This is a guest post by one of our Compliance Cohort members, Jennifer Johnson. Jennifer is a Vice President and Chief Risk Officer at a $225 million community bank, and shares her years of experience in multiple banks with us in this article.
In a previous article, we discussed those frustrating customers who come to us with bits and pieces of the information we need to make a loan decision, providing us with an incomplete application. If you’re OCD like me, those situations drive you more than a little crazy, especially when you know that you have obligations to notify the customer of your decision within 30 days of receipt of the request. So how do you handle these scenarios without pulling out your hair? I have a simple solution. Read on.
What is an incomplete application?
I think we all know in our gut when an application is incomplete, but as always, it’s important to know how the regulators define it. Application notification requirements are primarily addressed in Regulation B, which does not provide a definition for an incomplete application. Instead, it defines a complete application in §1002.2(f):
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).
It sounds more complicated than it is. To sum it up: if you haven’t received what you need to make a credit decision, you have an incomplete application. (Side note – if you don’t have all the information you normally consider but have enough to know that you’re not going to make the loan, stop reading this and issue an adverse action notice.)
What do I do with an incomplete application?
So your application is incomplete and you truly don’t know that whether you can make the loan without more information. What’s next? Regulation B gives you two options. Both involve notification to the customer within 30 days. Your two options are:
Tell the customer your decision.
Tell the customer what you need (with some caveats.)
Tell the customer your decision.
This option is pretty amusing to me, considering the point of this is that we don’t have enough information to make a decision. What they’re really giving you here is an out so that you don’t have to deal with the application anymore. While there may be a few rebels out there who feel they can approve the loan without complete information, most of you who choose this option will deny the loan because of an incomplete application. Your call. Either way, the customer must be notified of this decision.
Tell the customer what you need.
This is my preferred option. You do want to make the loan if possible, right? Plus, if you deny the loan due to an incomplete application, you have to start the process all over again when the customer is able to come up with what you need. A lot of people get this wrong, though, by just calling the customer or verbally making their request; however, the regulation is very specific about how you tell the customer what you need.
How do I tell the customer what I need to complete an application?
Ultimately, you get to decide what you need to complete an application, but Regulation B §1002.9(c)(2) is specific on how you communicate that need to the customer. Here are the things you have to do.
Make the request in writing.
In order to meet the requirements of the regulation, your request for additional information must be in writing. A phone call is not enough. What about an email? While there is nothing prohibiting you from communicating with the customer via email, an electronic message does not meet the requirements of the regulation unless it is E-Sign compliant (just like most of the disclosures required by Regulation B.) It’s feasible to send this notice electronically, but you might just find it easier to mail the request or deliver it to the customer in person.
Make sure you include the required content.
The regulation is also picky about what is included in the written request you send to the customer. Your notice must contain the following items:
The information you need to make the credit decision (duh)
A reasonable period of time for the applicant to provide the information (I call this the drop dead date)
A notice that failure to provide the information requested will result in no further consideration being given to the application (the ultimatum)
Notice of incompleteness Sample
I recommend you create a form letter that can easily be modified for each customer. Here’s a notice of incompleteness sample:
Dear [Borrower’s Name]:
This letter is to inform you that we have received your application for a loan for [describe loan request]; however, we are unable to process this request until we receive [describe missing information]from you.
We must receive this information from you by [specify reasonable date by which you wish to receive the information] in order to continue processing your application. Failure to provide this information will result in no further consideration being given to your application, and we will have no further obligation to notify you if you fail to respond by the date listed above. If you do supply the requested information by the date above, we shall continue processing your application and notify you of our decision within 30 days.
We look forward to hearing from you. If you need further assistance or have any additional questions, please do not hesitate to call us at [telephone number].
Quick, easy, and compliant.
So what do I do after the incomplete application notice is sent?
Here’s the great part – from a regulatory standpoint, if you send the request letter above (Regulation B calls it a “notice of incompleteness”) within 30 days and the customer doesn’t respond, you DON’T HAVE TO DO ANYTHING ELSE. Boom. Done. Close the file for incompleteness after the reasonable date you gave the customer and move on. (From a business standpoint, you may want to do some additional follow up with the customer, though.)
If the customer does provide the information you requested, you’re back on track. Hopefully this customer will be a wonderful new relationship for your institution despite some initial roadblocks. If not, you know what to do. Happy notifying!
