Pre-Approvals and Pre-Qualifications under HMDA and Regulation B

Issue/Inquiry

For HMDA purposes, what is the difference between a pre-qualification and a pre-approval? Is an Adverse Action Notice necessary if the pre-qualification or pre-approval is denied? If a customer requests a pre-approval, what date should be used on the HMDA LAR for the application if the pre-approved loan does not close or is denied due to collateral, once the property has been identified?

Response Summary

Pre-approval requests are treated as applications under HMDA if they are made under the pre-approval program in which a comprehensive analysis of the applicant’s creditworthiness is made and a written commitment issued. Pre-qualification requests are not treated as applications, and do not undergo a comprehensive credit underwriting analysis or result in a commitment; however, such requests are a preliminary determination of whether the applicant might qualify for an extension of credit from the financial institution.

A pre-approval request is also treated as an application under Regulation B and subject to the notice of action taken requirements of the regulation. Whether a notice of action taken is required for a pre-qualification request depends on whether the institution has treated it as an application, such as by making a credit decision on the basis of such request and informing the customer.

For HMDA reporting purposes, data is collected on a pre-approval request as such only if the request is denied or a commitment is issued that does not result in a loan origination. The application date will be the date of the request or the date it was received.

Response Detail

Pre-Approval and Pre-Qualification

Under Regulation C, which implements the Home Mortgage Disclosure Act (“HMDA”), a request for pre-approval for a home purchase loan is an application for HMDA purposes if the request is reviewed under a program in which the financial institution, after a comprehensive analysis of the creditworthiness of the applicant, issues a written commitment to the applicant valid for a designated period of time to extend a home purchase loan up to a specified amount.

A home purchase loan that will be an open-end line of credit, a reverse mortgage, or secured by a multifamily dwelling is not considered an application under this rule.

The written commitment issued pursuant to a pre-approval request may not be subject to conditions other than the following:

• Conditions that require the identification of a suitable property
• Conditions that require that no material change has occurred in the applicant’s financial condition or creditworthiness prior to closing
• Limited conditions that are not related to the financial condition or creditworthiness of the applicant that the financial institution ordinarily attaches to a traditional home mortgage application. 12 CFR §1030.2(a)(2).

This means that a pre-approval candidate is fully credit approved. The approval is a commitment to lend once an acceptable property is identified, verification is made that no material change has occurred to the applicant’s financial condition, and other conditions are fulfilled that the lender ordinarily attaches to home purchase loans (e.g., acceptable title insurance or a termite inspection), but which are not related to the financial condition or creditworthiness of the applicant.

A program that the financial institution describes as a “pre-approval program” but which does not qualify as such under the regulatory requirements is not a pre-approval program, and pre-approval requests under it are not treated as applications. If an institution does not regularly use the prescribed pre-approval procedures, but rather considers requests for pre-approvals on an ad hoc basis, it does not have to treat ad hoc requests as part of a pre-approval program for purposes of Regulation C. An institution should, however, be generally consistent in following uniform procedures for considering such ad hoc requests.  Official Interpretations, 1030.2(a)(2) – 3.

A pre-qualification request is a request by a prospective loan applicant for a preliminary determination on whether the applicant would likely qualify for credit under an institution’s standards, or for a determination on the amount of credit for which the prospective applicant would likely qualify. Some institutions evaluate pre-qualification requests through a procedure that is separate from the institution’s normal loan application process; others use the same process.

Unlike a pre-approval request, however, a pre-qualification request will not go through a full credit underwriting analysis and will not result in a formal commitment. It simply provides an informal estimate of the loan amount for which the applicant might qualify and is not considered to be an application under HMDA. Official Interpretations, 1030.2(a)(2) – 1,2.

Adverse Action Notice

Under Regulation B, if a pre-approval is made under a pre-approval program, it is considered to be an application if the institution evaluates the applicant’s creditworthiness and either issues a commitment or determines that the applicant does not qualify as a pre-approval. This means that, if the request is for a pre-approval, the appropriate notice of action taken must be given in accordance with the regulation’s requirements, including the giving of an adverse action notice, if the request is declined. However, if the creditor’s program does not provide for giving written commitments, requests for pre-approvals are treated as pre-qualification requests for purposes of the regulation. Official Interpretations, 1002.2(f) – 5.i,ii.

Whether an institution must provide a notice of action taken for a pre-qualification request depends on whether the institution has treated the request as an application. For instance, an institution may treat the request as an inquiry if the creditor evaluates specific information about the consumer and tells the consumer the loan amount, rate, and other terms of credit the consumer could qualify for under various loan programs, explaining the process the consumer must follow to submit a mortgage application and the information the institution will analyze in reaching a credit decision.

On the other hand, an institution has treated a request as an application, and is subject to the adverse action notice requirements if, after evaluating information, the institution decides that it will not approve the request and communicates that decision to the consumer. For example, if the institution tells the consumer that it would not approve an application for a mortgage because of a bankruptcy in the consumer’s record, the institution has denied an application for credit. Official Interpretations, 1002.9 – 5.

HMDA LAR Date of Application

Although requests under pre-approval programs are applications, a financial institution reports data regarding a request under a pre-approval program only if the pre-approval request is denied or approved but not accepted. A financial institution will also report a request under a pre-approval program that results in the financial institution originating a home purchase loan, but it will be reported as an originated covered loan. Official Interpretations, 1003.4(a)-1.ii.

In reporting the date of application, a financial institution would report the date it received the application or the date shown on the application form. The institution should be generally consistent (such as by routinely using one approach within a particular division of the institution or for a category of loans). Official Interpretations, 1003.4(a)(1)(ii) – 1.

In the case of a pre-approval request, the date reported would be the date the institution received the request or the date of the request.

This entry was posted on Monday, March 19th, 2018 at 6:00 am.