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#1357916 - 03/16/10 02:41 AM When does pre-qual = application?
Beth Fay Offline
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We are just completing an initial review of our mortgage application procedures incorporating all of the recent changes wrt RESPA, MDIA, HPML, etc. and are grappling with how to handle "pre-qualification" situations.

Under our current procedure, we do NOT provide a GFE/TIL when there is no property address identified (i.e. a "TBD" address) as this clearly is not an "application" under RESPA's definition.

BUT ... what about the pre-qual situation (which is quite common) where the borrower is considering or may have even made an (as yet unaccepted) offer on a specific property? In such a case there is no final agreed-upon contract, but the borrower has a property in mind and may have a target price he is willing to pay.

I have written our procedure (thus far) to require that we need an actual final (seller-agreed) sales contract in order to say that the property has been "identified" as well as to determine the "estimated property value" (sales price) and loan amount before we will issue a GFE. Our auditors are leaning towards the property being "identified" in such a case even if there is no seller agreement - thus triggering the GFE requirement. Obviously issuing a GFE in such a case is problematic as there is not yet a final purchase agreement and, even if the borrower does obtain a seller agreement on that particular property, many of the figures will almost certainly change. The "solution" to that (at least in the auditor's argument) is that any such changes become a "changed circumstance" if the property address / sales price / loan amount change vs. the GFE issued on the "identified property".

I would apprecite the thoughts of the BOL community on this issue. Thanks in advance.

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#1357965 - 03/16/10 01:02 PM Re: When does pre-qual = application? Beth Fay
Dani York, CRCM Offline
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It's my understanding and has also been discussed at length in the threads that requiring a sales contract to issue a GFE violates new RESPA. This is because the sales contract is viewed as a verification document and the bank is prohibited from requiring a verification document from the applicant before issuing the GFE.

I would side with your auditors on this one. If your applicant identifies theproperty on the application regardless of the status of a sales contract, and your have the other 5 pieces of information required by new RESPA, I would issue the GFE and then look for a changed circumstance once you get the contract.

I can apply for a loan to buy a house at 123 Main St before I even make an offer because I want to know 1--that I can get the loan, 2--if I have an approval/commitment, I can close faster, and 3--know how much I can offer on the house. I don't need a sales contract to do any of those things.
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#1357982 - 03/16/10 01:24 PM Re: When does pre-qual = application? Dani York, CRCM
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I agree with Dani York and your auditors, and those are the procedures I have set up here. Like Dani said, RESPA prohibits you from requiring a PA prior to issuing a GFE.

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#1358638 - 03/17/10 11:15 AM Re: When does pre-qual = application? MN Banker
Beth Fay Offline
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Interestingly enough, Boggs Patton has just published a summary of a meeting between HUD and representatives of some of the largest lenders and one of the topics was this very issue.

HUD's guidance (albeit in an industry post, not an "official" communication from HUD) states:

"With regard to pre-approvals, HUD advised that a pre-approval without the issuance of a GFE may be used in a purchase transaction only if the consumer has not executed a purchase contract on a property. [my emphasis]"

Of course this does not address the situation where the buyer may have "executed" a contract (i.e. made an offer), but where the seller has not responded or accepted - still not clear.

Doesn't this very comment from HUD indicate that they recognize the presence of an actual contract - regardless of wheter the property has been "identified" - as a central part of "idenifying" a property?

Perhaps HUD will at some point actully issue official guidance on this. I really do not agree that a purchase contract is a "verification document" - it is a necessary item in order to determine not only the property address, but also the sales price (property value) and loan amount.

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#1358729 - 03/17/10 01:33 PM Re: When does pre-qual = application? Beth Fay
Dani York, CRCM Offline
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Originally Posted By: Beth Fay
I really do not agree that a purchase contract is a "verification document" - it is a necessary item in order to determine not only the property address, but also the sales price (property value) and loan amount.


I guess my issue with this stance is this...

I come in and fill out a 1003, list the address of a house I want to buy, give you an amount that I want to borrower, and all the other information requested on the application document. I have identified a property that I want to purchase. How is the contract not a verification document in this instance? You will ask for my tax returns to verify my income, you will pull credit to verify my ability to repay, you will request verification of my employment, etc, etc. If I have given you an amount and a property address in writing on a FNMA 1003 application, why do you need a sales contract to issue me a GFE? You will only be using the sales contract to VERIFY everything I have already put on the application.

Again I ask, how is the sales contract not a verification document?
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#1358745 - 03/17/10 01:44 PM Re: When does pre-qual = application? Dani York, CRCM
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I don't disagree that the contract itself is a verification document. I just don't think you have to issue the GFE until the contract is executed. Basically you could say that we require one additional piece of information in addition to the six required by respa and that piece of information is that you have a contract on the property. That doesn't mean that you are going to require the borrower to send you a copy of the contract to verify what they are telling you. It only means that you require the contract to be completed. Maybe that doesn't really help anyone, but I think there is a distinction to be made there. I guess the only thing it may help with is keeping the lender from having to issue a separate gfe on fifteen different properties before the borrower settles on one.

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#1358761 - 03/17/10 01:56 PM Re: When does pre-qual = application? Brock
Dani York, CRCM Offline
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I understand what you are saying, and not that I don't agree with you in spirit; however, IMHO I don't think that requiring the applicant to have an executed contract to issue a GFE follows the spirit of what RESPA is trying to accomplish in making the GFE a shopping tool.

If I want to shop around for houses, that is my perogative. As an applicant, if I come to you and ask for a GFE on 15 different properties, you are required by regulation to issue me a GFE on each one if I have provided you all six pieces of information on my application. While regulation includes the language "and any thing else the lender deems necessary...", I believe that banks will be hard pressed to argue the neccessity of requiring anything more than the 6 items specifically stated by RESPA in order to issue me a GFE, especially items that could be viewed as verification documents, due to the regulatory climate we are in right now.

Of course, this is just my opinion, and it will really depend on your regulators and what they are looking for......
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#1358795 - 03/17/10 02:12 PM Re: When does pre-qual = application? Brock
M Cockrell Offline
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I agree with Dani.

If an applicant is required to have a contract in place before being provided with a GFE, the likelihood of them shopping is significantly decreased.

IMO, it flies in the face of the "spirit of the law."
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#1358875 - 03/17/10 02:50 PM Re: When does pre-qual = application? M Cockrell
Brock Offline
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I totally disagree. The spirit of RESPA, despite HUD's attempts to expand it into something much greater, is to allow consumers to shop for a loan. It is not to allow them to shop for a home. . I can see where the consumer would want to know the costs associated with each particular property, but why should the lender be responsible for providing this on multiple properties (all subject to tolarances) when they can't even charge for any of it? There is real work in creating these estimates and I want to comply, but I don't want to expand the reach of the regulations unnecessarily either.

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#1358898 - 03/17/10 02:58 PM Re: When does pre-qual = application? Brock
M Cockrell Offline
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We'll have to choose to disagree. RESPA is applicable to 1-4 family (residential) real estate, so what kind of loans are being shopped for: "home" loans.

It is a consumer protection law; therefore, it is irrelevant what costs the potential lenders are forced to incur. It's a cost of doing business in this consumer-friendly environment.
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#1358902 - 03/17/10 03:01 PM Re: When does pre-qual = application? Brock
Dani York, CRCM Offline
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I didn't mean to imply that RESPA was to shop for a home. It is to shop for a loan; however, in some cases, applicant's do both at the same time.

My point is that requiring me, as a consumer applicant, to have an executed contract prior to issuing me a GFE even though I already told you a loan amount and gave you a property address for a home I am interested in buying does not allow me to necessarily accomplish my goals as a consumer.

I am totally with you on all the extra work that would be required in such a scenario. I am, however, trying to point out the potential risk an institution faces when deciding on what constitutes an application. Your bank can choose to handle however it wants. My institution has decided that once we have the 6 specifically identified pieces of information, we issue a GFE. We have chosen not to assume any risk by adding to the definition of an application. We have decided that if the applicant later changes properties or loan amounts, to consider them changed circumstances. This works for us since our loan products and pricing are not very complex.

Your institution needs to determine, based on your regulators, product and pricing complexity, etc what risks it is willing to take by adding to the 6 pieces of information.
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I can't herd the cats anymore, so I just set up the electric fences and let them fry when they stray out of bounds.

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#1358923 - 03/17/10 03:14 PM Re: When does pre-qual = application? Dani York, CRCM
Brock Offline
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I think your assesment is totally on in this last strand Dani. I agree that there is some risk in making the decision to consider an executed contract an additional piece of information. I think we have all seen how HUD can take its regs and expand upon them through FAQs. I guess I just feel that sometimes posters are so conviced that their company policy is the only correct way that they interpret it as law. I'm sure your policy decision makes the most sense for your business. I'm just not sure it makes the most sense for mine. I know everyone is erring on the side of caution at this point, but I like to contine to explore what the law truly allows. Thanks for debating with me.

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#1358968 - 03/17/10 03:30 PM Re: When does pre-qual = application? Brock
Dani York, CRCM Offline
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No problem. Love a good debate...sometimes I think I should have been a lawyer....definitely would get paid alot better to spout off my opinions. smile
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I can't herd the cats anymore, so I just set up the electric fences and let them fry when they stray out of bounds.

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#1358975 - 03/17/10 03:32 PM Re: When does pre-qual = application? Brock
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Brock you stated in one of the previous posts that you do not believe you have to issue a GFE until the contract is executed. IMO I disagree. The application process never requires an executed contract. RESPA disclosures are shopping disclosures. See Reg. B's due diligence requirement. Reg. B governs the application process. To summarize the due diligence requirement, it essentially says if you require something to be part of an application, then YOU (the loan officer) need to collect it. That means that if you require a property address, you need to request it. Since you cannot execute the contract, just ask. If your applicant says that XXXX is my property address, you have satisified that portion of the application process.

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#1359004 - 03/17/10 03:42 PM Re: When does pre-qual = application? Brock
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I would suggest that you search purchase contract and David Dickinson's name. Somewhere in this forum I'm sure David quoted chapter and verse from the Reg that stated the purchase contract is most definitely a verification document and cannot be a condition of issuing a GFE. I'm certain I heard that in one of the training sessions I attended also...it may have even been the HUD webinar.

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#1359013 - 03/17/10 03:45 PM Re: When does pre-qual = application? CompDat
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CompDat, I think you are technically accurate without requiring more inforamtion as a part of the application process. I am saying that RESPA specifically allows the lender to require other pieces of information (I don't see how Reg B applies) in constituting a completed application, and I see no reason why you can't ask if they have an accepted offer on a home as one an additional piece of information. I do agree that the regs do not allow you to require that the contract be sent to you prior to sending the GFE, but that can certainly be a question. If they say no we haven't put in any offers yet or something like that then you say ok your application is incomplete until you have an accepted offer. As soon as you have that we will update the rest of the information based on your knowledge of the contract (not our review) and then we will send you a GFE.

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#1359041 - 03/17/10 04:04 PM Re: When does pre-qual = application? Truffle Royale
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Originally Posted By: Truffle Royale
Somewhere in this forum I'm sure David quoted chapter and verse from the Reg that stated the purchase contract is most definitely a verification document and cannot be a condition of issuing a GFE.


I am not arguing that requiring a contract to be sent to you is not a verification document. I am arguing that asking if the contract has been executed is allowed. It is difficult to separate the two in the manner in which most lenders operate, but if you can do it, there is a possiblity to ask the question.

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#1359043 - 03/17/10 04:05 PM Re: When does pre-qual = application? Brock
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Originally Posted By: Brock
RESPA specifically allows the lender to require other pieces of information


It does permit financial institutions from requiring other pieces of information, but those pieces of information cannot be more burdensome than the regulation. For example your institution may require (example) an estimation of credit score, but they cannot require the credit score before issuing the GFE. So to suffice they could say... do you know if you have good credit, bad credit etc. That will not permit them to pull credit prior to issuing a GFE. (I know bad example since a credit pull is the only verification that can be performed.

Originally Posted By: Brock
I don't see how Reg B applies


Reg. B governs the application process. Your references to RESPA's definition of application are the definition of application to provide a GFE. Thus, both regulations work hand in hand. It is very hard to understand RESPA's definition without Reg. B's definition. The diligence requirement ties it all together. It basically says, you lender, need to request. The verification phase, comes third. Thus the providing of the information by the applicant (not the verification of) is sufficient to document an application.

Originally Posted By: Brock
and I see no reason why you can't ask if they have an accepted offer on a home as one an additional piece of information


You can certainly ask it, but you cannot require it.

Originally Posted By: Brock
If they say no we haven't put in any offers yet or something like that then you say ok your application is incomplete until you have an accepted offer


This seems burdensome and probably excessive. The borrower has provided all the information to complete the application except for something you can verify. Remember, in Reg. B YOU (Lender) does the verification. Not the applicant. IMO a better idea would be to call it a completed application, and ask for the contract to help you verify some information. But if it is not provided, I do think you still have a completed application. I also think that (with maybe a few minor fee exceptions) there is nothing on a purchase contract that really changes your GFE.

Originally Posted By: Brock
As soon as you have that we will update the rest of the information based on your knowledge of the contract


I expect that your regulator will claim you are not permitting shopping.

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#1359046 - 03/17/10 04:07 PM Re: When does pre-qual = application? Brock
M Cockrell Offline
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Based on 3500.7(a)(5), you cannot require "as a condition for providing a GFE, that an applicant submit supplemental documentation to verify the information provided on the application."

I think you're traveling down the proverbial "slippery slope," my friend, when you're requiring "supplemental documentation," even if it is only verbal documentation.
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#1359061 - 03/17/10 04:17 PM Re: When does pre-qual = application? M Cockrell
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Actually I thought of a better idea. Perhaps there is something I do not understand about your lending area. Lets start with one question. Why do you need a purchase agreement to issue a GFE?

In the case of my state, if someone were to tell me that they needed a purchase agreement to issue a GFE, and I asked why I would expect 1 of 2 answers.

1) Because we don't want to give out GFEs (clearly a violation).

or

2) Certain information on the Purchase Contract tells who pays what fees. My response would be, you need to put them on the GFE regardless of who pays for them.

To conclude my state excercise, I would contend that there is nothing on the Purchase Contract that will impact my GFE.

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#1359074 - 03/17/10 04:22 PM Re: When does pre-qual = application? M Cockrell
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Is there such a thing as "verbal" documentation? "Supplumental Documentation" ,as stated in the regs, clearly is referring to something in a tangible format that can either be viewed on a screen or on paper. It cannot be referring to questions or you could not ask for anything besides the six peices of information. Based on the interpretation of RESPA that last two posters provide there is certainly other information in the 1003 that would be a respa violation, and that just can't be. If HUD wanted to say you can't request other information in the regulation they should have said so. Instaed, the reg specifically says you can request other information. As I said, I am not arguing that requiring the physical contract to be reviewed by the lender should be allowed. I am simply saying that you can ask if the contract has been executed.

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#1359083 - 03/17/10 04:28 PM Re: When does pre-qual = application? Brock
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Originally Posted By: Brock
Based on the interpretation of RESPA that last two posters provide there is certainly other information in the 1003 that would be a respa violation, and that just can't be. If HUD wanted to say you can't request other information in the regulation they should have said so.


That is just not true. By an applicant completing or supplying information on the 1003 there is no verification. You make them put their DOB on the 1003 but you do not say we need a birth certificate. You ask if they are married but you do not make them prove this with a marriage certificate. The application is the request....

Brock, I think you are on the right path. I think you seem to be grasping a lot about RESPA, and the AHAAA moment will come soon. Dan Persful and I got into an enlightening discussion about Reg. B about 5 months ago. If you look that up it might help tie the two together. Dan and I certainly disagreed about some things in the thread but it really helps to understand the application process, IE what is an application. I have said all I can in this thread, good luck.

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#1359116 - 03/17/10 04:41 PM Re: When does pre-qual = application? CompDat
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I agree that by supplying information on the 1003 there is no verification. I am saying that if you think asking whether or not the borrower has a contract is a verification that certainly asking other questions on the 1003 are verifications. I am trying to point out that your argument doesn't make sense with legitimate inconsistencies and you are not responding to my point. I agree that this is complicated. Lets not pretend that anyone knows the answers beause no one does. I think many of these types of questions will not be answered for years to come until some of these things are challenged in court. I have said many times that the more conservative, and possibly better approach, would be to give the GFE as soon as the borrower gives you any address, but that doesn't mean that is the only thing allowed by the regs.

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#1359143 - 03/17/10 05:05 PM Re: When does pre-qual = application? Brock
M Cockrell Offline
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Originally Posted By: Brock
Is there such a thing as "verbal" documentation?

IMO, yes. While you may not be requiring a written copy of the contract, you are still requiring the applicant to attest, authenticate, certify, confirm, corroborate, demonstrate, document, substantiate, support, validate, verify they have a binding contract in place before you'll issue a GFE.

Originally Posted By: Brock
"Supplumental Documentation" ,as stated in the regs, clearly is referring to something in a tangible format that can either be viewed on a screen or on paper.

This is not a position I'd want to defend to an examiner, as I do NOT believe it is "clearly" defined as referring to written/electronic documentation only.


Bottom line: The posters here are offering their opinions in an attempt to help. You're free to take the advice or not. Best of luck in whichever way you proceed.
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#1359154 - 03/17/10 05:13 PM Re: When does pre-qual = application? Brock
Dan Persfull Offline
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The definition of an application does not define what you need in order to issue a GFE. It defines what you need in order to make a credit decision. 3400.7 then states once you have an application with the information needed to make a credit decision then you must issue the GFE, however the FAQs go on to clarify that you cannot request verification documents to verify any information furnished on the application as a condition of issuing the GFE.

You don't need a purchase agreement to make a credit decision. The purchase agreement verifies the information furnished on the application concerning the terms of the purchase.

(b) Other terms. As used in this part:
Application means the submission of a borrower's financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the borrower's name, the borrower's monthly income, the borrower's social security number to obtain a credit report, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any other information deemed necessary by the loan originator. An application may either be in writing or electronically submitted, including a written record of an oral application.


If your FI refused to provide me a GFE simply because I have not placed an offer on the identified property then once I leave your FI I am going to make the following phone calls.

1. My attorney
2. HUD
3. Your primary Federal regulator
4. Your state regulator
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