by Fredric J. Gooch – General Counsel, DocuTech Corporation
Customers frequently ask DocuTech questions regarding best practices when making disclosures to borrowers. One of the most asked questions has to do with the problem with multiple applicants on a single loan and whether each applicant needs to receive disclosures or whether it is sufficient to provide the disclosures to one borrower without any compliance concerns. Unfortunately there isn’t a simple answer to this question. The patchwork of federal and state laws that require borrower disclosures do not have a common answer to this question. In fact, a quick survey of most state and federal laws shows that there is scant authority to provide guidance on this question. This article will review several disclosure requirements to see if multiple borrower disclosures are addressed. Following this discussion we will summarize what DocuTech believes are best practices in tackling the problem of multiple borrower disclosures.
The Good Faith Estimate
Regulation X states “the lender must provide the applicant with a GFE.” 24 C.F.R. §3500.7(a)(1). The term “applicant” is not defined in the RESPA statute or anywhere within Regulation X. Taking the language of the regulation literally a lender should be able to prove that each applicant received a GFE. This would require proof of mailing to each applicant or proof of electronic delivery in a manner that complies with the standards set forth in the E-SIGN law.
There is some disagreement on this issue. We have seen commenters state that HUD only requires one copy of the GFE to be distributed to multiple borrowers. The preamble to Regulation X in 1992, 57 Fed. Reg. 49,600, 49,605 (11/2/92) states “HUD requires only one Special Information Booklet (and, at 3500.7(a), one copy of the Good Faith Estimate) to be distributed to multiple borrowers.” There are also references made to withdrawn HUD Ruling January 18, 1979 (Martini) to support this position.
DocuTech tends to support a conservative approach to implementing regulations and supports the position that the GFE should be given to each applicant. This interpretation squares with the language of the statute and the regulation. Another issue with the contrary position is that both citations apply to the old RESPA rule and/or to withdrawn HUD opinions.
Regulation Z gives much better guidance on how to comply with the Truth-in-Lending disclosures when there are multiple applicants on a loan. It states that when there are multiple applicants the disclosures “may be made to any consumer who is primarily liable on the obligation.” 12 C.F.R. 226.17(d). It does clarify that there are different rules for loans that are subject to the right to rescind. It clarifies “If the transaction is rescindable under §226.23, however, the disclosures shall be made to each consumer who has the right to rescind.” Ibid.
Therefore the rule for the TILA disclosures is that the disclosures must only be delivered to one borrower who is primarily obligated on the loan unless there is a right of rescission and in that case each applicant must receive a copy of the disclosures.
Equal Credit Opportunity Act
Disclosures to multiple applicants under the Equal Credit Opportunity Act “need only be given to one of them but must be given to the primary applicant where one is readily apparent.” 12 C.F.R. §202.9(f). So while it may be a relief to only have to worry about disclosure to one borrower, this section does introduce another compliance concern which causes lenders to need to analyze the loan to determine the primary applicant. If it is deemed to be “readily apparent” and the disclosure is not made to that applicant then you could have a compliance issue on your hands.
This is just a small sample of the hundreds of disclosure requirements lenders have monitor to determine best practices when it comes to multiple applicants. Many lenders look for ways to reduce costs by only mailing packages to primary applicants, but this approach can cause compliance problems down the road. Fortunately the electronic disclosure processes allow lenders to deliver disclosures to multiple borrowers with minimal costs, but when borrowers fail to consent within allowable time periods disclosures must be mailed “snail mail” to keep with regulatory requirements. In most circumstances if the borrowers live together at the same address lenders are safe to only send one package, but in circumstances where co-borrowers live at different addresses, it is best to send separate packages to avoid any compliance issues. It may cost a bit more to comply with this disclosure process, but in the long run it is less painful than dealing with a litigious borrower who claims to have never received disclosures, or the auditor who disagrees with your position.