When a financial institution receives a request for a loan, they are required to respond to that applicant within a certain amount of time to advise them of their credit decision. That time, however, can vary based on the specific situation and/or financial institution, which has left many compliance professionals confused as to what actually is required. Therefore, let’s take a quick look at the applicable banking regulations and break down what they mean.
Overview of the Regulation B 30-day Rule
The Regulation B 30-day rule sets forth the requirements of a financial institution for notifying applicants of their credit decision. Unfortunately, this rule is not a simple as it may seem, as there are several parts to this rule.
The 30-day rule actually has five different requirements for providing notifications. While similar, each of these rules have separate requirements and must be reviewed, understood, and followed accordingly.
Specifically, the first of the five requirements are found in 1002.9(a)(1) which states that a creditor shall notify an applicant of their action taken (credit decision) 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.
The final requirement relates to incomplete applications and is found in 1002.9(c) as follows:
(c) Incomplete applications. (1) Notice alternatives. Within 30 days after receiving an application that is incomplete regarding matters that an applicant can complete, the creditor shall notify the applicant either:
(i) Of action taken, in accordance with paragraph (a) of this section; or
(ii) Of the incompleteness, in accordance with paragraph (c)(2) of this section.
30-Days After Receiving a Completed Application
The first part of the 30-day rule requires creditors to provide notification of their credit decision within “30 days after receiving a completed application concerning the creditor’s approval of, or counteroffer to, or adverse action on the application.” While this is a mouthful to say, it really isn’t that difficult. Said another way, you have 30 days to provide notification of your credit decision after you receive a completed application.
In fact, the challenging part of this first 30-day requirement is to understand when the clock starts. While the rule says it starts after you have a “completed application,” we must understand what a “completed application” actually is.
The commentary to paragraph (9)(a)(1) of part 1002.9 of Regulation B says that a completed application occurs when a creditor obtains all of the information it normally considers in making a credit decision. Specifically, the commentary states the following:
1. Timing of notice—when an application is complete. Once a creditor has obtained all the information it normally considers in making a credit decision, the application is complete and the creditor has 30 days in which to notify the applicant of the credit decision. (See also comment 2(f)-6.)
As you can see, the commentary here references another comment, which is from the definition section in Regulation B. Comment 2(f)-6 states the following in regards to a completed application, under Regulation B:
6. Completed application—diligence requirement. The regulation defines a completed application in terms that give a creditor the latitude to establish its own information requirements. Nevertheless, the creditor must act with reasonable diligence to collect information needed to complete the application. For example, the creditor should request information from third parties, such as a credit report, promptly after receiving the application. If additional information is needed from the applicant, such as an address or a telephone number to verify employment, the creditor should contact the applicant promptly. (But see comment 9(a)(1)–3, which discusses the creditor's option to deny an application on the basis of incompleteness.)
Unlike TRID rules under Regulation Z which clearly define a completed application as having received six pieces of information (name, income, SSN, address, loan amount, and estimated property value), Regulation B provides latitude for establishing what a financial institution considers to be a complete application. This latitude can make it challenging to know when the 30-day rule under Regulation B kicks in, especially since each financial institution may define a completed application in a slightly different way.
For example, a bank may take a conservative approach for their mortgage loans and say that they will use the same definition of a complete application for Regulation B as they do for TRID. The result is that whenever this financial institution receives the required six pieces of information which are considered to be a complete application under TRID, the 30-day clock for providing a communication of a credit decision under Regulation B also kicks in. While many banks are able to easily make a conditional approval within this time frame, many will not be making their final approval until more than 30-days later - until all verification documents are received back from the applicant. Under the Regulation B 30-day rule, a conditional approval should be sufficient in most cases to satisfy the notification requirements.
While some financial institutions may be willing to provide a conditional approval to applicants for their mortgage loans, other financial institutions may not feel comfortable providing a conditional approval, especially for other types of products. For example, a commercial lender may want to have the appraisal back on a commercial loan before they make their credit decision. The challenge with this, of course, is that appraisals often take longer than 30-days to receive. Therefore, if a financial institution normally requires an appraisal to be received before it will make a credit decision on a commercial loan, then the Regulation B 30-day clock won’t start until the appraisal has been received.
The bottom line with the 30-day rule is that Regulation B defines a completed application (which starts the 30-day clock) as occurring “once a creditor has obtained all the information it normally considers in making a credit decision.”
30 Days After Taking Adverse Action on an Incomplete Application
The second part of the Regulation B 30-day rule requires creditors to notify an applicant of their credit decision within 30 days after taking adverse action on an incomplete application, unless notice is provided in accordance with paragraph (c) of this section. As we have just finished discussing a “complete” application, we now need to understand what an incomplete application is under Regulation B.
Generally, while not defined under Regulation B, an incomplete application is an application that is missing certain pieces of information which need to be provided by the applicant before a credit decision can be made. For example, when a creditor receives an application that is not considered a "complete" application under Regulation B - meaning that the applicant did not provide all of the information the creditor normally requires in making a credit decision - this is a common example of an incomplete application.
Another example of an incomplete application is a bit more complex. In certain instances when a creditor considers an application to be complete under Regulation B, but only provides a conditional approval, the creditor still needs certain verification information from the applicant in order to make a final credit decision. When a creditor is missing this verification information from an applicant, this is still considered an incomplete application under Regulation B. Put another way, an incomplete application includes instances when you have received a complete application (under your Reg B definition) but are missing key pieces of information that can be provided by the applicant in order to make your final credit decision. The missing information will often be verification information that will need to come from the applicant, such as tax returns or W2s.
When you have an incomplete application, Regulation B doesn’t let you just give up on the applicant and call the loan withdrawn. In fact, it only really gives you three options for proceeding with the incomplete application:
Approve the loan
Deny the loan
Provide an alternate notice of incompleteness
As you are waiting on documentation to approve the loan, option one is out. Option three is a good way to provide an applicant more time to provide the needed information and if they don’t provide it within the time period you set, you can then consider it withdrawn (and don’t have to deny it). That said, there are times where you may just want to deny the incomplete application and be done with it. In these cases, the Regulation B 30-day rule gives you 30 days to notify an applicant of your credit decision.
Read more about incomplete applications here.
30 Days After Taking Adverse Action on an Existing Account
The third part of the Regulation B 30-day rule requires creditors to notify an applicant of their credit decision within 30 days after taking adverse action on an existing account. As the definition of “adverse action” under Regulation B includes “A termination of an account or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor's accounts”, the 30-day rule could apply to an existing account. Said another way, if you terminate an existing loan (like a line of credit) or make an unfavorable change (like reducing a line of credit), then the Regulation B 30-day rule requires you to notify the customer within 30 days of the “adverse action.”
90 Day After a Counter Offer
Okay, this isn’t really a 30-day rule, but it is included in the same section of Regulation B, which is technically the notification requirements section. This final part requires creditors to notify applicants of their credit decision within 90 days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered.
Basically, the rule is saying that financial institutions are not permitted to just provide a counter offer and be done with an applicant if they don’t accept the counter offer. Remember, the definition of an adverse action is when a creditor does not grant credit on substantially the same terms applied for. This means that a counter offer is actually a denial if the applicant does not accept the counter offer.
As an adverse action notice is required if an applicant does not accept a counter offer, most financial institutions just provide a combined denial/counter offer notice so that they don’t have to track all of their counter offers and then deliver denial notices to those applicants than don’t accept the counter offer.
The commentary to Regulation B provides the following in regards to this:
“6. Counteroffer combined with adverse action notice. A creditor that gives the applicant a combined counteroffer and adverse action notice that complies with §1002.9(a)(2) need not send a second adverse action notice if the applicant does not accept the counteroffer.”
30 Day Rule for Telephone Applications
The Regulation B 30-day rule applies to telephone applications, but with one exception. If an applicant does not provide enough information for a financial institution to deliver an adverse action notice (i.e. name and address), then the financial institution has no further responsibility in providing communication of their credit decision (given that they requested the information from the applicant). Specifically, the commentary to the Regulation 30-day rule states the following in regards to denying a telephone application:
“When an application is made by telephone and adverse action is taken, the creditor must request the applicant's name and address in order to provide written notification under this section. If the applicant declines to provide that information, then the creditor has no further notification responsibility.”