trees

The MLO certainly has excellent judgment in CE providers and instructors. However, she missed the boat on the purpose of these exacting definitions and intended protections. Regulations B and Z define the term “application” differently and for differing purposes. It’s easy to miss the forest for the trees when analyzing the granular components of the laws apart from the whole intent.

The TILA and ECOA are similar in that both pertain to credit administration. However, the objectives of the statutes differ completely. These laws greatly differ in focus.

The TILA centers on reducing the uninformed or inappropriate use of credit. The TILA’s implementing Regulation Z mitigates instances of borrowers getting into financing they don’t understand or is unsuitable for their needs. On the other hand, the ECOA is a fair lending law. The ECOA’s implementing Regulation B describes unlawful credit discrimination and provides for required practices to ensure equal access to credit opportunities for business and consumer lending. The TILA applies exclusively to consumer credit.

The overarching justification for the TILA is stated in the Congressional purpose statement when enacting the legislation.

(TILA) 15 USC 1601(a) Congressional findings and declaration of purpose.

“The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.

Now compare that with the Congressional scope statement from the ECOA.

(ECOA) 15 USC §1691(a) Scope of prohibition. Activities constituting discrimination.

“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract) or because all or part of the applicant’s income derives from any public assistance program; or because the applicant has, in good faith exercised any right under this chapter.”

The Regulation Z definition of an application includes identified property, but Regulation B may not. Hence under Regulation B Notice requirements, preapprovals may be applications. Under Regulation Z, preapprovals are not an application.

Regulation Z implements the TILA and describes the application for early disclosure purposes, including financial disclosures (e.g., the Loan Estimate). Regulation Z requires the lender to provide timely financial disclosure when a consumer is at greater risk of making an uninformed use of credit. The consumer’s misuse of credit includes a failure to comprehend:

  • The cost of the credit
  • The credit risks (e.g., risky features such as balloon payments, negative amortization, or prepayment penalties)
  • The competitiveness of the credit offered

Regulation B implements the ECOA and describes the term application to mitigate the risks of unlawful discriminatory treatment or effects. For example, an identified property is unnecessary for a lender to discriminate against a person on a prohibited basis. Whereas under Regulation Z, the lawmaking considered that a consumer is at greater risk of the uninformed or inappropriate use of mortgage credit when a property is identified (no property, no consummation, no harm).

“12 CFR §1026.2(a)(3) – This Regulation Z definition applies to a closed-end consumer credit transaction secured by real property or a cooperative unit other than a reverse mortgage. An application consists of the submission of 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.”

Here is what Regulation B and the Official Commentary state about application and notice requirements. Note that the identification of property is not a requirement in meeting the definition of an application.

12 CFR §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.

“Comment 2(f)-2,3 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.”

“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. 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.

12 CFR §1002.2 Comment 2(f)-3,5 When an inquiry or prequalification request becomes an application.

“Examples of an application. An application for credit includes the following situations: A person asks a financial institution to “preapprove” her for a loan (for example, to finance a house she plans to buy) and the institution reviews the request under a program in which the institution, after a comprehensive analysis of her creditworthiness, issues a written commitment valid for a designated period of time to extend a loan up to a specified amount.”

MLOs can lose sight of the law’s intent when over-analyzing the regulation’s granular requirements before comprehending the law’s whole objective. For example, the Regulation B notice requirements are not for the benefit of sellers, listing agents, and builders. Instead, Congress requires the Notice (lender feedback and communication) to be used to promote the nondiscriminatory administration of credit. And in the case of adverse action, the Notice provides valuable information to applicants on specific credit obstacles.

Additionally, the law requires lenders to memorialize applications in writing. Suppose the lender is unaware of the existence of an application. In such cases, consistent compliance and fair lending are improbable.

Furthermore, the lender may have unqualified MLOs making adverse credit decisions when the answer should be yes. As a result, in addition to possible fair lending violations, the lender is giving away business because an MLO may not want the perceived hassle of putting the deal together. Or, as is often the case, the MLO fails to leverage the appropriate credit solution.

From the Legislative History of the Equal Credit Opportunity Act Amendments of 1976

The requirement that creditors give reasons for adverse action is a strong and necessary adjunct to the antidiscrimination purpose of the legislation, for only if creditors know they must explain their decisions will they effectively be discouraged from discriminatory practices. Rejected credit applicants will now be able to learn where and how their credit status is deficient and this information should have a pervasive and valuable educational benefit. Instead of being told only that they do not meet a particular creditor’s standards, consumers particularly should benefit from knowing, for example, that the reason for the denial is their short residence in the area, or their recent change of employment, or their already over-extended financial situation.

Notice Requirements

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

Keep in mind that a credit decision does not require an underwriter. For many lenders, a credit decision includes relatively informal exchanges. For example, suppose an MLO informs an individual, based on information the MLO has evaluated about that individual, that the lender cannot help them. More likely than not, the MLO renders a credit decision, and such evaluations follow a credit application. Your preapprovals might be credit decisions too.

And don’t forget the record requirements. If someone complains about a negative credit decision, there will be a demand for records (a loan application must be in writing). The recording of applications can be electronic or hardcopy.

12 CFR §1002.12 Record retention.

Preservation of records —(1) Applications. For 25 months after the date that a creditor notifies an applicant of action taken on an application or of incompleteness, the creditor shall retain in original form or a copy thereof:

(i) Any application that it receives, any information required to be obtained concerning characteristics of the applicant to monitor compliance with the Act and this part or other similar law

(ii) A copy of the following documents if furnished to the applicant in written form (or, if furnished orally, any notation or memorandum made by the creditor):

(A) The notification of action taken; and

(B) The statement of specific reasons for adverse action; and

(iii) Any written statement submitted by the applicant alleging a violation of the Act or this part.

Hope that clears things up for you!



Mortgage Borrowers Can Challenge Inaccurate Appraisals Through the Reconsideration of Value Process

FROM THE CFPB By Patrice Alexander Ficklin, Makalia Griffith, and Tim Lambert – OCT 06, 2022

Accurate appraisals are essential to the integrity of mortgage lending. Overvaluation can decrease affordability, make it harder to sell a home or refinance, and increase the risk of foreclosure. Undervaluation can prevent a homeowner from accessing accumulated equity, whether through sale or a home equity loan. Both over- and under-valuation keep individuals, families, and neighborhoods from building wealth through homeownership.

Homebuyers and homeowners can ask for a lender to reconsider a home valuation the consumer believes to be inaccurate. This process is often referred to as a “reconsideration of value” or “ROV.” Borrowers can point out, for example, factual or other errors or omissions, inadequate comparable properties, or provide evidence that the appraisal was influenced by prohibited bias.

Responsible lenders focused on serving their customers typically will provide borrowers with clear, actionable information about how to raise concerns about the accuracy of an appraisal. A lender’s reconsideration of value process must ensure that all borrowers have an opportunity to explain why they believe that a valuation is inaccurate and the benefit of a reconsideration to determine whether an adjustment is appropriate. While an individual lender’s reconsideration of valuation process may vary, lenders must make sure that their reconsideration of value process is nondiscriminatory and available and accessible to all.

Some lenders include information about how to request a reconsideration of value in the copies of appraisals and other home valuations required under the Equal Credit Opportunity Act Valuations Rule. Other lenders may provide information about the reconsideration of value process and a borrower’s ability to provide relevant information before an appraisal is conducted. When lenders provide borrowers with clear, plain-language notice of reconsideration of value opportunities, lenders help ensure that their reconsideration of value process is nondiscriminatory. Lenders that fail to have a clear and consistent method to ensure that borrowers can seek a reconsideration of value risk violating federal law.

Ensuring that homebuyers and homeowners can challenge inaccurate appraisals is one of many efforts that the CFPB and other federal agencies are working on to ensure fair and accurate appraisals. The CFPB has already taken the first step to implement legal requirements to limit bias in algorithmic appraisals. Regulators are also working to provide more oversight over the activities of the Appraisal Foundation, which wields enormous power over the appraisal industry. Learn more about the work of the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE)


Q1. What is PAVE and why was the Task Force formed?

On June 1, 2021, the centennial of the Tulsa Race Massacre, President Biden announced the creation of an interagency initiative to combat bias in home valuations. President Biden directed the PAVE Task Force to (i) evaluate the causes, extent, and consequences of appraisal bias, and (ii) establish a transformative set of recommendations to root out racial and ethnic bias in home valuations.
PAVE is a first-of-its-kind interagency task force dedicated to ending discrimination in home valuations. The task force includes 13 federal agencies and offices and is chaired by Director of the Domestic Policy Council Ambassador Susan E. Rice and the U.S. Housing and Urban Development Secretary Marcia L. Fudge.

Q2. Why is the Task Force focused on home appraisals?

One of the main reasons that the Task Force is focused on home appraisals is because of how appraisals can impact the homeownership and wealth gaps. An appraisal is an important part of the homebuying process, as it establishes the value of the property for a home loan. Simply stated, fair and accurate appraisals directly impact national homeownership rates. More than 50 years since the Fair Housing Act’s passage, the racial homeownership gap is wider than ever: in 2021, the Black homeownership rate reached only 44 percent, while the white homeownership rate reached 74 percent.

The Task Force believes that if the Federal Government advances equity in the appraisal process, it can also make substantial progress toward closing the racial homeownership and wealth gap.

Q3. How does the work of the Task Force affect me as a consumer?

The Task Force is focused on combatting racial and ethnic bias that can cause a low valuation during the homebuying or refinance process. During the homebuying process, a low valuation can cause the sale to fall through. This may harm both the buyer and the seller, as the buyer is unable to become a homeowner, and the seller is unable to realize potential gains from the sale A low valuation in a refinance transaction can result in the lender making credit-risk related price adjustments that lead to higher interest rates for the borrower. In some cases, it can result in the borrower not being eligible for the refinance. In the common case where borrowers are seeking to access some of their realized home equity wealth via a cash out refinance, a low valuation can reduce the amount of wealth available to the borrower.

Both occurrences can impact property values and the accumulated wealth of homeowners in that community. Ultimately, this can inhibit how families in that community leverage equity to pay for college, pay for repairs, or provide a buffer during financial hardship. Reduced property values can also diminish the property tax revenue that funds the maintenance and improvement of community schools and amenities.

Q4. What is the PAVE Action Plan?

The Action Plan is a document that outlines clear actions that federal agencies will take to root out appraisal bias. The Action Plan is part of an ongoing commitment from the Federal Government to expand homeownership rates for families and communities of color. This commitment will continue to be informed by data, members of industry, advocacy, fair housing, and academic organizations, and by the stories of all Americans who dream of homeownership.

Q5. What are some of the successes of PAVE to date?

The Task Force has made significant progress since its first meeting in August 2021. For example, the Appraisal Subcommittee (ASC) launched an independent review of the Uniform Standards of Professional Appraisal Practice (USPAP) and the qualification criteria for the appraiser industry to understand potential barriers to entry for underrepresented communities. Additionally, in November of 2021, FHA issued a Mortgagee Letter to clarify nondiscrimination requirements applicable to appraisers and lenders. The Action Plan includes a full list of successes to date.

For more information on the evolving federal response to appraisal discrimination:


CFPB Appraisal Discrimination


Tip of the Week – Avoid Any Appearance of Mortgage Fraud or Pretending to be a Superior Court Judge

A Fraud Case Home Run

Mortgage Loan Officer Charged With Bank Fraud and Aggravated Identity Theft

This case falls under the “you can’t make this stuff up” and “one for the ages” category, but I guess you can make this stuff up. Allegedly. No ordinary fraud for this MLO. Forget about fake W2s or pay stubs. That is so 20th Century.

Instead, this inventive MLO allegedly created fake child support orders and faked the signatures of sitting Florida judges! Wait until she meets a real judge. Oh, sh**! LOL

The complainant allegedly fabricated divorces and awarded child support payments to applicants with no children and no marriages! What a waste of imagination and talent.

Come on! We have enough real marital strife in the world without MLOs fabricating divorces over a two-bedroom condo in Pompano Beach!

Uh-oh, look out. Here comes the real Judge, and she’s none too happy.

Who knows, if convicted, the accused might have a second act as a jailhouse lawyer. Here comes Judge Shackles! LOL!

Orlando, FL

United States Attorney Roger B. Handberg announces the return of an indictment charging (REDACTED) with four counts of bank fraud and four counts of aggravated identity theft. If convicted, she faces up to 30 years in federal prison on each bank fraud count and a mandatory consecutive 2 years’ imprisonment on the aggravated identity theft counts.

The indictment also notifies (REDACTED) that the United States is seeking an order of forfeiture in the amount of $130,000, representing the proceeds of the charged criminal conduct.

According to the indictment, (REDACTED), in her capacity as a licensed mortgage loan officer, created and executed a mortgage fraud scheme targeting the financial institution where she worked. To ensure that otherwise unqualified borrowers were approved for mortgage loans, (REDACTED) falsified the borrower’s income through completely fabricated or inflated monthly child support payments on mortgage loan applications that she signed and certified to the financial institution’s underwriting department.

In furtherance of her scheme, (REDACTED) created fictitious Final Judgments of Dissolution of Marriage showing the borrowers were entitled to receive non-existent monthly child support payments. (REDACTED) then used the names of Judges from the Circuit Court of the Ninth District of Florida and forged their signatures on the fabricated Final Judgments of Dissolution of Marriage. (REDACTED) then created bogus Florida Department of Revenue Statements showing the party purportedly paying monthly child support payments to the borrowers and manufactured phony prepaid debit card statements showing the borrowers purportedly withdrawing the non-existent monthly child support payments.

In most cases, the borrowers did not have the children listed or had never been married. (REDACTED) submitted bogus paperwork to the financial institution to support the false monthly income on the loan applications. Based on (REDACTED) misrepresentations, the financial institution approved and funded the mortgage loans.

An indictment is merely a formal charge that a defendant has committed one or more violations of federal criminal law, and every defendant is presumed innocent unless, and until, proven guilty.

This case was investigated by the Federal Housing Finance Agency – Office of Inspector General, U.S. Department of Housing and Urban Development – Office of Inspector General and the Florida Office of Financial Regulation. It will be prosecuted by Special Assistant United States Attorney Chris Poor.