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
