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August 1, 2015: The Day the Pre-Approval Died?

With only 65 days left until the Consumer Financial Protection Bureau’s Integrated Disclosure Rule takes effect, you’ve got time to listen to Don McLean’s 1971 classic about one more time (that song is REALLY long). This brings me to the point of today’s blog post…

One of the many criticisms of the Integrated Disclosure Rule is that it will eliminate a creditor’s ability to provide a pre-approval/pre-qualification. Beginning August 1st, your credit union will have an “application” once you are in possession of the following six (and only six) pieces of information:

  • Member’s name
  • Member’s income (just the amount; NOT verification of that amount)
  • Member’s social security number
  • Address of the subject property
  • Estimated value of the subject property
  • Loan amount sought

Upon receipt of an “application”, the 3-day clock to provide the member with a Loan Estimate starts ticking.

The argument that pre-approvals/pre-qualifications are no longer permitted stems from the language found in Section 1026.19(e)(2)(iii) which states: “The creditor or other person shall not require a consumer to submit documents verifying information related to the consumer’s application before providing the disclosures required by paragraph (e)(1)(i) of this section.” I’m not convinced this language impacts your ability to do a pre-qualification. Let me explain.

For purposes of this blog, I’m defining pre-approval and pre-qualification as follows:

  • Pre-approval – the member has identified a subject property and is asking to be pre-approved for the purchase of that particular property.
  • Pre-qualification – the member has not identified a subject property and is merely asking for a pre-qualification (based on credit history and income). The pre-qualification is subject to the member identifying a subject property that meets the credit union’s guidelines (appraised value, etc.)

Look at the commentary to Section 1029.19(e)(2)(iii). It states as follows: “The creditor or other person may collect from the consumer any information that it requires prior to providing the early disclosures before or at the same time as collecting the information listed in Section 1026.2(a)(3)(ii).” In my opinion, this interpretation makes a pre-qualification just as applicable after August 1st as it is today.

Many buyers want to know if their pre-qualified for a mortgage loan before they begin the process of shopping for a home. Many realtors want their clients to have said pre-qualification letter. And I don’t know of too many credit unions that would feel comfortable issuing a pre-qualification letter without supporting documentation, e.g. income verification. According to the commentary outlined above, this remains a permissible practice.

If I have yet to find a property and am merely looking to get pre-qualified for a loan, the commentary makes it clear that you may collect from me any information that you require prior to providing me the Loan Estimate, e.g. income verification. Remember, if I haven’t identified a subject property then you are missing one of the six required elements of an application and are not required to provide a Loan Estimate. Section 1026.19(e)(2)(iii) only prohibits the practice of making delivery of the Loan Estimate contingent on my submitting additional documentation. So for example, if I’ve identified a property and am looking to get pre-approved to purchase that particular property, you’ll need to provide me with a Loan Estimate before you can require supporting documentation. However, keep in mind that a Loan Estimate is not a loan commitment. Nothing in the Loan Estimate commits you to extending me the mortgage loan if it turns out I don’t make as much money as I claim to.

Confused yet? You and everyone else in the industry… That’s why PolicyWorks stands ready to be your partner in mortgage lending compliance with its ComplyRight Mortgage consulting solution. Please visit http://www.policyworksllc.com/complyright-mortgage-20.cfm for additional information. On that note, have a nice Thursday!

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