I need help clarifying the difference between a pre-qualification and a pre-approval. We do not have a written program for pre-approvals in our policy. However, we will give written pre-qualification letters, subject to certain restrictions, to applicants that meet our underwriting standards. Our practice seems an awful lot like my understanding of a pre-approval program without using that word. If you can provide any guidance on how to differentiate the two or classify our current practices I would appreciate it. It is causing problems when determining if adverse actions are necessary under Reg B.
Here is my current situation. Applicant requests a 'pre-qualification' to purchase a primary residence. All information is provided on the application document except a property address. The request is put through our automated underwriting system which says the credit should be denied due to excessive debt to income. The applicant is contacted and then asks for a loan amount we would be willing to lend. Further underwriting is completed to determine he could qualify for a loan amount of xxx. Then the applicant says they will not be proceeding with the application. Does the way this 'pre-qualification' was treated turn it into an application for credit or a pre-approval and therefore require an Adverse Action? If so would you treat it as a counter-offer that was not accepted (denial)?
A pre-qualification is an estimate of how much you can afford in a mortgage payment. It is based upon the information you provide, and is subject to the approval process, including further details such as a credit report, appraisal, and income verification. The information you provide won't be verified as part of the pre-qualification process. As I understand your situation, you do not collect the six pieces of information needed to have an application (you do not get a property address). This pre-qualification would be subject to further information being provided, as noted. Your qualification is based on the info provided with NO VERIFICATION or receipt of other documents. It is not subject to Reg B AA notice.
A pre-approval is a firmer commitment on behalf of the bank and is a more formal process which includes a credit check and even an employment verification. During a pre-approval the bank would do all the work of a full approval, except normally for the appraisal and title search. A credit report will be obtained to verify monthly payments on installment loans and credit cards, and to check whether the applicant has a history of making payments on time. VOE, VOD and income verification paystubs and W-2 forms (or tax returns if you are self-employed), plus statements from savings and investment accounts to verify assets are requested.. Pre-approval in most cases have the six pieces of information to have an application. Non-origination would be subject to an adverse action notice if denied. Hope this helps.
I recently attended a HMDA compliance seminar and received the following short answer on pre-quals vs. pre-approvals from Compliance professional, Adam Wittmer:
A pre-qual involves running "hypotheticals" based on unverified information provided by the borrower. A pre-approval involves full underwriting of verified information without a subject property.
Official Staff Commentary to Regulation B 1002.2(f)(5)(ii) - "If the financial institution evaluates the person's creditworthiness and determines that they do not qualify for a pre-approval."..that is an example of an application.
As I interpret this, a written notice of action taken would be required in these cases. The definition of an application for Regulation B (for written notices) is not the same as the definition of an application in Regulation Z (for early doc timing requirements).
Official Staff Commentary to Regulation B 1002.2(f)(3) regarding: "When an inquiry or prequalification request becomes an application" states: "A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the notification requirements under § 1002.9. Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks."
We do not have a pre-approval program either. We pre-qualify with "verbal" income and debt information so the potential borrower will know how much house they can afford.
Greetings, first off, attached is a tool someone else created years ago and was the mechanism needed to get more comfortable with this process. It gives the distinction for what makes a prequal vs a pre-approval. This definition only matters specifically to HMDA reportability. For Reg B purposes, you have an application and should follow all the adverse action channels. For HMDA you do not have an application and need not report. For TRID, you do not have an application and need not worry about these disclosures. Does this help?
PS - the pre-qual is non-binding and the pre-approval is binding on the bank.
If you have enough info to make a credit decision, you have an application under Reg B and a denial would trigger disclosure. It also triggers the appraisal disclosure (within 3 days of app).