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#1904729 - 03/12/14 08:55 PM Prequals, Credit Reports and Permissible Credit
CindyS Offline
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I'm researching Prequalifications and have found dozens of threads on the subject, but I'm still torn on whether they constitute Permissible Purpose for pulling a credit report. There seem to be different opinions on the matter! I was convinced that we could pull a credit report and then today I got a newsletter from a compliance company on the subject and it states that you can't on pre-approvals (so I assume it would be the same stance for prequals). Here's a portion of what they stated:

"Another common misinterpretation of the FCRA permissible purpose rules falls under pre-approval programs. Many institutions have borrower pre-approval programs whereby they give a potential borrower a conditioned pre-approval of a prospective loan. When a potential borrower applies for pre-approval, that is not a request for credit. Thus, it does not constitute a permissible purpose to obtain the person's credit report"

Does anyone have a definitive answer on the subject or an opinion/interpretation from a regulator?

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#1904756 - 03/12/14 09:47 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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I suggest taking this up with the author from the compliance company because that is the stupidest thing I have ever heard of . How can you underwrite someone for a pre-approval of a loan without a credit report.

You need to ask them for an opinion/interpretation from a regulator.

What portion of a pre-approval falls outside of "intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer"

I guess if you are going to pre-approve someone, but actually are not intending to enter into a credit transaction with them, you might have an argument. smile
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#1904932 - 03/13/14 03:01 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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#1905019 - 03/13/14 04:11 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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Would you look at a pre-qual the same way as a pre-approval, Randy? (other opinions definitely appreciated too!)

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#1905075 - 03/13/14 05:16 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
rlcarey Online
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Well, in my world, a pre-qual only involves the information handed to you by the customer and is usually based on what their DTI can support, unless they tell you about other issues that would disqualify them, such as a bankruptcy.
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#1905167 - 03/13/14 06:30 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
CindyS Offline
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So, Randy, by that statement, are you saying that under a strictly Pre-qual program (and not a HMDA Pre-approval program), you do not have Permissible purpose to pull credit?

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#1905168 - 03/13/14 06:36 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
Dan Persfull Offline
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I'm not Randy but IMO a pre-qual request would give you a permisible purpose to obtain a credit report.

IMHO both a pre-approval and pre-qual request would fall under the text Randy quoted approve:

"intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer"
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#1905176 - 03/13/14 06:42 PM Re: Prequals, Credit Reports and Permissible Credit rlcarey
Kathleen O. Blanchard Offline

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Originally Posted By: rlcarey
I suggest taking this up with the author from the compliance company because that is the stupidest thing I have ever heard of . How can you underwrite someone for a pre-approval of a loan without a credit report.

You need to ask them for an opinion/interpretation from a regulator.

What portion of a pre-approval falls outside of "intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer"

I guess if you are going to pre-approve someone, but actually are not intending to enter into a credit transaction with them, you might have an argument. smile


AGREED! I am in total disagreement with what that newsletter states.
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#1905216 - 03/13/14 07:38 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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Ditto that.

I do have a bit of a different opinion on the pre-qual vs pre-approval, however.

Pre-quals are too easily obtained from many different FI's in the shopping process, not only to see what you can qualify for, but even what programs an FI offers.

I'm not convinced I would expect these FI's to all ding my credit score by pulling credit without my permission. I did not apply for credit.

A pre-approval is more of a final deal that I need in order to finalize a contract, etc...I would expect that my credit would play a role and wouldn't be going to a bunch of different places to obtain one.
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#1905221 - 03/13/14 07:42 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
Kathleen O. Blanchard Offline

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I agree re prequals. A credit report is really not needed for them. It is really a "well, based on what you said it looks like.." kind of deal.

A preapproval means you have the loan if the collateral works out.

(Not getting into credit card preapprovals, which also are done deals, just the $ can change subject to findings.)
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#1906327 - 03/18/14 04:01 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
Sound Tactic Offline
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I am with everyone on this. Under the FCRA you have six permissible purposes. The first one listed is below:

intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer; or

To paraphrase this, it is basically saying you can pull credit if you have an application. A pre-approval is an application.
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#1906331 - 03/18/14 04:10 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
CindyS Offline
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It seems that everyone here is in agreement that you have permissible purpose under a Pre-approval, but there's obviously different opinions on whether you have permissible purpose for a Pre-qualification. We want to stay in the land of Pre-quals versus Pre-approvals, but want to be sure we can pull credit under FCRA. I just can't find a definitive answer on the subject.

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#1906336 - 03/18/14 04:17 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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So if, when I don't have an application or a property but I do have enough info (ie: name, SS#, stated income) to run desktop underwriter which pulls a cbr as part of it, would you consider this a pre-approval or a pre-qual? We don't issue a pre-approval letter. It is used to give the warm fuzzy, 'if this all checks out then you should be able to get a loan' letter.

Up until now this has passed muster with our examiner as a pre-qual but this article and discussion have caused me to question whether that will continue or not.

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#1906344 - 03/18/14 04:27 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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Isn't there a difference between a 'prequal' and an 'inquiry'? I don't look at someone asking about different programs as a prequal, but rather an inquiry. Prequals to me have about the same meaning as preapprovals, just less formal. If all i'm doing is asking about different programs, then i'm not asking to be "prequalified" for anything am i?
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#1906354 - 03/18/14 04:36 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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I agreee re: inquiries, raitchjay.
Problem for me comes with Reg C re: pre-approval vs pre-qual.
If I call it a pre-approval here am I going to have to change my HMDA reporting?

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#1906460 - 03/18/14 07:31 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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Originally Posted By: CindyS
It seems that everyone here is in agreement that you have permissible purpose under a Pre-approval, but there's obviously different opinions on whether you have permissible purpose for a Pre-qualification. We want to stay in the land of Pre-quals versus Pre-approvals, but want to be sure we can pull credit under FCRA. I just can't find a definitive answer on the subject.


A prequalification is classified as two different ways depending on your treatment of the prequalification. Application #1 is an inquiry, classification #2 is an application. For purposes of vernacular, the inquiry is not an application. If your goal is to avoid the application then you do not want to be pulling credit reports on everyone. Your loan officers should be obtaining basic information, verbally from the customer, in order to give them information about what loans and options the customer has.

In some cases (with the inquirers permission) you may be able to pull credit if they authorize you to do so, in order to give them more precise information. Get it in writing. Additionally, don't make it a habit. The credit report turns into a verification document. Once you have a verification document, it can be perceived as the application already taking place.

This comes from the commentary to Reg. B on the definition of application. You pull verification documents such as a credit report [to paraphrase] promptly AFTER the application.
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#1906461 - 03/18/14 07:33 PM Re: Prequals, Credit Reports and Permissible Credit raitchjay
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Originally Posted By: raitchjay
Isn't there a difference between a 'prequal' and an 'inquiry'? I don't look at someone asking about different programs as a prequal, but rather an inquiry. Prequals to me have about the same meaning as preapprovals, just less formal. If all i'm doing is asking about different programs, then i'm not asking to be "prequalified" for anything am i?


To some extent I disagree with this and so does Reg. B. Prequals do not have a definition but Preapprovals do. If you want to differentiate between an application and not an application (inquiry), it is based on your treatment, not your naming convention.
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#1906491 - 03/18/14 08:16 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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In some cases (with the inquirers permission) you may be able to pull credit if they authorize you to do so, in order to give them more precise information.

You might want to check your contract with your consumer reporting agency as most standard contracts do not support pulling reports solely based on written authorizations in the certifications the bank has signed.
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#1906516 - 03/18/14 09:13 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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Hmmm thank you Randy. I had not considered that. If what you say is true, and let's say I am not permitted to based on the FCRA signed authorization, then I would argue for an inquiry a credit report should never be pulled.
Last edited by Red Herring; 03/18/14 09:13 PM. Reason: error in structure
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#1906541 - 03/18/14 10:59 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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Once you start evaluating anything from a consumer, I can almost guarantee that you have tripped the application trigger and it is no longer an inquiry.

Some of this is a little dated, but there are still some very good relevant points:

http://www.fdic.gov/regulations/compliance/mortgage/preq2.pdf
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#1906569 - 03/19/14 01:16 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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I am in total agreement. What I am trying to explain is that calling something a prequalification, but using verification documents certainly makes it look like an application for Reg. B and HMDA (provided you have a property address). Additionally, property address does not need to be a purchase agreement. It just needs to be what the applicant believes they are applying for. If they did verbally provide a property shopping disclosures are required.
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#1906636 - 03/19/14 02:36 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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So my take-away here is that if you don't have a property address which would make this a pre-qual per your definitions, four posters side with the writer of the article who stated this does not fall under 'permissable purpose' and I cannot pull a cbr.

Dan seems to be my lone ally in this.

Gotta love it when op pieces cause this much of a ruckus.

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#1906639 - 03/19/14 02:44 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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Oh and btw, Randy, thanks for that link..I'd not seen that before. smile
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#1906649 - 03/19/14 02:51 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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In the case of a purchase in which you lack a property address the person may be applying for a full preapproval (IE and application). In which case yes, you can pull a credit report. But if you are wanting to treat the preapprovals as inquiries it becomes very difficult to justify the pulling of a credit report. I found this tidbit from the commentary on the FCRA. I think the devil is in the details. Even see the information on spouses credit reports. It specifically uses the term application. IE, in my opinion the FCRA is saying that a legitimate business need means an application. They even reference Reg. B.

But the part I want to analyze from the commentary is below.

http://www.fdic.gov/regulations/laws/rules/6500-2700.html

3. ``Legitimate Business Need''

Under this subsection, a party has a permissible purpose to obtain a consumer report on a consumer for use in connection with some action the consumer takes from which he or she might expect to receive a benefit that is not more specifically covered by subsections (A), (B), or (C). For example, a consumer report may be obtained on a consumer who applies to rent an apartment, offers to pay for goods with a check, applies for a checking account or similar service, seeks to be included in a computer dating service, or who has sought and received over-payments of government benefits that he has refused to return.

In the above commentary they reference examples of permissible purposes. In all of these cases, the party that's credit report is pulled is applying.

applies for a checking account or similar service,

applies to rent an apartment

Obviously I am not your bank, and this is my interpretation. But I think the regulation is very black and white.
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#1906651 - 03/19/14 02:53 PM Re: Prequals, Credit Reports and Permissible Credit CindyS
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Truffle...i think a prequal allows you to pull a credit report. How can you prequalify anyone for anything without one? I draw a line between an inquiry and a prequal.
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