If a customer applies for a loan at our bank but does not qualify for any of the loan products we offer, we may refer the customer to a separate mortgage provider (not affiliated with our bank) that offers certain products that we do not, such as VA and FHA loans. When this occurs, should we send the customer a counteroffer or an adverse action notice? Also, should we include these applications on our Home Mortgage Disclosure Act loan application register (HMDA LAR)?

If your bank receives a completed loan application and makes a determination that the applicant does not qualify for any of the loan products your bank offers, you should send the applicant an adverse action notice. Additionally, if your bank is a HMDA reporter, you should report the application on the HMDA LAR, provided the application was for a “covered loan” not subject to any reporting exclusions.

Under Regulation B, a refusal to grant credit to an applicant in substantially the amount or on substantially the terms requested is an adverse action. A counteroffer occurs when a lender makes an offer to grant credit in a different amount or on other terms than those requested. A referral to a separate mortgage provider that may be able to grant credit to the applicant is not a counteroffer, since your bank is not making the offer. At the same time, however, your bank is refusing to grant credit to the applicant, and as a result, you should send out an adverse action notice within thirty days of receiving the completed application.

Importantly, however, notwithstanding the above discussion, if your bank declines to grant credit because the applicant requested a specific type of credit that your bank does not offer (a VA loan, for example), this would not constitute an adverse action under Regulation B, and you would not need to send an adverse action notice.

Regarding HMDA reporting, if the applicant applied for a “covered loan” (a closed-end mortgage loan or an open-end line of credit that is not an excluded transaction under Regulation C), your bank should report the application on the LAR, indicate that it was denied, and provide the date the action was taken.

For resources related to our guidance, please see:

Regulation B, 12 CFR 1002.2(c) (“Adverse action.

(1) The term means: (i) A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered;

* * * * *

(2) The term does not include: . . . (v) A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested.”)

Regulation B, 12 CFR 1002.9(a)(1) (“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;

(ii) 30 days after taking adverse action on an incomplete application, unless notice is provided in accordance with paragraph (c) of this section;

(iii) 30 days after taking adverse action on an existing account; or

(iv) 90 days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered.”)

Regulation B, 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. 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.”)

Regulation C, 12 CFR 1003.4(a)(8) (“A financial institution shall collect data regarding applications for covered loans that it receives, covered loans that it originates, and covered loans that it purchases for each calendar year. . . . The data collected shall include the following items: (8) The following information about the financial institution's action:

(i) The action taken by the financial institution, recorded as one of the following: . . . (B) Whether an application for a covered loan that did not result in the origination of a covered loan was approved but not accepted, denied, withdrawn by the applicant, or closed for incompleteness; . . .

(ii) The date of the action taken by the financial institution.”)

Regulation C, 12 CFR 1003.2(b)(1) (“In general. Application means an oral or written request for a covered loan that is made in accordance with procedures used by a financial institution for the type of credit requested.”)

Regulation C, 12 CFR 1003.2(e) (“Covered loan means a closed-end mortgage loan or an open-end line of credit that is not an excluded transaction under § 1003.3(c).”)