Are you a HMDA bank? Do you have a preapproval program? What’s a prequalification?
When it comes to HMDA, pre-approvals and pre-qualifications are completely different animals. Your bank might use the terms interchangeably but it’s important you understand the difference so you don’t end up in hot water with your examiners! If you have a pre-approval program, it’s a big deal because it’s something you are required to report on your HMDA-LAR.
Click on the video to listen to David explain.
On July 7th, we hosted a webinar, “HMDA Advanced Lessons”, where we get into the more complicated issues related to being a HMDA reporting institution. Things like mixed-use properties, demographic information, complicated data fields, etc. The webinar is available now On Demand so be sure to check it out!
Do you have a pre-approval program? What’s the difference between a pre-approval and a pre-qualification? Hi, Dave Dickinson with Bankers Compliance Consulting.
Let’s talk about HMDA specifically. If you’re not a HMDA bank, there’s still some wording in Regulation B, the Equal Credit Opportunity Act. It talks about prequels and pre-approvals, but it really doesn’t make a big difference there. They both might be requests for credit, but let’s talk specifically about HMDA. When it comes to HMDA, if you have a pre-approval program, that’s a big deal and it’s different than pre-qualification.
What’s a pre-approval? Well, let me explain what a pre-qualification is first. A pre-qualification isn’t really defined. It says that it’s a gut level. Maybe I’m looking at their FICO score. Maybe I’m asking some debt-to-income, loan-to-value, and I’m not fully underwriting them. I’m just saying, “Yeah, I think you qualify for X amount. Let us know when you find a house.”
If you have that, you certainly have an application. You’re saying, “Yes,” or you might be saying, “No, you can’t afford a tent.” That would be an adverse action notice that gets triggered at that point. But what’s a pre-approval? Well, there’s some strict criteria.
First off, you have to have a program, and I’ll come back to that. You have to issue a written commitment for a designated period of time for a home purchase (Side note, you can’t do a refinance pre-approval.) They’re either applying or they’re not. This is only purchase loans. How much home can they afford? Written commitment, designated period of time for a home purchase where a specified dollar amount you give them, and here comes the big one.
Number five, you fully vet these applicants; comprehensive review. In fact, the Reg says that you do everything. “Full verification of income, resources, and other matters is typically done by the institution as part of your normal credit evaluation program.” That’s a quote.
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