MLO Mentor is an ongoing series covering compliance best practices for mortgage loan originators (MLOs). This article discusses the notification rules and disclosures required under the Equal Credit Opportunity Act (ECOA).

Notification rules

All notifications required under the ECOA are to be provided to the primary applicant. [12 CFR §1002.9(f)]

Applications and applicants

The ECOA defines an application as an oral or written request for an extension of credit. Preapprovals and inquiries may also be considered applications, depending on the lender’s conduct. If a lender evaluates information about the applicant and declines a request for more information, then the preapproval or inquiry may be considered an application which triggers a notice of action taken. [12 CFR §1002.2(f); Official Interpretations of 12 CFR §1002.2(f)-3]

A completed application is an application which contains all the information regularly required to make a credit decision for the loan the applicant is seeking. [12 CFR §1002.2(f)]

An example of an inquiry which is not an application is when a consumer asks about terms for a home purchase loan, and provides their income and intended down payment, but the loan officer only explains the lender’s loan-to-value ratio without making a decision on whether the applicant qualifies for the loan. [Official Interpretations of 12 CFR §1002.2(f)-4]

Notice of action taken

When an application is made on behalf of an applicant to more than one lender and the applicant expressly accepts a loan offered by one of the lenders, notification of action taken by any of the other lenders is not required. If a loan is not offered or the applicant does not expressly accept one of the loans offered, each lender taking adverse action must comply with this section, directly or through a third party. A notice given by a third party must disclose the identity of each lender on whose behalf the notice is given. [12 CFR §1002.9(g)]

Now, a lender would not necessarily know that another lender’s loan offer had been accepted. In such cases, it’s better to be safe than sorry. In other words: when in doubt, disclose!

Lenders who received fewer than 150 applications during the preceding calendar year can give oral, rather than written notifications. [12 CFR §1002.9(d)]

Incomplete applications

Within 30 days after receipt of an incomplete application, a lender must provide to the applicant either:

  • a notice of action taken [12 CFR §1002.9(a)(1)(ii)]; or
  • a notice of incompleteness. [12 CFR §1002.9(c)(2)]

A written notice of incompleteness is required to:

  • include a list of information needed to complete the application;
  • designate a reasonable period of time for the applicant to provide the information; and
  • contain a statement informing the applicant that failure to provide the information requested will result in no further consideration being given to the application. [12 CFR §1002.9(c)(2)]

If the applicant fails to respond to the notice of incompleteness within the designated time period, the lender has fulfilled its duties under ECOA.

If the applicant supplies the requested information within the designated time period, the lender must then follow ECOA rules for completed loan applications. [12 CFR §1002.9(c)(2)]

A lender may orally notify the applicant of the information needed to complete the application. However, if the application remains incomplete after an oral notification, the lender must then send either a written notice of action taken or a written notice of incompleteness. [12 CFR §1002.9(c)(3)]

Withdrawn loan applications

Applications withdrawn by the applicant do not require a notice. If a lender approves an application, and the applicant has not inquired about or otherwise acted on the application within 30 days after the application, the application is considered withdrawn. [12 CFR §1002.9(e)]

Completed loan applications

After the lender’s receipt of a completed loan application, the lender has 30 days to:

  • notify the applicant the loan is approved;
  • notify the applicant the loan is denied with the notice of action taken; or
  • counteroffer the applicant’s loan request. [12 CFR §1002.9(a)(1)(i)]

If the applicant is notified of a counteroffer and does not respond, the lender must provide the notice of action taken within 90 days of the counteroffer. [12 CFR §1002.9(a)(1)(iv)]

A notice of action taken must be in writing and contain:

  • a statement of the action taken;
  • the name and address of the lender or loan originator;
  • a statement identifying the purposes of the ECOA; and
  • the name and address of the federal agency in charge of the lender or loan originator’s compliance with the ECOA. [12 CFR §1002.9(a)(2)]

This statement identifying the purposes of the ECOA must be substantially similar to this:

“The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); 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 the Consumer Credit Protection Act. The Federal agency that administers compliance with this law concerning this creditor is [name and address as specified by the appropriate agency or agencies listed in appendix A of this part].” [12 CFR §1002.9(b)]

Additionally, the notice of action taken must contain:

  • a statement of the specific reasons for the action taken; OR
  • a notice stating:
    • that within 60 days of the lender’s notification, the applicant may request a statement listing the reasons for denial and the lender must deliver the statement within 30 days of the applicant’s request; and
    • the name, address and telephone number of the person from whom the statement of reasons can be obtained. [15 USC §1691(d)(2)]

If the lender or loan originator chooses to provide the specific reasons orally, they are also to disclose the applicant’s right to have them confirmed in writing within 30 days of receiving the applicant’s written request for confirmation. [12 CFR § 1002.9(a)(2)]

If the lender or loan originator chooses to provide the specific reasons orally, they are also to disclose the applicant’s right to have them confirmed in writing within 30 days of receiving the applicant’s written request for confirmation. [12 CFR § 1002.9(a)(2)]

The statement of specific reasons cannot be a boilerplate statement that the applicant did not meet the lender’s internal standards. As its name implies, the reasons must be specific to the application, rather than generic. [12 CFR §1002.9(b)(2)]

Next week, we’ll discuss record retention and discrimination rules under ECOA.

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