Let’s start with the basics: what exactly
is a preapproval? There are many variations, but it is normally a response to a
consumer wanting to get a picture of
whether or not a mortgage loan is possible. Within the context of this discussion, let’s assume a customer comes into
the bank and asks to be preapproved for a
loan to purchase a particular property he
or she has identified. The loan officer asks
for detailed financial information from
the customer, runs a credit report and/or
obtains the consumer’s credit score, and
performs a comprehensive underwriting.
A preapproval letter reflecting the bank’s
commitment is then provided to be presented to the seller or real estate agent.
A couple distinctions are in order:
first, it doesn’t matter what the bank,
marketing, or the loan officer calls this,
whether a preapproval, prequalification, commitment letter, or anything
else. This type of confusion is commonly seen in HMDA reporting. Under
HMDA, “prequalifications” are not
reported while only “preapprovals” that
meet HMDA definition are. The critical
difference is because a prequalification
does not involve a property location. A
preapproval may not have one either,
but under HMDA a prequalification
request (no property location) is not
reportable.
Another important distinction is,
under HMDA, a prequalification in-
volves a “preliminary determination” of
the customer’s creditworthiness, while a
preapproval “must result from a compre-
hensive underwriting of the applicant,”
including verifications and the like, and
the issuance of a commitment. Accord-
ing to HMDA’s commentary, this com-
prehensive underwriting “is typically
done by the institution as part of its nor-
mal credit evaluation program.” Concen-
trate on what the program does rather
than what it’s called, and in particular
look to see whether a specific property is
identified as well as the depth of under-
writing scrutiny. HMDA also requires
the bank to have a formal preapproval
program for reporting to be required.
Although the new HMDA rule made
a few tweaks to the definition of a preapproval, the basic concept of what one
is has stayed the same. So if they’re still
contemplated under the HMDA rules,
why would preapprovals be a thing of
the past? Let’s take a look at the TRID requirements, which differ from HMDA’s.
The term “preapproval” is not formally defined within the TRID rules.
The CFPB also specifically refused to
include a preapproval as an “application,”
stating “the Bureau does not believe that
the definition of application will restrict
creditors’ ability to provide prequalification cost estimates or grant preapprovals.” That may be what the Bureau said,
but let’s see what information the lender
collects during our preapproval scenario
and make a judgment.
Let’s assume the preapproval is sought
by our customer because he or she has
identified a particular property and
needs proof of credit approval in order
to be taken seriously when making an
offer. What information would the bank
want before issuing something like this?
This being a comprehensive underwrit-
ing (since the bank is committing to
making a loan), let’s assume the bank
requests the consumer’s name, income,
assets, debts, and social security number
so it can determine creditworthiness
and determine capacity for credit. Then,
since a property has been identified, the
bank asks for the property’s address and
an estimate of its value to determine
loan-to-value (LTV). Finally, the loan
officer asks how much will be put down
as well as the loan amount the customer
thinks it will take to buy the home.
Presto, within all that information are
the six pieces of information that consti-
tutes an application under TRID (name,
income, SSN, property address, esti-
mated property value, and loan amount
sought). Does that mean the customer
has now “applied” for a loan rather than
merely asking for a preapproval? Yes and
no. The answer is yes since the bank has
received the six pieces of information
necessary to constitute a TRID-covered
application. This therefore means a Loan
Estimate must be provided to the con-
sumer within three days of submission
of that information. But the answer is al-
so no, since practically speaking the con-
sumer has not intended to apply (yet);
he/she is just interested in obtaining the
preapproval in order to go shopping.
So which is it? The final answer is it
doesn’t really matter as long as the prop-
er disclosures are provided in a timely
manner. In other words, in this par-
ticular situation the consumer must be
provided with a Loan Estimate because
TRID requires it, and the preapproval
letter (whether it’s considered a commit-
Is There No Such Thing as a
Preapproval Anymore?
ASTAPLE OF THE MORTGAGE INDUSTRY is the preapproval etter. Consumers ask for them in some cases, for example, because they’re interested in a particular high-demand property and the real estate agent won’t even agree to meet unless the buyer has been
preapproved. But how have changes in mortgage compliance due to the TRID
(TILA-RESPA Integrated Disclosures) rule and the impending changes in
HMDA affected preapprovals?
