Regulation B, FCRA, and Prequalification Requests

Issue/Inquiry

The Bank issues prequalification letters upon request. Its practice is to run a credit search after receiving consent from the individual. Is the Bank allowed to obtain a credit search for a prequalification or would this make it a preapproval?  If the Bank cannot prequalify the customer, does it have to issue an Adverse Action Notice?

Response Summary

Whether a creditor is required to provide a notice of action taken for a prequalification or preapproval request depends on whether it has treated the request as an application. If so, and if the Bank has indicated to the customer that it would not approve the loan, then it must provide an Adverse Action Notice in a timely manner. A permissible purpose for obtaining a credit report includes the written instructions of the consumer or using the information in connection with a credit transaction involving the consumer.

Response Detail

A financial institution may offer information to prospective borrowers prior to the submission of a written loan application. Such an activity may include a formal prequalification program, in which the institution applies basic underwriting standards to the prospective borrower’s financial situation. Under Regulation B, a prequalification request is a request from a prospective borrower for a preliminary determination on whether the prospect would qualify for credit under the creditor’s standards. Generally, a prequalification request will not undergo full credit underwriting and will not lead to a formal commitment to lend.

Preapproval requests are requests which undergo normal underwriting and lead to a credit fully approved, with only the need to identify a property which meets all collateral conditions, such as sufficient appraised value for the amount requested, no title issues, and all inspections passed. The only conditions that may be placed on a true preapproval are collateral conditions. Official Interpretations, 1002.2(f) – 5(i).

Regulation B provides a creditor some freedom in establishing their own application process, including what information they will require in an application. 12 CFR §1002.2(f). Nevertheless, whether they will be required to provide the appropriate notification of action taken for a prequalification or preapproval request will depend on whether they have made a credit decision in response to the request.

If the creditor provides general information, such as loan terms and the maximum amount the customer could borrow under various loan programs, but explains the process the customer must follow to submit a loan application and the information it will analyze in reaching a credit decision, the request will not be an application and a notice of action taken will not have to be provided.

On the other hand, if it has informed the customer that it would not approve the application because, for example, there is a bankruptcy on the customer’s record, then it has treated the request as an application for credit. Since it has denied the application, it must provide the appropriate notification within the time prescribed by the regulation. Official Interpretations,  1002.2(f) – 3.

With respect to credit requests, the Fair Credit Reporting Act recognizes that a permissible purpose for obtaining a consumer report includes doing so in accordance with the written instructions of the consumer to whom it relates, or in connection with a credit transaction involving such consumer. 15 U.S.C. §1681b(a)(2),(3). The Bank would therefore be permitted to obtain a consumer report in response to a request for a prequalification, in that it has the consent of the consumer (which should be written), and that it is in connection with a credit transaction involving the consumer.

This entry was posted on Monday, April 30th, 2018 at 6:00 am.