I. INTRODUCTION
Under Regulation B, an issue often arises as to when a potential customer’s inquiry directed to or conversation with a bank employee becomes an oral application. The regulation and its application rules apply to consumer, business and agricultural credit.
Example: An individual telephones the bank and speaks with a bank employee regarding the possibility of financing the potential purchase of a used car. The caller explains that he probably will be asking for a loan amount of between $10,000 and $12,000 and that he saw an advertisement by the bank promoting a low interest loan rate. The bank employee acknowledges the ad, explaining that the promotion involves a home equity loan. The caller then states that he and his wife recently purchased a new home for $107,000 and that the loan balance is approximately $96,000. In response, the bank employee explains that the bank will lend up to 80% of a home’s equity, and since the inquirer does not yet have sufficient equity, he will not qualify for the loan.
Issue: Will the above telephone conversation be enough to trigger Regulation B’s rules on oral credit applications?
Discussion: Yes. In reviewing the Regulation B definition of “application,” the bank employee’s response amounted to a “judgment” or “conclusion,” based on an evaluation of information provided by the individual in relation to a loan product being offered by the bank. The bank employee, based on the information given by the inquirer, made a credit decision and denied the oral “application.” In the example above, even if the bank employee was not authorized to grant or deny any loan application, the bank is required, under Regulation B, to send an adverse action notice to the individual.
II. ESTABLISHED PROCEDURES
Some bankers might believe that the example given above does not really affect their bank because their written Loan Policies and Procedures provide that only “written” applications for credit will be considered. The Staff Commentary to Regulation B notes that although a lender has the latitude to establish its own application process, a lender’s procedures are established by both its written policies and procedures and its practice. Therefore, even though a bank’s written policies and procedures only recognize written loan applications, a practice to make credit decisions based on oral applications amounts to “established procedures” recognizing oral, as well as written, applications. The Staff Commentary [Paragraph 2(f)(2.)] states that “established 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 established procedures are to accept both oral and written applications.
If oral applications become part of a bank’s established procedure, several regulatory requirements are likely to be triggered. Notice of adverse action was noted previously. If a purchase or refinance of a principal residential dwelling is involved, an oral application must be reduced to writing and government monitoring information be collected in compliance with Regulation B. The bank and the oral application may be subject to the Home Mortgage Disclosure Act (Regulation C) and Loan/Application Register data would have to be collected and reported.
III. CREDIT APPLICATIONS
The term “application” is defined in § 202.2(f) of Regulation B to mean:
an oral or written request for an extension of credit that is made in accordance with procedures established by a creditor for the type of credit requested. The term 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.
The Staff Commentary [Paragraph 2(f)(3.)] elaborates:
A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor alsoevaluates information about the applicant, decides to decline the request, and communicates this to the applicant, the creditor has treated the inquiry as an application and must then comply with the notification requirements under § 202.9 [adverse action]. Whether the inquiry becomes an application depends on how the creditor responds to the applicant, not on what the applicant says or asks. (Emphasis supplied.)
Providing information to potential customers about loan terms or simply talking to a person about facts (e.g., explaining loan products, loan programs and underwriting standards to a potential customer; stating or restating information provided by the potential customer) is regarded as a credit inquiry and not an application. Once a bank representative goes beyond giving information or stating facts and engages in evaluating information, making a judgment and communicating a conclusion to a potential customer, the inquiry becomes an application. Since this may involve some “gray area,” the conservative approach to compliance should treat any inquiry in doubt as an application. Examples of inquiries that are not treated as applications may be found in Paragraph 2(f)(4) of the Staff Commentary.