Our bank will soon accept home improvement loan applications to be secured by a 2nd mortgage.

If we determine that the applicant's credit is acceptable and ratios qualify (based on applicant's claimed income), we will issue what we call a conditional approval letter right away. One condition will be that the applicant provides us with income verification (e.g., W-2s and pay stubs) before we can schedule a closing. Another condition is the title search comes back with no ownership or lien issues.

If the applicant does not follow through and never sends in their income verification, how would you answer these:

1) Would the Hmda rule consider our conditional approval letter a pre-approval, pre-qualification, or approval?
2) Would this application be hmda reportable?
3) Should the application be reported as incomplete or approved but not accepted?

Thank you.

It doesn't sound like you are verifying income as part of the approval letter; therefore, it's not a "preapproval" for HMDA and not reportable as such. The following is from our HMDA training material:

A request for preapproval… is an application under 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. [§1003.2(b)(2)] To be a preapproval program… the written commitment… must result from a comprehensive review of the creditworthiness of the applicant, including such verification of income, resources, and other matters as is typically done by the institution as part of its normal credit evaluation program.

1) Would the Hmda rule consider our conditional approval letter a pre-approval, pre-qualification, or approval?
As Jerod stated these are not a preapproval or a prequalification. They are applications for credit.

2) Would this application be hmda reportable?
They meet the definition of a home improvement loan in 1003.2(i) so they would be reportable.

3) Should the application be reported as incomplete or approved but not accepted?
Requiring income information is an underwriting condition therefore it is not an approved but not accepted. If the letter meets the notice of incompleteness requirements in 1002.9 you can report closed for incompleteness. If it does not you have to provide the applicant an AAN denying the loan for an incomplete application.

From page I-37 for the 2020 GIR

i. Action taken examples. If the approval is conditioned on satisfying underwriting or creditworthiness conditions and they are not met, the institution reports the action taken as a denial.

Dan, your information is very helpful. Thank you!

Good call Dan! I blew right past the "home improvement" part of the scenario.