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Thursday, June 5, 2014

Preapproval Programs

QUESTION
In the case of preapprovals, we are unsure about whether we should include them in the code for preapprovals in the HMDA-LAR. The HMDA guides only refer to a Preapproval Program. If we offer preapprovals, are we involved in a Preapproval Program? 

ANSWER 
Among other reporting requirements, an application type and action taken on a request for a preapproval under a preapproval program would need to be reported on the HMDA-LAR. There are three elements of a covered preapproval program that lead to the requirement for such reporting.

The essential components of a preapproval program are:

1. The lender conducts a comprehensive analysis of the applicant’s credit-worthiness (i.e., including such verification of income, resources, and other matters as is typically done by the lender as part of its normal credit evaluation program);

2. A written commitment to the applicant is issued and valid for a stated period of time for a up to a specified amount (i.e., purchase money mortgage to purchase a home); and,

3. The written commitment is not subject to conditions other than:
a. Conditions that require the identification of a suitable property;
b. Conditions that require that no material change has occurred in the applicant’s financial condition or credit-worthiness prior to closing; and,
c. Limited conditions that are not related to the financial condition or credit-worthiness of the applicant that the lender ordinarily attaches to a traditional home mortgage application (i.e., cleared termite inspection, acceptable title insurance binder).

It is valid to include as a condition that an applicant must provide a settlement statement showing adequate proceeds from the sale of the current home, where such proceeds are to be used from the sale of the current home to purchase the new home subject to the preapproval.

[12 CFR § 203.2(b)(2); 12 CFR, Part 2, Supplement I § 203.2(b)-3]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group