Most of our loan originations are from online interactions with applicants. We offer a prequalification program.
People go online and provide a set of information to us. Then we get them prequalified, although we still need other information, like the appraised value of the house they’re buying.
Our customers really like our program because they can rely on our letter of prequalification to know the maximum house price and down payment they can afford.
Our concern is about issuing Regulation B’s Notice of Action Taken.
For prequalifications, when do we issue the Notice of Action Taken?
ANSWER
You ask an interesting question. I think you may be surprised with the answer!
Most financial institutions these day that are engaged in mortgage lending offer customers “prequalification” for a mortgage loan. Usually, all of the application information is taken from the customer, including credit reports, employment verifications, and the verification of other information, but some part of the loan underwriting process is left out.
This occurs when the customer does not yet have a particular home or property in mind, but instead, wants to “prequalify” for a loan. If your customers know the maximum amount they can borrow with a given amount for the down payment, they will know the price range they can afford for a home. When a customer finds a home, they return to the lender with that information.
There are a number of compliance rules under several regulations that require certain actions and/or disclosures whenever an application form is given by a lender or, in the case of Internet banking, whenever the individual is asked to supply or transmit application information online.
The prequalification process, though, does not fit neatly into what is traditionally thought of as an “application” and, by extension, does not therefore fit neatly into the concise framework of the regulations. In most instances, the issue has been dealt with in the Commentary to the regulations, but there are still instances where the issue is less than clear.
Let's zero in on your concern. For purposes of disclosures and reporting, when is the Notice of Action Taken required under Regulation B?
The general rule under Regulation B for consumer credit is that a financial institution must take action on and notify the applicant of action taken within 30 days of receiving a completed application. However, under the Commentary to sections 1002.2(f) and 1002.9 of Regulation B, whether a financial institution must provide a notice of action taken for a prequalification or preapproval request depends on the financial institution’s response to the request.
Delving further into the response, a lender may treat the request as an inquiry if it provides general information, such as loan terms and the maximum amount a consumer could borrow under various loan programs, explaining the process the consumer must follow to submit a mortgage application and the information the lender will analyze in reaching a credit decision.
But, a lender has treated a request as an application, and is subject to the Adverse Action Notice requirements if, after evaluating information, the lender decides that it will not approve the request and communicates that decision to the consumer. For instance, in reviewing a request for prequalification, if a financial institution tells the consumer that it would not approve an application for a mortgage because of a bankruptcy in the consumer’s record, the financial institution has denied an application for credit.
Therefore, if a prequalification application is denied, an Adverse Action Notice is required to be provided to the applicant.
However, if the applicant is prequalified for credit, no notification under Regulation B is required until the applicants have found a home they want to purchase and provides this information and any other required information to the financial institution which completes the application. Once all of the required information is received (i.e., appraisal, and so forth), the application is complete and the 30-day decision clock begins to run.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
