 Application
or Loan Data
Preapproval
The new revisions consider requests for
preapproval of home purchase loans as applications.
For all home purchase loans and applications, lenders
must report whether a preapproval was requested and,
if so, report denials of such preapproval requests with
a separate action taken code. The lender also has the
option of reporting preapproval requests that were approved
by the lender but not accepted by the applicant. Lenders
will not report preapproval requests that are withdrawn
or incomplete. Prior to the amendments, requests for
preapproval were not reported.
WHAT IS A PREAPPROVAL?
A request for preapproval is an application for a home
purchase loan in which the lender, after a comprehensive
analysis of the creditworthiness of the applicant, issues
a written commitment to the applicant for a specific
time period to extend a home purchase loan up to a specified
amount. The written commitment may be subject to only
a limited set of conditions, including:
- the identification of a suitable property;
- verification that no material change has occurred
in the applicant’s financial condition or creditworthiness
prior to closing; and
- limited conditions ordinarily attached to a traditional
home mortgage application (such as certification of
a clear termite inspection).
DISTINGUISHING PREQUALIFICATIONS FROM PREAPPROVALS
Determining whether a request by a potential applicant
is for prequalification or preapproval is critical in
deciding what applications to report under HMDA. The
primary differences between them are that a prequalification
is a less formal request in which the underwriting is
less rigorous and the lender makes no binding written
commitment to provide financing. The commentary to Regulation
C differentiates between them as follows:
PREQUALIFICATION
- A prequalification request is a request by a
prospective loan applicant for a preliminary determination
on whether the prospective applicant would probably
qualify for credit under an institution's standards
or for a determination of the amount of credit for
which the prospective applicant would probably qualify.
PREAPPROVAL
- A preapproval request is a request by a prospective
loan applicant in which the lender has calculated
the applicant’s buying power and has committed
in writing to make the loan, provided the home's
value draws an adequate appraisal. The lender verifies
the applicant’s income, asset and debt information.
Preapprovals are generally more time-consuming than
prequalifications because the lender may request
copies of tax records, pay stubs and bank records,
and may pull a copy of the applicant’s credit
report and check for any inconsistencies in work
or credit history.
REASON FOR CHANGE
The Federal Reserve Board believes that requests for
preapproval have become commonplace in the mortgage
market and that including this information in the HMDA
data will more accurately reflect market activity. Furthermore,
data on denials of preapproval requests will provide
more complete data on the availability of home financing
and will be useful in determining fair-lending compliance.
As with traditional applications, these preapproval
data will allow comparisons of minority and non-minority
populations. The comparisons will serve as useful screening
devices to help identify underwriting processes and
practices that may warrant scrutiny.
REPORTING PREAPPROVALS ON THE HMDA-LAR
“Preapproval” field on the HMDA-LAR
The reporting requirements add the "preapproval"
data field and codes as well as additional codes under
the “action taken” field. For reporting
purposes, record whether an application or loan involved
a request for preapproval of a home purchase loan in
the new “preapproval” field. The three code
choices for this field are:
Code 1 – Preapproval was requested
Code 2 – Preapproval was not
requested
Code 3 – Not applicable
If an institution has a preapproval program, but the
applicant does not request a preapproval, the institution
should enter Code 2. If an institution does not have
a preapproval program, the institution should enter
a Code 3. Also enter Code 3 for applications or loans
for home improvement or refinancing and for purchased
loans.
Under the existing “action taken” data
field, codes have been added to cover preapproval requests.
For reporting purposes, use one of the revised code
choices:
Code 1 – Loan originated
Code 2 – Application approved
but not accepted
Code 3 – Application denied
by financial institution
Code 4 – Application withdrawn
by applicant
Code 5 – File closed for incompleteness
Code 6 – Loan purchased by
your institution
Code 7 – Preapproval request
denied by financial institution
Code 8 – Preapproval request
approved but not accepted (optional reporting)
Consistent with current reporting rules, a request
for a preapproval that results in loan origination will
continue to be reported as Code 1. A request for preapproval
that is withdrawn or incomplete is not covered under
HMDA and should not be reported. Preapproval requests
that are denied should also be reported.
| EXAMPLE
ONE
FACTS: Cindy Miller has an established
credit history with Farmers and Builders
Bank. She speaks with a loan officer
regarding the fact that she and her
husband would like to buy a bigger
house. As the conversation continues,
she starts to discuss how their financial
position has improved dramatically.
Consequently, the loan officer says
that he will be glad to evaluate their
income, current debts and credit history
to see how much money they might qualify
to borrow. The next day, he calls
Miller on the telephone to tell her
the maximum loan amount for which
she would qualify and invites her
to contact him once a property has
been identified. |
|
QUESTION |
Is this a preapproval
that is subject to Regulation C? |
|
ANSWER |
This encounter
does not fit the definition of a request
for a preapproval. This informal fact-finding
request is closer to a prequalification.
The loan officer performed only cursory
underwriting to determine the maximum
amount of money that the couple might
qualify to borrow. He did not issue
a formal written commitment to originate
this loan once a suitable property
was identified. |
|
|
| EXAMPLE
TWO
FACTS: Mortgage Lending Inc. is contacted
by Matt and Helen Barstow, who are
in the process of buying their first
house. The husband and wife complete
a written application and provide
a great deal of personal financial
information, including where each
is employed, monthly income, personal
assets and current debts. The mortgage
company evaluates the credit according
to Fannie Mae underwriting guidelines
and issues a written loan commitment
for $150,000. This commitment is good
for the next 60 days. The only limitation
placed on the commitment is that a
suitable property is found and that
the couple’s financial position
does not substantially deteriorate
during the term of the commitment.
|
|
QUESTION |
Is this a request
for preapproval that is subject to
Regulation C? |
|
ANSWER |
Yes, this request
is an example of a request for preapproval.
The mortgage company has an established
formal program in which applications
are underwritten using standards that
are similar to those used in underwriting
a standard mortgage loan application.
Once the applications are approved,
the mortgage company issues a formal
written loan commitment for a specified
amount for a specified time period.
The limitations that are placed on
each commitment are limited to those
specifically permitted in a preapproval
program by the definition in Regulation
C. |
|
QUESTION |
If within the
60-day time period that is provided
in the loan commitment, the couple
locates a home and the mortgage company
extends a mortgage loan, how would
this transaction be reported? |
|
ANSWER |
In this case,
the preapproval resulted in a loan
origination. Therefore, the mortgage
company should report a Code 1 for
“preapproval was requested”
in the preapproval field and a Code
1 for “loan originated”
in the “action taken”
field. |
|
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