The Home Mortgage Disclosure Act (HMDA) requires institutions to indicate what “action” was taken on reportable applications. The institution must choose between a finite list of these actions to describe what exactly happened to the covered loan or application. What was the ultimate outcome? Was the transaction originated or purchased from another institution? Was the application denied, withdrawn, or closed for incompleteness? Or, was the application approved but not accepted?

HMDA specifically explains that “approved but not accepted” is appropriate only when “the financial institution made a credit decision approving the application before closing or account opening, subject solely to outstanding conditions that are customary commitment or closing conditions, but the applicant or the party that initially received the application fails to respond to the financial institution’s approval within the specified time, or the closed-end mortgage loan was not otherwise consummated or the account was not otherwise opened.” This language clearly indicates that an application has not been “approved but not accepted” merely because an institution considers it to be approved, or because approval language has been communicated to the customer, or because initial underwriting conditions have been met. A transaction is “approved but not accepted” if an institution has all of the necessary documentation and information needed to make a credit decision and, based on that information, the application is approved but the transaction is ultimately not originated.

In some instances, the institution may indicate an application is approved but additional information or action on the part of the borrower is required before the loan can be originated. Is this an example of “approved but not accepted”? Well, the answer is “it depends.” In order to make this determination, we must analyze exactly what outstanding conditions stand between the current application and origination. Whether or not we can classify the application as “approved but not accepted” will depend on whether those conditions constitute customary commitment or closing conditions or whether they include any underwriting or creditworthiness conditions. An approval subject to customary commitment or closing conditions may be coded as “approved but not accepted” if those conditions are not met. An approval subject to underwriting or creditworthiness conditions may not be coded as “approved but not accepted” if those conditions are not met.

According to HMDA, “customary commitment or closing conditions include, for example: a clear title requirement, an acceptable property survey, acceptable title insurance binder, clear termite inspection, a subordination agreement from another lienholder, and, where the applicant plans to use the proceeds from the sale of one home to purchase another, a settlement statement showing adequate proceeds from the sale.” Compare these conditions to underwriting and creditworthiness conditions which include “conditions that constitute a counteroffer, such as a demand for a higher down-payment; satisfactory debt-to-income or loan-to-value ratios, a determination of need for private mortgage insurance, or a satisfactory appraisal requirement; or verification or confirmation, in whatever form the institution requires, that the applicant meets underwriting conditions concerning applicant creditworthiness, including documentation or verification of income or assets.” This distinction is incredibly important. “If the conditions are solely customary commitment or closing conditions and the conditions are not met, the institution reports the action taken as approved but not accepted.” On the other hand, “If the approval is conditioned on satisfying underwriting or creditworthiness conditions and they are not met, the institution reports the action taken as a denial.”

If a Regulation B notice of incompleteness was provided to the customer requesting additional information and no timely response was received, the institution may code the application “closed for incompleteness.” Finally, “If the applicant expressly withdraws before satisfying all underwriting or creditworthiness conditions and before the institution denies the application or closes the file for incompleteness, the institution reports the action taken as application withdrawn.” Let’s consider a couple of examples. Your institution requires the previous two years tax returns in order to make a credit decision, but the borrower fails to provide the tax returns. The institution sends a Regulation B notice of incompleteness informing the customer of the need for the tax returns, but the customer still does not provide them within the time specified by the notice. The institution codes the application “closed for incompleteness” (Code 5). In another example, your institution requires a satisfactory appraisal, but when the appraisal is received, the value of the property is lower than anticipated. An institution may then lower the loan amount due to loan-to-value considerations. In this scenario, the lower loan amount constitutes a counteroffer and is an underwriting or creditworthiness condition. If the customer elects to not proceed with the transaction (thereby refusing your counteroffer), the institution must code the application as “denied” because the underwriting or creditworthiness condition was not met.

Therefore, when coding a covered transaction as “approved but not accepted,” an institution must carefully evaluate any conditions that may have accompanied the approval to determine whether the “approved but not accepted” action taken is truly appropriate.

 

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