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Thursday, October 18, 2018

Charging Fee for Preapprovals

QUESTION
As a lender, we frequently receive requests for preapprovals from consumers so they can shop for their home with knowledge as to what they can afford in terms of a loan. We pull a credit report prior to issuing the preapproval. Currently, we do not charge any fees in connection with the preapproval. 

Can we charge a “preapproval” or “preapplication” fee prior to pulling credit?

ANSWER 
You do not state the type of loan the preapproval is being issued with respect to.  For purposes of this response, the assumption is that consumer is seeking preapproval for a consumer loan secured by a one to four-unit residential property in which the consumer intends to reside. Thus, if the preapproval results in a mortgage application, it will be subject to the TILA-RESPA Integrated Disclosure (“TRID”). 

You also do not provide any information regarding the extent of your verification process, other than to state that you will pull a credit report prior to issuing the preapproval. For purposes of this response, and without delving into the issue of preapproval versus prequalification and UDAAP concerns raised by whether a preapproval program comports with the Home Mortgage Disclosure Act’s (“HMDA”) definition of preapproval, the assumption is that the preapproval program does not qualify as a HMDA preapproval program.

Under TRID, a creditor is barred from imposing any fee on a consumer in connection with the consumer’s mortgage loan application, such as an application, appraisal or underwriting fee, prior to the consumer’s receipt of a Loan Estimate and the consumer thereafter indicating an intent to proceed. The one exception to this prohibition is that a creditor may impose “a bona fide and reasonable fee for obtaining the consumer’s credit report” prior to the issuance of the loan estimated”. [12 CFR 1026.19(e)(2)]. Thus, at any time prior to the delivery of a loan estimate in connection with the application, the creditor may impose a credit report fee.

TRID also prohibits a creditor from requiring the consumer to submit documents verifying information related to the consumer’s mortgage loan application prior to the creditor proving the Loan Estimate. [12 CFR 1026.19(e)(2)(iii)] However, TRID does not prohibit the consumer from voluntarily submitting verification documentation such as bank statements, W-2s, etc. In that instance, the creditor is permitted to use the information as part of its verification process.  Notwithstanding, there can be no requirement that the consumer provide such information prior to the creditor’s issuance of the Loan Estimate.

So, back to the question, can a “preapproval” or “preapplication” fee be charged with respect to a request for a preapproval prior to a creditor pulling credit? 

In support of charging a fee, the typical creditor argument is that at this point, we do not have all 6 pieces of information for a TRID application (consumer’s name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought), so TRID does not apply and therefore nothing prevents us from charging such a fee.  Typically, the missing piece is the property address.

At the outset, the assumption is that the “preapproval” or “preapplication” fee exceeds the bona fide and reasonable fee which a creditor may charge for the credit report. If the fee simply equates to the charge for the credit report fee, it is certainly permissible, and it would be advisable in that instance to call it a credit report fee rather than rename it a “preapproval” or “preapplication fee”. Transparency is key in eliminating any UDAAP concerns. 

If the “preapproval” or “preapplication” fee exceeds the credit report fee and is intended to be an additional application or underwriting fee, charging the fee based on the fact that the creditor does not have a TRID application (notwithstanding that the approval is for a loan that will be subject to TRID), sends a creditor down a slippery slope. And, absent further regulatory guidance, it is a business decision as to whether you as the creditor want to walk down this slope. The cautious position is that once the missing 6th piece of information is obtained, usually the property address, the preapproval application morphs into a TRID application and thus, the charge of the “preapproval” or “preapplication” fee becomes a TRID violation. Additionally, to the extent the creditor required the consumer to provide verification documentation in order to obtain the preapproval, there is another TRID violation. The creditor may assert that the creditor did not require the consumer to provide verification documentation. But, realistically, if the creditor is charging a fee and gives the consumer a list of documents that consumer may “voluntarily” provide, it is difficult to believe that a consumer will believe s/he is does not need to provide the documents in order to obtain the preapproval.

As an aside, it is important to remember that if you as the creditor have pulled credit and decided to deny the application based on the credit report and communicated such to the consumer, you must issue an adverse action notice under the Equal Credit Opportunity Act.  [12 CFR 1002.9]

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group