VIDEO: Denial for Low Appraisal
In this Compliance Clip, Adam discusses whether or not a customer withdrawing a loan for a low appraisal is really a denial, even if they have expressly withdrawn by providing written notice of their intent to withdraw.
Video Transcript:
The following is a transcript of this video:
This Compliance Clip is going to talk about denials for low appraisals. The question that I received this week and many times over the years is this, is an application considered to be withdrawn or denied if an applicant provides written notice of their intent to withdraw?
What happens sometimes is this comes up in a HMDA review. Now, not necessarily, it could come up in a denial review when you're reviewing denied loans and withdrawn loans, but it often comes up in HMDA reviews when you're looking at those denials and withdrawn loans to make sure that the codes are proper.
In this specific case that I saw today, the question was, it said, basically, that they had an instance where the loan officer had called this a withdrawn loan. I've actually seen this over the years where this does happen where a loan officer will call it a withdrawn loan but the compliance person is concerned whether or not this is in fact a denial. So in this particular case that I saw, the loan officer had said this, and they also had notes in the system, that said that the appraised amount came in low. And they talked to the customer about the appraisal coming in low for the refinance and telling the customer that they would have to bring money to cover closing costs and to cover the value ratio that they needed to have because it came in 20,000 lower than what they expected. The customer basically replied by saying, I don't have any cash reserves to be able to pay for this. Essentially, what happened is they were coding these as in fact, in this case, it was incomplete, but I've seen this before, sometimes loan officers will call this a withdrawn loan. So essentially the customer says it's withdrawn and sometimes the customer even gives a written notice of their intent to withdraw. That's the question we have. I hope that I explained that clearly.
The answer to this, of course, comes from regulation B. It actually comes from the Definition Section which is 1002.2 as well as the Notification Section that talks about adverse action notices at 1002.9. At 1002.2, this is the Definition Section, so let's remind ourselves of the definition of Adverse Action. Adverse action is considered one of three things. It's a refusal to grant credit on substantially the same terms as requested, it's a termination or unfavorable change on an existing account, or it's a refusal to increase credit upon request. So adverse action is all three of these, but in our specific question, what we're talking about is the first piece, a refusal to grant credit on substantially the same terms as requested.
In this case when we have a customer who has an appraisal come in low, they've requested a certain amount of cash back in a certain loan amount. What we, essentially, are doing is saying, we can do the loan if you bring more cash. So some people seem to forget, loan officers sometimes, or whoever, seem to forget that by offering to do the loan in a different amount is in fact a denial. Because what you're doing is you're saying we can counteroffer. We could still do the loan at a different amount but this is actually a counter offer that your bank is offering.
That means that this is actually a denial. Now, if they proceed with a counter offer, you don't have to give an adverse action notice. Now, if they don't proceed with it or it doesn't go through what happens is it becomes a denial for Reg B purposes so your best option is actually to provide a combined denial counteroffer notice to customers. That's a whole other conversation but a nice little side note that I’m including in this Compliance Clip. The bottom line here is when you have an appraisal come in low and you can't do it for what they originally wanted, that's considered a denial. Even if you could do it a different way, it's still denial because doing that in a different way is actually a counter offer. That's how Regulation B views it.
The real question here is, the applicant was providing a written notice of their intention to withdraw. That puts a little bit of a spin on this because Regulation B specifically says this. It says that if a customer expressly withdraws their application, you are not required to provide an adverse action notice. That is assuming that you didn’t deny the loan. I have actually seen where this has happened. Actually, early in my career, I learned this the hard way with a bank that I was working with because I saw where an examiner came in and it told this bank that they were coding things wrong for HMDA. I didn't learn it the hard way, the bank did, that I was working with at the time, but I was able to get a good story out of it. So what happened was this examiner came in and said that all the loans that the bank had been coding as withdrawals were actually denials. What was happening was a conversation like this: the customer's appraisal comes in low, loan officer calls them and says, “Hey, guess what? Your appraisal came in low.” and the customer says, “What does that mean?” And the banker then says, “Hey, remember how we talked about we had to come in at this amount and we couldn't get the loan if it didn't come in with that amount?”. The customer says, “Yeah. So what can I do?” and the loan officer says, “Well, there’s really nothing you can do if you don't have more money to bring.” Then the customer says, “Forget it.” At that point, the loan officer jumps on that says, “Oh, so you want to withdraw? So just send me any notes saying you want to withdraw.”
And the customer does that and says, “You know what? I don't want to proceed at this time.” Then the loan officer may then take that and say, this is an expressly withdrawn loan, we don't have to consider this a denial because they withdrew so this is a withdrawal.
That is not correct because essentially what's happened is you told your customer you can not do the loan on substantially the same terms as applied for, and that is a denial, said and done. It's done. It’s a denial, you cannot proceed, you cannot pass go. That's how it works. At the end of the day, if you have a low appraisal amount and you tell the customer you cannot do the loan, you have a denial. That's what you have and you owe them an adverse action notice and your HMDA lar needs to be reported that way if you’re a HMDA reporter.
If you've been doing this wrong, I’ve seen banks get written up for both, for HMDA violation, as well as Regulation B for violation of not sending an adverse action notice. That answers our question and that concludes this Compliance Clip.