Regulation B: Prequalifications

QUESTION
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

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 6^th 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

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