Pre-Approvals under new RESPA Rule

Hi guys, I am having a very hard time with the pre-approval scenario under the new rule. We mainly serve 1st time homebuyers and we also work with brokers. These types of Borrowers have to have a pre-approval letter to shop for a house. Has anyone come up with some good procedures to allow for pre-approvals? or will we have to do away with our pre-approval program?

No address = No RESPA

I think the problem is....as my mortgage center was describing....you can't ask for verification documents until you provide a GFE and you don't want to provide a GFE without property address because if you do, you're bound by it....thus you can't pre-approve a loan. I hope I wrote that correctly.

You are correct Swiggles.

you can't ask for verification documents until you provide a GFE

The transaction would not be subject to RESPA, so there would be no GFE. So ask away.

So, do you two gentlemen agree? I guess what you're saying Randy is that the application with no address is not subject to RESPA and so we can ask for whatever we want to. But once there's an address, it becomes subject to RESPA and we have three days to issue a Good Faith Non-Estimate.

FWIW that's how I see it. No address means RESPA does not apply, so you only have to be aware of ECOA, HMDA and FCRA compliance isssues.

However, you cannot do a "pre-qual" if the applicant has provided a property address.

Why can't we ask for verification documents until the GFE is issued? All the FAQ's say is that Loan Originators cannot process a loan until the GFE has been issued, but they don't provide a definition of "processing" a loan.

It also says that we cannot request verification documenst as a requirement of issuing a GFE, but I dont think it prohibits it.

Melissa, I believe you have to look at the spirit of the law. The beginning words in the preamble to that section are: "In order to prevent overburdensome documentation demands on mortgage applicants, and to facilitate shopping by borrowers..."

The OTS/HUD presentation contains a bullet point that says "may not collect supplemental documentation from borrower or verify at GFE stage". It seems that regulators will expect that you don't get verification docs prior to issuing the GFE & the applicant's intent to proceed.

ahou is right. Read §3500.7(a)(5). It makes it very clear that you cannot ask for verification documents until after they receive the GFE AND express an intent to continue. Also read this from the Federal Register:

After the GFE has been received, the loan originator may collect additional fees needed to proceed to final underwriting for borrowers who decide to proceed with a loan from that originator. As noted, at that time, verification information or any other information could be required from the applicant, such as bank statements and W–2 forms, to confirm representations made by the applicant in the application. [Federal Register 11-17-08, page 68212]

I disagree. This is going to become a RESPA transaction. I don't believe asking for verification documents before there is a property identified is acceptable.

Technically, it's a loophole, but I would hate to try to defend this.

David - what is your recommendation to your clients regarding PreApprovals and RESPA? Should they not do them at all OR modify a PREQUAL product to allow for credit and ratio calcs based on a short form application, without a property?

I think you're caught between a rock and a hard place for preapprovals. Here's my opinions:
1. Only do prequalifications (no verifications requested except credit reports).
2. Issue a GFE without a property, then ask for verifications and give a preapproval. The "risk" you run is the identification of a property is not a changed circumstance. However, what's the risk here? Will a property ID'd really be that big of a deal? There will likely be other changed circumstances you can take advantage of if something on the GFE is really off.

It's loophole we'll have to use. Otherwise, we might as well get out of the mortgage business.....can't survive without the ability to issue pre-approval committments.

I'm more and more of the opinion that all this regulation is intended to drive banks out of the mortgage lending business.

We have been issuing prequalifications for years; have never issued preapprovals; and will continue to issue prequalifications. Yes, occasionally inquirers will ask for a preapproval, but after we explain that we don't do that, they are usually OK with the prequalification.

We have a HMDA pre-approval program whereby we issue formal pre-approval letters. In order to compete in our market, according to our mortgage lenders, we absolutely MUST maintain the program. Historically, we've always issued a GFE even for pre-approval requests with no address even though it wasn't a requirement.....no more.

OK, just had a great discussion with staff. No address means no "application" under the RESPA definition, but it is still a mortgage loan so it is still covered under RESPA in general. You just arent required to send the disclosures until the definition of "application" has been met, which includes a property address.

I did see the OTS presentation that stated that you cannot collect any documetns prior to the GFE, so prequalifications it is!

I agree with Melissa's interpretation. Good summary.

Soooooo.......um.......can I say that my bank does not pre-approve (has no formal pre-approval program), call the pre-approval requests pre-qualifications and still issue a formal commitment letter after gathering verfication data?

You can't gather verification data until the GFE is delivered and the borrower communicates they wish to proceed. Period! That's it.

You can do prequalifications - a quick and dirty underwriting using only verbal info and a credit report. You can certainly issue a commitment letter, but would you want to?

Poo!!!

I was kind of sitting on the fence on this one, but until all 6 criteria is obtained as outlined in 3500.2(b), you do not have an application for a Federally Related Mortgage Loan. Therefore the request is exempt from RESPA and if it's exempt then it is exempt from all provisions of the Reg.

I don't see where RESPA (3500.7(a)(4) & (5)) prohibits you from pre-approving a loan request under your normal operating procedures for your pre-approval program. You are not requiring verification documentation to provide a GFE, you are requiring it to make a "credit" decision.

HOWEVER, on page 68212 which David cited it also states the following:

None of the information collected by the originator prior to issuing the GFE may later become the basis for a "changed circumstance" upon which a loan originator may offer a revised GFE unless the loan originator can demonstrate that there was a changed circumstance in the particular information or that it was inaccurate, or that the loan originator did not rely on that particular information in issuing the GFE.

So if you have verification documents to make your credit decision then it has to be assumed when you later issue your GFE that GFE is relying on the verification information gathered, therefore you better make sure it's as accurate as possible because your chances of having a "changed circumstance" is going be slim to none.

FWIW, I do agree with the sentiment that "pre-approvals" should now be down graded to "pre-qualifications". In most cases in a purchase transaction a "pre-qualification" is as sufficient as a a "pre-approval".

OK Dan,I see what you are saying. I am still going to stay away from requesting verification documents until RESPA specifically addresses the issue...

I have come around to David and Dan's opinions on this one. Pre-approvals are dead. The ABA wrote to HUD regarding the necessity to address this issue in October. Of course - no response other than the say the Federal Reserve governs pre-approvals under Regulation C. Another handy response from DUH, err. I mean HUD.

So who wants to get in on the pool to guess the percentage of Pre-Approval Code "1" and "2" that will be missing on HMDA LARS starting with 2010 year reporting?

Kind of makes that whole field of HMDA DATA rather moot. Nice going there HUD.

Yea, I am going to go with the guys who have "compliance is my life" under their names.

Who is going to train all of the RE Agents and asset managers that demand a pre-approval letter?

I was at a RESPA symposium a few days ago. HUD attended the event and confirmed what I have always thought. This is also confirmed by a conversation I had with the FDIC. You CAN REQUEST income documentation before the GFE has been mailed or received. You cannot make the GFE conditional on receipt of these documents.

How do you prove your GFE is not conditional? That' easy, if the applicant didn't provide the requested information, would you still mail the GFE? Assumiing you had an application, yes you would. The FDIC stated if they saw lots of applications where the GFE had not been provided for 10 days after an application was received, they would suspect the GFE might be conditional. Otherwise, if your bank is good at meeting the 3 day requirement to provide earlies, you shouldn't have any problems.


If you want to be extremely conservative you could wait until after you mail the GFE or I guess you could wait until they receive the GFE. I don't think that is necessary and if you read the regulation and the Federal Register carefully this is clear. The Federal Register says you can REQUIRE documentation after receipt. It does not say you can't REQUEST documentation before receipt.

I think you're splitting hairs. When you read the Federal Register, the regulation and the FAQs, it is clear to me HUD doesn't want you asking for verification info before the GFE is issued AND they indicate they want to proceed. This is not an argument I would want to have with my examiners.

It's technicalities like this that push the law makers to write such complex laws and regulations. Do what's right and we wouldn't have to have such complicated rules.

Seriously, David, what LO is going to be sitting with the applicants and not talk about them having to bring in pay stubs, etc., if they decide to proceed with the loan? Isn't that the kind of 'request' IRBF says HUD and FDIC confirmed as ok? The last sentence quoted above is the important part.

Swiggles, back to your original question, most LOs, real estate agents and/or borrowers don't kown the difference between a pre-approval and a pre-qual. We switched to pre-quals about two years ago and haven't had a stitch of trouble. It's the down and dirty kind mentioned in this thread. The borrowers get a letter stating that, subject to verification, it looks like they'll qualify for a loan amount of $$. It ends with 'this is not a commitment to lend.' That's all the borrower and their realtor really want anyway.

I think it's ok to say "if you want to proceed with the loan, this is what I'll need." This is just like what I've mentioned with the cover letter sent with the GFE. But it's not ok to say to tell applicants to bring in documents with them at the time of application.

I also think the type of logic you mention is similar to "what LO is not going to want both spouses on a note". They do it all of the time, but that doesn't make it right.

We are not requiring the income documentation prior to issuance of the GFE but do require income documentation before an underwriter will review the file. Hence we would let them know we will take their application and issue the GFE/TIL, but would not move the application forward until they provide income information for underwriting.

On purchases, we are going to require the purchase contract as an additional item required for our definition of an application, as we see it vital to a valid GFE.

My humble opinion is that a few lenders did make the GFE conditional on the applicant providing additonal information that would then make them less likely to shop around for a loan. HUD wants to stop this and I agree with the premise that making the applicant pay fees and jump through a bunch of hoops to obtain a GFE is not a good thing.

However, I do not get the impression after reading through the FAQ, regulation, or federal register that HUD wants to prevent a lender from requesting or mentioning what documentation will be necessary. I agree with Truffle, all lenders are going to mention what they need at application. How does that discourage shopping?? Most applicants probably won't bring in the requested information for several days. By the time they do they would have already received the GFE. Either way, it would be next to impossible for a regulator to police this even if you are of the opinion that requesting documentaion is not permitted unless you time stamp when you receive the documentation.

Time will tell but I would guess in 6 months time you won't see banks being cited for requesting documentation. Since I have confirmation from my regulator and HUD that my interpretation is ok, I'm going with that. If the FDIC changes their stance on this we'll adjust as well.

If you re-read my original post you will see I do not believe RESPA prevents gathering information needed to process a pre-approval. Question 10 on page 4 of the 11/19/09 FAQs seems to support that opinion.

The RESPA rule does not address preapprovals or the information required in relation to preapprovals.

HOWEVER, the supplement paragraph I posted makes it clear that any information gathered before issuing a GFE is not a cause for a changed circumstance, thus why I agree that pre-approvals should be considered to be downgraded to pre-authorizations. Otherwise in most cases once the pre-approval becomes an application and you have to issue the GFE it will have to be darn accurate because your chances of having a changed circumstance to reissue a GFE are going to be slim to none.

It's a "risk" the FI is going to have to consider taking and consider if the benefits of continuing a pre-approval program outweighs the risks when a pre-qualification in 98% of the time will be just as sufficient as a pre-approval.

However - those of us working with hundreds of lenders and thousands of applicants know that this is going to occurr (ask for the verifying info at application). What we are doing, as a process, is follow the regulation where it states "The lender may at any time collect from the loan applicant any information that it requires in addition to the required application information. However, the lender is not permitted to require, as a condition for providing a GFE, that an applicant submit supplemental documentation to verify the information provided on the application." Therefore - we are training lenders not to require the supplemental documentation before issuing a GFE - and we will have back-room tracking to ensure a GFE is issued within 3 days of receiving the needed items for an app (per RESPA). On preapprovals, I am sure at times the GFE will be issued prior to receiving an address (even though technically it isn't subject to RESPA until we have an address, and that isn't a "changed circumstances, etc. etc.)

We are like mice on the wheel with this me thinks...

If you are going to continue your pre-approval program why would you do this? The addition of an address would not be a changed circumstance for you to issue a revised GFE (FAQ #8 page 14), and if there is no address there is no application for a Federally related mortgage loan subject to RESPA so the RESPA rules do not apply.

As stated, the risk in pre-approvals is that you have all verifying documentation obtained prior to issuing the GFE and it will be very unlikely that you will have a legitimate changed circumstance once you have an application subject to the GFE because the information obtained prior to issuing the GFE is not a basis for a changed circumstance.

Because of the potential risk of the fees being out of tolerance in a pre-approval situation at this point I don't think I want to accept that risk and put the bank in a position to have to absorb those fees if out of tolerance.

Again I emphasize it's a risk factor for the FI to accept, but if you do accept it I do not believe you are in violation of 3500.7(a)(4) & (5) by requiring verification document to issue a true pre-approval (IOWs all your underwriting is 100% complete with the exception of the identity of an acceptable property).

Now for me I am putting this topic to rest.

IMO a purchase agreement is a verification document. I don't believe you can require a purchase agreement (verification of the property address) as part of your definition of a completed application under RESPA.

In reference to the new HUD/GFE guidelines, can we run automated underwriting, in addition to a credit report, on an incomplete application (missing property address on a purchase) for prequalification purposes, if we only charge for the credit report?

Sure. You can do anything you want as long as you don't ask for verification documents or a fee.

Well pushback from my clients is that they absolutely, positively MUST BE ABLE TO issue pre-qualifications wherein all the borrower has to do is find the property they want to buy.

All of them say this service is very important to their members (yes - these are credit unions) and they can't understand why HUD would want to handicap a member who is trying to shop for a home.

I have suggested that they tell their members that HUD has made this decision and if they aren't happy, please feel free to complain to their Congressman.

As far as the issue that the address doesn't constitute a "Changed Circumstance" - that would be nice except that TRANSFER TAX FEES can vary from county to county. So I guess everyone that would issue a GFE better find out the fees for the most expensive county in their lending area and use that for the GFE.

You can issue a prequalification (based on the credit report and verbal info from the applicant). You'll have problems with a preapproval (full verification) as we have discussed.

And that is my question... what could possibly change as a result of naming a property. Changes would come from drastic appraisal change, loan amount request, loan program change, significant underwriting changes, borrower requested changes.

In my network some Orginators are of a mind that they can't ACCEPT income docs from the borrower at time of application. I think that this is taking it to the absurd level. If a potential borrower comes armed with all of their documentation at time of application do we really have to turn this documentation away? I hope not.

JJ, I agree that a property ID is not a big deal. However, where I keep going is the estimate of property value. If you haven't ID'd a property, can you really have an estimate of property value?

Based upon HUD's own FAQs (#24 of GFE-General), you are perfectly able to issue a GFE without all the identified pieces of information. However it is assumed that you had all pieces of information when you issued the GFE. Additionally, #1 under "GFE-Changed Circumstances" says that: 1)information collected prior to issuing the GFE cannot become the basis of a changed circumstance (unless it is found to be inaccurate or not relied upon)and, 2)the LO is presumed to have relied upon the named 6 pieces of information before providing the GFE. I argue, based upon FAQ #8ii (our famous property address Changed Circumstance), that the reason this is not a changed circumstance is because you cannot claim it inaccurate because it was never there in the first place, and HUD has slammed the door by saying it is automatically assumed that you relied upon it. This logic should apply to any of the pieces defined for an application. I think it is disingenuious to put an estimated property value without ID'ing a property, and I don't want to be stuck to a GFE I issued without a property value (especially where I'm from, where transfer taxes are split between buyers and sellers). That is why we have decided to nix the pre-approvals and go to prequals only.

Comply Wren - after reading that FAQ where a lender is ASSUMED to have received all 6 pieces of information if it issues a GFE, I am inclined to agree that the actual property value identified later might not be considered a Changed Circumstance.

The more I talk with mortgage lenders about this, the more I am finding they have decided that a formal Pre-Approval program is not worth the trouble.

So Pre-quals it is! Everybody gets to report a "3" in the Pre-Approval field on their HMDA LAR for 2010 data. Yay.