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#1663870 - 02/11/12 05:27 PM Preapproval and satisfactory appraisal: OK?
Blue78 Offline
Junior Member
Blue78
Joined: Sep 2007
Posts: 46
New England
We are all familiar with the Reg. C requirements for a preapproval program:

203.2(2) Preapproval programs. A request for preapproval for a home purchase loan is an application under paragraph (b)(1) of this section if the request is reviewed under a program in which the financial institution, after a comprehensive analysis of the creditworthiness of the applicant, issues a written commitment to the applicant valid for a designated period of time to extend a home purchase loan up to a specified amount. The written commitment may not be subject to conditions other than:
(i) Conditions that require the identification of a suitable property;
(ii) Conditions that require that no material change has occurred in the applicant's financial condition or creditworthiness prior to closing; and
(iii) Limited conditions that are not related to the financial condition or creditworthiness of the applicant that the lender ordinarily attaches to a traditional home mortgage application (such as certification of a clear termite inspection).


Then there is this guidance under "action taken" in the HMDA FFIEC FAQs:

Conditional approvals---customary loan-commitment or loan-closing conditions. The commentary indicates that an institution reports a "denial" if an institution approves a loan subject to underwriting conditions (other than customary loan-commitment or loan-closing conditions) and the applicant does not meet them. See comment 4(a)(8)-4. What are customary loan-commitment or loan-closing conditions?
Answer: Customary loan-commitment or loan-closing conditions include clear-title requirements, acceptable property survey, acceptable title insurance binder, clear termite inspection, and, where the applicant plans to use the proceeds from the sale of one home to purchase another, a settlement statement showing adequate proceeds from the sale. See comments 2(b)-3 and 4(a)(8)-4. An applicant's failure to meet one of those conditions, or an analogous condition, causes the application to be coded "approved but not accepted." Customary loan-commitment and loan-closing conditions do not include (1) conditions that constitute a counter-offer, such as a demand for a higher down-payment; (2) underwriting conditions concerning the borrower's creditworthiness, including satisfactory debt-to-income and loan-to-value ratios; or (3) verification or confirmation, in whatever form the lender ordinarily requires, that the borrower meets underwriting conditions concerning borrower creditworthiness.

Conditional approvals---failure to satisfy creditworthiness conditions. How should a lender code "action taken" where the borrower does not satisfy conditions concerning creditworthiness?
Answer: If a credit decision has not been made and the borrower has expressly withdrawn, use the code for "application withdrawn." That code is not otherwise available. See Appendix A, I.B.1.d. If the condition involves submitting additional information about creditworthiness the lender needs to make a credit decision and the applicant has not responded to a request for the additional information in the time allowed, use the code for "file closed for incompleteness." See Appendix A, I.B.1.e. If the borrower has supplied the information the lender requires for a credit decision and the lender denies the application or extends a counter-offer that the borrower does not accept, use the code for "application denied." If the borrower has satisfied the underwriting conditions of the lender and the lender agrees to extend credit but the loan is not consummated, then use the code for "application approved but not accepted."
For example, if approval is conditioned on a satisfactory appraisal and, despite notice of the need for an appraisal, the applicant declines to obtain an appraisal or does not respond to the lender's notice, then the application should be coded "file closed for incompleteness." If, on the other hand, the applicant obtains an appraisal but the appraisal does not support the assumed loan-to-value ratio and the lender is therefore not willing to extend the loan amount sought, then the lender must use the code for "application denied."


These FAQs help distinguish between customary closing conditions and underwriting conditions. I understand that a preapproval letter cannot contain any underwriting conditions, just customary closing conditions. However, the FAQs imply that a satisfactory appraisal is an underwriting condition:

“Customary loan-commitment and loan-closing conditions do not include ... (2) underwriting conditions concerning the borrower's creditworthiness, including satisfactory debt-to-income and loan-to-value ratios”

A loan-to-value ratio is derived from an appraisal. The value determined on the appraisal will determine whether or not there is a satisfactory loan-to-value ratio. If a satisfactory appraisal is considered an underwriting condition concerning the borrower's creditworthiness for purposes of action taken, why isn’t it considered an underwriting condition for purposes of preapprovals? Or is it? Maybe it just comes down to the language in the regulation.

The reason for my question is that we are in the process of determining whether or not we had a preapproval program in 2011 for HMDA purposes. We are examining our preapproval letter. It is pretty sparse and does not mention any other underwriting condition except for the aforementioned satisfactory appraisal. It states: “Conditions: identification of a property and satisfactory appraisal.” One of the conditions allowed under Reg. C is the following:

Conditions that require the identification of a suitable property

My question: Is this language (“identification of a suitable property”) just another way of saying “A preapproval can be subject to only one underwriting condition, and that underwriting condition is a satisfactory appraisal”?
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#1663871 - 02/11/12 05:31 PM Re: Preapproval and satisfactory appraisal: OK? Blue78
Kathleen O. Blanchard Offline

10K Club
Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,293
They have to find a property and that property must be acceptable as collateral. Some property issues come up outside of the appraisal process.

For a preapproval program, you must fully underwrite for credit AND there cannot yet be a property identified.

Once a property is identified and accepted (appraisal, termite, mold, title, etc.) the borrower is ready to go to closing.
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Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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