HMDA and Preapprovals

Issue/Inquiry

The CFPB HMDA data collection chart indicates that the financial institution must determine whether the transaction involved a preapproval request for a home purchase loan under a preapproval program. What is considered a “preapproval program”?

Response Summary

A preapproval request is reportable on the HMDA LAR as an application if a commitment was issued pursuant to a program requiring a comprehensive analysis of the creditworthiness of the applicant, and is subject only to limited conditions such as the identification of a suitable property. Data must be collected under a preapproval program only if the request is denied, is approved but not accepted by the applicant, or results in the origination of a home purchase loan.

Response Detail

Under Regulation C, which implements the Home Mortgage Disclosure Act (“HMDA”), a financial institution is required to collect data on applications it received, covered loans it originated, and covered loans it purchased during the calendar year that were covered by the loan application register (“LAR”). A financial institution must collect data regarding requests under a preapproval program only if the preapproval request is denied, is approved by the financial institution but not accepted by the applicant, or results in the origination of a home purchase loan. 12 CFR §1002.4(a).

A preapproval request for a home purchase loan is an application if the request is reviewed under a program for which the financial institution, after a comprehensive analysis of the creditworthiness of the applicant, issues a written loan commitment to the applicant that is valid for a designated period of time. The written commitment may not be subject to conditions other than:

• Conditions that require the identification of a suitable property
• Conditions requiring 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, which the financial institution ordinarily attaches to a traditional home mortgage application

A request for preapproval for a home purchase loan that will be an open-end line of credit, a reverse mortgage, or secured by a multi-family dwelling is not considered to be an application. 12 CFR §1002.2(b)(2).

The official commentary notes that, in addition to conditions involving the identification of a suitable property and verification that no material change has occurred in the applicant’s financial condition or creditworthiness, the written commitment may be subject only to other conditions (unrelated to the financial condition or creditworthiness of the applicant) that the institution ordinarily attaches to a traditional home mortgage application approval. These are limited to conditions such as requiring an acceptable title insurance binder or a certificate indicating clear termite inspection, and, in the case where the applicant plans to use the proceeds from the sale of the applicant’s present home to purchase a new home, a settlement statement showing adequate proceeds from the sale of the present home.

Whether a program offered by a financial institution is a preapproval program depends on whether the program satisfies the definition of Regulation C, rather than whether the program is called a preapproval program. Official Interpretations, 1003.2(b) – 3.

Preapprovals must be distinguished from prequalifications. A prequalification request is a request by a prospective loan applicant for a preliminary determination as to whether the prospective loan 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. Regulation C does not require an institution to report prequalification requests on the LAR, even though these requests may constitute applications under Regulation B for purposes of Adverse Action Notices. Official Interpretations, 1003.2(b) – 2.

This indicates that the degree of analysis for a prequalification request is less than that for a preapproval, no commitment is issued by the institution, and the conditions that the prequalification is subject to will be more extensive.

This entry was posted on Monday, February 11th, 2019 at 6:00 am.