Is it industry standard to run a credit report and LP/DU on a prequalification letter to a consumer?

I believe running a credit report and LP/DU on a consumer would be subject to an ECOA adverse action notice if a lender denied a consumer based on the information from the credit report or LP/DU. Further, I would consider this to be a pre-approval and not a prequal.

Any thoughts? I appreciate the insights provided by others.

What ever actions you take on a pre-qual, regardless of whether you run a credit report or not, if you deny them - it's adverse action and would require you to send an adverse action notice.

I agree with the adverse action notice on even pre-quals. I was trying to draw a distinction after reading many threads regarding whether or not running the credit report and LP/DU would place the consumers request on the prequal or pre-approval continuum.

One determining factor is if you issue written commitment letters. If you are issuing written commitment letters with only the limiting conditions as described in the HMDA guidance, then you are treading on the preapproval definition. Other then that, I think you can do whatever you want for a pre-qual.

This is a topic we've been going rounds about regarding our secondary market mortgages. What we've finally settled on is that if it didn't receive full underwriting from the mortgage company, it's a pre-qual whether or not we pull credit. We do occasionally issue a commitment letter, but they are conditional to full underwriting and do not contain expiration dates so we've decided they don't cross the pre-app/pre-qual barrier.

I could have this wrong, and any insight or suggestions offered would be much appreciated. I'm a total newbie to this game and am trying to figure it out as I go.

Wavewatcher, we consider what you're describing our pre-approval program, we don't do pre-quals. Plus, most buyers/brokers want a preapproval vs. a pre-qual anyway. We do pull a credit and run it through LP and give early disclosures. Originators aren't crazy about "all the paperwork" but I don't want any reg B issues.

Pizzaz &RCarey, I agree with your analysis about what we are doing is a pre-approval (no matter what it's called), I needed "back-ups" because we are now having discussions and differing memos about "who is right" in this situation.

Appreciate the insights.

Best definitions I've seen came from PBS seminar and I quote:

A prequalification request is a request by a prospective loan applicant (other than a request for preapproval) for a preliminary determination on whether the prospective applicant would likely qualify for credit under an institution's standards, or on the amount of credit for which the prospective applicant would likely qualify.

This was discussed as the initial sit-down with the LO where generalized numbers are discussed and which ended up with a "looks like you'll qualify" type of situation.

Preapprovals can only be on a home purchase loan and must meet the following criteria:
*the request is reviewed under an established preapproval program;
*the preapproval program includes a comprehensive analysis of the creditworthiness of the applicant;
*the institution issues a written commitment to the applicant, valid for a designated period of time, offering to extend a home purchase loan up to a specified amount;
*the written commitment is not subject to any conditions other than: identification of a suitable property; no material changes in financial conditions; no other conditions not related to the applicants financial condition other than those normally attached to a home purchase (ie, appraisal, flood, etc.)

Can I throw in a comment here? I probably should tag this on to the prior threads on pre-approvals since this doesn't pertain to pre-quals, but it's Monday, I'm taking the easy way out.

Our secondary market department also always issues a commitment letter to puchase-applicants, the letter meets all the conditions put forth in the HMDA guide. After talking to my examiners earlier in the year, I have reluctantly been reporting these as Code 1 Preapprovals. However, because of several good points brought up in the ealier threads, we would like to exempt from Code 1 those apps where a property address was not identified at time of application. I ran this by my regulator (FDIC), also mentioning the FFIEC edits issue. The Dallas region forwarded my question to Washington for review --- the resulting answer was no, if we have a program whereby we issue written commitment letters that meet the definition of a pre-apporoval program we are to report them as Code 1. Washington told the regional office that whether a property was identified at the time of application is not a criteria that would preclude an application from being coded a Preapporval for HMDA. I was told Washington was aware of the edit problem and it would be fixed for 2005 reporting.

I think this is all bogus, but we will continue to report these as pre-approvals --- even though a pre-approval was never "requested", and we may even have a purchase contract. I can't imagine this information would be beneficial to anyone in the long run as there is no way to really tell a true pre-approval request from a regular purchase application. I guess we could stop doing commitment letters or goof them up to the extent they would not qualify