ComplianceNovember 16, 2015

Prequalifications and preapprovals — what are they and how do the TRID rules affect them?

We’ve noticed some confusion surrounding the treatment of “prequalifications” and “preapprovals” under TRID. First, let’s define what those terms mean, and then we’ll look at the TRID consequences.

The difference between “prequalification” and “preapproval.”

Both terms describe a situation where a potential borrower tries to establish the amount of the mortgage loan that the borrower will be able to obtain. “Prequalification” is less formal than “preapproved.”

The potential borrower seeking to prequalify is only asking for a general or approximate estimation of the amount for which the borrower would be eligible. The borrower is not looking for any sort of formal commitment from the lender for a loan of a particular amount. The prequalification enables the borrower to start house hunting and look for homes to possibly purchase where the price is less than or equal to the prequalification amount.

A preapproval is a more formal statement by the creditor of how much the creditor will lend to the consumer. In a preapproval, the creditor commits to an amount that the creditor will lend to the consumer. This is a document the consumer can use in shopping for a house—the consumer can prove that he will have financing at the level shown in the preapproval.

You can remember the difference by keeping in mind that “approval” has a more specific and definite tone to it—the consumer has been approved. Qualified suggests that while the consumer may meet certain standards, he or she has not yet been approved.

How are preapprovals and prequalifications treated under TRID?

There are three rules in TRID that have an effect on preapprovals and prequalifications:

  • The rule that prohibits imposing fees before delivery of the Loan Estimate
  • The rule that prohibits requiring verification information prior to providing the Loan Estimate
  • The rule that requires a notice on written information provided to the consumer

The Fees Rule

This Rule prohibits anyone from charging the consumer a fee in connection with the consumer’s mortgage loan application prior to the consumer receiving the Loan Estimate disclosures and prior to the consumer indicating an intent to proceed with the transaction. One exception is charging a fee for pulling a consumer’s credit report. This fee may be charged to the consumer in advance of issuing the Loan Estimate.

If the consumer is requesting a prequalification or preapproval, and the loan would be subject to the TRID rules, don’t charge a fee (other than for a credit report) prior to providing the Loan Estimate. Also, be sure the consumer has indicated an intent to proceed with the transaction before charging any associated application fees.

The Verification Rule

This rule prohibits anyone from requiring the consumer to provide documents verifying information related to their mortgage loan application before providing the Loan Estimate. If the consumer voluntarily submits verifying information, the creditor is allowed to collect it and take verification action. Also, the creditor can collect any information that it normally requires prior to providing the Loan Estimate. But neither the creditor nor anyone else can require, before providing the Loan Estimate, that the consumer provide verifying documentation.

You can collect the designated information you require in creating a prequalification or preapproval, but you cannot require the consumer to provide documentation that verifies this information unless you have provided the Loan Estimate. For example, if you normally require the balance amounts of deposit accounts, you may collect that information but you cannot require that the consumer provide bank statements to verify the information without having provided the Loan Estimate.

The Written Information Rule

This Rule requires that a notice be placed on any written estimate of terms or costs provided to the consumer before the consumer receives the Loan Estimate. The notice must be clear and conspicuous, and appear at the top of the front of the first page of the written estimate. It must be in a font size no less than 12 point, and must read as follows: “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.”

You should look at your documentation for pre-qualifications and preapprovals to see whether they should carry this notice.

More information on the rules governing prequalifications and preapprovals in Regulation Z at 12 CFR 1026.19(e) and the corresponding part of the Official Commentary.