Joint Applicants

QUESTION:

We are a direct lender and have three questions that are somewhat related. Firstly, we know that application signatures by spouses and others are not permitted to be used for extending credit in certain circumstances, yet our training material is not clear about the rule. What is the rule? Secondly, if an applicant uses joint financial information, can we assume the application is for joint credit? And thirdly, exactly who is a joint applicant?

ANSWER:

Except as provided in Regulation B, a creditor may not require the signature of an applicant’s spouse or another person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standard of creditworthiness for the amount and terms of the credit requested. [12 CFR § 202.7(d)(1)]

The basic intent of the signature rule is to ensure that a qualified applicant is able to obtain credit in his or her own name. Therefore, a creditor may not require an applicant who is creditworthy to provide a cosigner, even if the creditor applies the requirement without regard to sex, marital status, or any other prohibited basis. 

[12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.7(d)-1]

With respect to an applicant submitting joint financial information in order to obtain an extension of credit, a creditor may not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit. [12 CFR § 202.7(d)(1)]

Finally, a joint applicant is someone who applies contemporaneously with the applicant for shared or joint credit. It does not refer to someone whose signature is required by the creditor as a condition for granting the credit requested. 

[12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.7(d)-2]

Jonathan Foxx

President & Managing Director
Lenders Compliance Group

Flood Insurance: Two Residential Structures under One Policy

QUESTION

We have a loan which is secured by a single family residential property with a guest house located on the property. The guest house is connected to the main residence via an elevated deck. In the past, we have required separate flood insurance policies for the main residence and the guest house. Our borrower would like to have both buildings covered under the same policy. Is this permissible?

ANSWER

If a building securing a loan is in a special flood hazard area, the lender must require flood insurance in an amount at least equal to the lesser of the outstanding principal balance of the loan or the maximum limit of coverage limit of coverage available under the National Flood Insurance Program (NFIP).  [12 CFR § 339.3] 

“Building” is defined as a “walled and roofed structure, other than a gas or liquid storage tank, that is principally above ground and affixed to a permanent site, and a walled and roofed structure while in the course of construction, alteration, or repair”.  [12 CFR § 339.2]   

The flood insurance requirement does not apply with respect to “any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence”. A structure is "detached" from the primary residential structure if it is not joined by any structural connection to that structure and it “serves as a residence” if it is “intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities”.  [12 CFR §339.4] 

As the guest house serves as a residence and is attached to the main house by a structure (i.e. the deck), it does not qualify for the exemption from the flood insurance requirement, which brings us back to the initial question: can the main residence and guest house be covered under one flood insurance policy? Nothing in the regulation prohibits the structures from being covered by one policy.

In accordance with the NFIP Flood Insurance Manual, the NFIP “insures additions and extensions attached to and in contact with the building by means of a rigid exterior wall, a solid load-bearing interior wall, a stairway, an elevated walkway, or a roof.” Thus, the guest house can be considered an addition or extension of the guest house and both the main residence and guest house can be covered under one policy. Alternatively, the homeowner can cause the guest house to be separately insured. However, in permitting the structures to be covered by one policy, the lender as well as the homeowner must be mindful of the fact that limiting coverage to one policy could have a substantial effect on the ability of the homeowner to rebuild in the event of a flood.

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

HMDA and TRID

QUESTION: We are working to improve our HMDA reporting policy and wonder how, if at all, does the TRID rule definition of application trigger or affect HMDA reporting?

ANSWER: The short answer is that receipt of some or all of the six pieces of TRID application information does not necessarily trigger an “application” for purposes of HMDA reporting.

Under Regulation C, an application for HMDA reporting purposes is defined as an oral or written request for a home purchase loan, a home improvement loan, or a refinancing that is made in accordance with procedures used by a financial institution for the type of credit requested. [12 CFR §1003.2] Pursuant to TRID, if a consumer submits an application, a requirement to provide the Loan Estimate is triggered under §1026.19(e).

An application under TRID is defined as the submission of the six pieces of information with which we are now so familiar: (1) the consumer’s name, (2) the consumer’s income, (3) the consumer’s Social Security number to obtain a credit report (4) the property address, (5) an estimate of the value of the property, and (6) the mortgage loan amount sought. Unlike the TRID rule, Regulation C does not contain a clear, succinct definition of the term application. Rather, the Regulation C definition of application depends on a creditor’s particular policy and procedures, which may or not mirror receipt of the six pieces of application under the TRID rule.

The term “application” is defined differently across most regulations. One should always be mindful to consider the purpose of any regulation, and particularly the various regulations that define what a mortgage application is and what it triggers. Under the TRID rule, the goal is to provide consumers disclosures that enable them to shop for and compare different loan and settlement cost options in a timely manner. Hence receipt of an application triggers the loan estimate. The purpose of HMDA is to prevent discrimination and insure that the housing needs of communities are being met. Thus, receipt of an application under HMDA triggers reporting about the disposition of that application, demographics, the applicant’s characteristics, and so forth.

The CFPB has stated that the TRID definition of an application does not change the current Regulation C definition of application, nor does it supersede it. While it is important for a creditor to create and comply with a clear and concise HMDA reporting policy and application definition, it may be just as important to consider the regulatory purpose of HMDA when creating that policy.

Michael Goldhirsh, Esq.

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Pre-existing Business Relationship

QUESTION

We really appreciate your weekly FAQs! We have always assumed that we had a pre-existing business relationship with our borrowers. But our regulator has told us that there are guidelines for this exception. Would you please outline the guidelines for us?

ANSWER

Thank you for the kind words about our FAQs. Much appreciated!

A “pre-existing business relationship” is a relationship between a person or a person’s licensed agent and a consumer based on:

1. A financial contract between the person and the consumer that is in force on the date a solicitation covered by the affiliate marketing provisions is sent to the consumer;
2. The consumer’s purchase, sale, or lease of the person’s goods or services, or a financial transaction (including holding an active account or a policy in force or having another continuing relationship) between the person and the consumer during the eighteen-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer; or
3. An inquiry or application by the consumer regarding a product or service offered by the person during the three-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer. [12 CFR § 334.20(b)(4) – FDIC; 16 CFR § 680.3(j) – FTC; 12 CFR § 222.20(b)(4) – FRB; 12 CFR § 41.20(b)(4) – OCC; 12 CFR § 717.20(b)(4) – NCUA]

Regarding the third item, please note that the affiliate marketing rules of the federal financial institution regulators and the Federal Trade Commission include examples of when there is and when there is not a pre-existing business relationship.

Jonathan Foxx

Managing Director

Lenders Compliance Group