Asked HUD the question regarding requesting verification documents on a prequalification since a prequal isn't covered under RESPA (don't have property address, for example). Sorry for the length of the question, but I thought more detail was better than not enough.

Q: Pre-2010 RESPA rules, many lenders would be asked to do a prequalification of customers, and this generally occurred before the customer had located a property. Many realtors require that the customer have a "prequal letter" in hand before they start looking for properties. Some lenders would issue these prequal letters based upon very limited information and no verification of the information provided by the applicant (i.e. brokers). However, other lenders, such as banks, would not issue these prequal letters without having received verification documents verifying the information the applicant put on the application form (i.e. paystubs, W-2s, etc.).

RESPA §3500.7 clearly states that "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."

Because lenders would be requesting this verification documentation not as a condition for providing a GFE (given that it's not a RESPA covered application at that point since there is no property address), but as a condition for providing the prequalification letter, is it okay for lenders to continue to request that verification documentation at this early point in the process? Although the loan will become a RESPA covered loan application once the last pieces of information are given (i.e. property address, estimated value of the property), at this point in the process, it's not yet a RESPA covered loan application.

HUD's Answer:

Finally a sensible answer, and one that agrees with me..

Thanks for posting this.

thanks for posting this info.

Yes, Dan, that's what we thought too as we did the happy dance!

It's great when the feds respond in a way that actually makes sense. Thanks for pursuing this with HUD.

For what it's worth...I had posed the same question to HUD. I received my answer back today:

You inquired whether loan originators can request verification documents on a prequalification or preapproval.

No. In order to prevent over burdensome documentation demands on mortgage applicants, and to facilitate shopping by borrowers, the final rule specifically prohibits the loan originator from requiring an applicant, as a condition for providing a GFE, to submit supplemental documentation to verify the information provided by the applicant on the application. Loan originators, however, can require applicants to provide such verification information after the GFE has been provided in order to complete final underwriting. In addition, the rule does not bar a loan originator from using its own sources before issuing a GFE to independently verify the information provided by the applicant.

Similarly, HUD has long supported a public policy goal of creating a circumstance where consumers can shop for a mortgage loan among loan originators without paying significant upfront fees, or requiring burdensome documentation, that impede shopping. To this end, and consistent with the Federal Reserve Board’s recently issued revised regulations limiting the fees that a consumer may be charged for the delivery of TILA disclosures, loan originators may not charge consumers anything more than the cost of a credit report prior to issuing a GFE.

So now we have contradicting answers from HUD. As I stated in a different post, I'm not relying on any phone calls or emails from HUD. Unless it's in the regulation or in a FAQ, it doesn't count (to me). This is proof of what I'm talking about.

I know I'm one of the few, if not the only one, that takes this stance. But, until you have all 6 pieces of information that defines an application in 3500.2 then you do not have an application that is subject to RESPA. Therefore the provisions of RESPA do not apply and until that application is subject to RESPA HUD does not have the authority to tell you how you can and cannot process your pre-approval/qualifications.

NOW, on the other hand you can't purposely leave out information to avoid the requirements either. You have to do your due diligence to complete the application otherwise you have Reg B issues.

3500.7 plainly states you cannot require the documentation as a "condition" of issuing the GFE. So again I'm saying as long as you provide the GFE within the 3 business day of receiving an application subject to RESPA then you have met your disclosure requirement.

I can see your point Dan, & I can argue it for a bank. However when you read HUD's stance (in the preamble) and here, it's tough to argue this "gray area":

In order to prevent over burdensome documentation demands on mortgage applicants, and to facilitate shopping by borrowers, the final rule specifically prohibits the loan originator from requiring an applicant, as a condition for providing a GFE, to submit supplemental documentation to verify the information provided by the applicant on the application. Loan originators, however, can require applicants to provide such verification information after the GFE has been provided in order to complete final underwriting. In addition, the rule does not bar a loan originator from using its own sources before issuing a GFE to independently verify the information provided by the applicant.

Similarly, HUD has long supported a public policy goal of creating a circumstance where consumers can shop for a mortgage loan among loan originators without paying significant upfront fees, or requiring burdensome documentation, that impede shopping. To this end, and consistent with the Federal Reserve Board’s recently issued revised regulations limiting the fees that a consumer may be charged for the delivery of TILA disclosures, loan originators may not charge consumers anything more than the cost of a credit report prior to issuing a GFE.

I'm not putting additional burden on the consumer that prevents them from shopping. They have come to me and asked me to pre-approve them for a loan. Before I give them a loan commitment they are darn well going to provide me the information I need to underwrite that request.

(5) The lender may at any time collect from the loan applicant any information that it requires in addition to the required application information.

A pre-approval/qualification is generally not subject to RESPA because they do not meet the definition of an application under 3500.2 therefore I have no regulatory obligation to provide the consumer a GFE, nor will I going forward because of the change circumstance rule. My pre-approval/qualification request is not an application for RESPA purposes therefore I am not requesting verification documents as a condition to issue the GFE, nor does my request place any undue burden on the consumer from shopping elsewhere. In fact once I provide a loan commitment with all the terms he has information that would benefit him in shopping other lenders such Lender Dan has committed these terms to me, what can Lender David do to beat Lender Dan's terms?

. . . 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.


My request for the consumer to provide me verification documents in order to give him a loan commitment is not keeping him from shopping my competitors nor am I conditioning the issue of a GFE on the verification documents. Once the application becomes an application under 3500.2 the consumer will receive their GFE within the alloted 3 business days regardless of any other documentation received and IMO that is in compliance with 3500.7.

If we require verification documents before doing a pre-approval or pre-qualification, and the customer later submits a formal application which requires a GFE, then haven't we in effect required additional verification before issuing a GFE?

Also, I had a related question I was hoping someone could comment on. Our Mortgage Dept does prequalifications prior to a specific property be decided on to allow customers to know the price range of homes they need to be looking at. They state that customers want to know an idea of the closing costs they can anticipate. Is there any way of providing this information without it becoming an actual GFE?

Dan is going rogue...

Yes you have but you have not required those documents as a condition of issuing the GFE. And as I said you aren't even required to issue a GFE on pre-approvals/qualifications UNLESS they meet the definition of an application in 3500.2.



You can issue them a statement something to the affect that our closing cost range from $X to $Y. You could even put together a sheet that shows typical closing costs such as Title work will range from X To Y dependent on the loan amount, etc. Just make it generic without any of the GFE wording or reference to HUD lines. IOWs it shouldn't take on the persona of a GFE.

I am leaning towards Dan's camp and I am not sure that HUD's ultimate view will be any different - i,e, the deferral on the pre-qual question to the FRB regulations in the FAQs as an example. If the prequal doesn't trigger an application under RESPA, then it is not covered. They are not shopping for a loan, they are seeking a determination as to what they will qualify for. Settlement costs are not even a part of or a consideration within that equation and would be dealt with at the time of application under the RESPA and TILA standards.

And what we have here is a classic example of conflicting benefits for consumers.

One the one hand, consumers want to be able to shop the costs among lenders before committing to a particular loan.

On the other hand, consumers want to be able to have that "Pre-approval" letter to strengthen their hand at the bargaining table. If a seller receives two offers, one from an unproven borrower and one from a "pre-approved" borrower, the pre-approved borrower has a better chance of having their offer accepted. And many sellers/brokers are saavy about the difference between "pre-qualified" and "pre-approved."

No. But without revising the fees affected by the change would require you to live with the original disclosure.

Also, if you are going to redisclose you must do so within 3 business days of learning of the changed circumstance.

FWIW I agree with Dan. Without all 6 pieces of info, it isn't an application and not subject to RESPA. Asking for a prequal and needing info for the prequal doesn't, IMHO, go against the rule since it doesn't fall under the RESPA rule without all the info...

The hesitation with issuing a GFE on a preapproval is simply HUD does not consider hte borrower finding a property as a changed circumstance, which really exposes the lender that issued the GFE.

We have emailed HUD with a question not unlike FlamingoGal however we have indicated we want to provide a listing of anticipated closing costs a borrower could anticipate in a purchase transaction. We believe that a PreQual is incomplete if there is not a reasonable discussion as to what to expect from a cost perspective. Obviously, part of a PreQual is knowing the borrower has the reserves and funds due at closing. First time homebuyers especially want to know what is it going to cost. We would not be issuing a GFE with a PreQual, just an cost worksheet.

When we get an answer, we will share with the board.

*RANT WARNING*

AAAAAAAHHHHHHRRRRRRGGGG! Okay - that's just a very frustrated compliance officer venting a little steam. I know we are all in the same boat, but this is CRAZY, FRUSTRATING, and HUD - I hope you are reading - OF NO HELP AT ALL TO CONSUMERS!!!! This never should have been finalized with so many unanswered questions!!! How can we possibly have any assurance we are properly disclosing when we don't have enough guidance to get it right, the guidance we do have is conflicting, and so much of the guidance doesn't even make sense - it will complicate things even more for borrowers! Because we don't have enough info in the Reg or FAQs for us to make decisions on our questions, I've emailed many questions to HUD, and haven't received answers to even a third of those. I know they are busy and I don't fault the employee, but how can this be beneficial and less expensive to the consumer?

Bullseye - do you happen to have the name of the person who gave you that answer?

What I'd like to do is take the answer they gave you, and forward it with the answer they gave me back to HUD to point out the inconsistency and ask for clarification.

Thank you!

"RESPA Staff" was all that was provided. Sorry!

I am with the posters above and not putting a lot of faith in these emails. I have also spent a lot of time on the phone with my examiner (FDIC) and don't really feel all that comfortable with a lot of what he is saying either. So I guess we'll just fly on a wing and a prayer until exam time or HUD helps us out!

All of you keep talking about HUDs 6 required pieces of information. Why do you leave out the 7th? HUDs requirements are their baseline 6 pieces of info, and further, any other information deemed necessary by the loan originator. Many lenders/brokers are requiring additional items, the most common of which is a completed and signed 1003.

As a company policy, requiring a completed 1003 - which, by the way, makes a heck of a lot of sense considering that it has many items necessary to make a credit decision not covered by HUD's baseline 6 pieces of info - removes the whole question about whether or not you need to issue a GFE within 3 days of obtaining the 6 pieces of info.

Because on prequalifications and preapprovals without property - they already aren't covered by RESPA. And also because there isn't a signature requirement on a 1003 - we have many applications where it is considered an application for HMDA or RESPA, but we never get the signature of the applicant.

Just thanking you again Bullseye for posting the response you got from HUD because we never would have received a follow-up response from them reversing their original opinion. I sent the response you got along with the original response I got to HUD and requested clarification as the two responses were in opposition. (not the first time I've had to do to this) I was told that the original response we got - which we just got last Tuesday - was an incorrect response.

Okay - I'm not surprised - if you look at where I posted their answer, I said I was surprised by the answer. But, I am very frustrated - basically, it's really no use emailing questions to them as you can't trust their answers and they aren't going to tell you later if they determined the answer they gave you was wrong. So, we are just supposed to fly by the seat of our pants on the ones we have questions on unless they come out with an FAQ that addresses it (and we then find out we've been doing something wrong for months).