Application vs. Prequalification

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Question:

We are confused as to what is considered a prequalification and what is an application. According to your definition it's a prequalification if a specific property is not identified. We have a situation where a borrower came in and got prequalified without a specific property in mind. At this point we are classifying the file as a prequalification. Several days later he calls and says he has found a property and is signing the purchase agreement that day. Our loan officer does not send out disclosures until a week later when she gets the purchase agreement. Should her three days have started when he told her he had found a property and was signing the purchase agreement? Our loan officer is saying that the borrower did not state the specific address (the loan officer did not ask for it either). Therefore our loan officer said it was still a prequalification until she received the purchase agreement. Is the loan officer correct? If it is not considered an application until we have the specific address what obligation do we have to ask for the address? This loan officer also stated that she never does the disclosures until she has a purchase agreement. Any information you have on a prequalification versus application and when we are required to send disclosures would be great. We argue about this all the time!

Answer:

The difference between a prequalification and an application is becoming more and more important. Concerns about discriminatory prescreening and about predatory lending have made this a hot topic. There will be changes made to both Regulation B and to Regulation C to clarify the difference. Right now, the regulations say two different things. The regulators' goalis to reach as broadly as possible forward into the application process and give preapplications as much coverage as possible. Right now, Regulation B clearly applies to preapplications while Regulation C has not. However, the changes to Regulation C bring in required reporting of prequalifications. That will inevitably call attention to prequalifications and increase the lender's risk of noncompliance with early disclosures under Regulations Z and X (RESPA).

Right now, RESPA does not apply unless and until there is a property. It is the existance of a dwelling as security that triggers RESPA coverage. The early disclosure rule in Regulation Z is triggered by a written application and coverage under RESPA. Needless to say, the actual moment of coverage is unclear in the situations you describe.

How to solve this? I think you are right on track when you suggest that the loan officer has a duty to collect as much information as possible as soon as possible. When the customer calls to say that they have identified a property, the pieces have clicked into place from the customer's perspective. Therefore, the loan officer has a duty to act accordingly. That means they should either get the property address and the sales price so that disclosures can be generated or schedule a facetoface meeting with the applicant (if that is appropriate) so that the written application can be formally taken. The date from which to count the three days would be the earlier of whichever course of action the loan officer and appliant took.

First published on BankersOnline.com 5/06/02