Answer:
I just finished writing the following analysis of the RESPA FAQs that were issued 4/2/10. The following section addresses your questions:
Preapprovals
On page 11 of the FAQs, HUD states the following and then lists a revised FAQ #33 and adds a new FAQ #34. We have added our “commentary” to these FAQs below each section.
“The following two questions address preapprovals. For the purposes of these questions, a preapproval is a document issued by a lender stating that a consumer qualifies for a specific loan amount. A preapproval is intended to assist a consumer who is shopping for a house by enabling the consumer to enter into a purchase contract that does not contain a financing contingency. A preapproval is never to be used as a substitute for a GFE. If an applicant has chosen a property to purchase and the loan originator is willing to qualify the applicant for a specific loan amount, then a loan originator should issue the applicant a GFE that facilitates shopping for a loan, not just a preapproval used to shop for a property. For example, a lender may never issue only a preapproval to an applicant seeking to refinance his or her loan; the lender must also issue a GFE.”
33) Q: Can a loan originator provide a GFE without a property address? A: Yes, a loan originator can determine that a property address is not one of the required pieces of information that the loan originator needs in order to issue a GFE. It is important to note that a loan originator must consistently apply its policy on the information it deems necessary to issue a GFE, and the RESPA rule requires a loan originator to issue a GFE whenever it receives information sufficient to complete an application for a GFE. As a result, if a loan originator received an application for a preapproval and that application included all of the pieces of information that the loan originator requires to issue a GFE, the loan originator must issue a GFE and all of the rules that govern the GFE process would apply. In addition, if a GFE is issued without a property address, the future receipt of the property address is not a changed circumstance that would allow the loan originator to issue a revised GFE.
34) Q: Does RESPA prevent a loan originator from verifying information on an application for a preapproval? A: The RESPA regulations do not address preapprovals. If the loan originator is missing one of the elements it requires for a loan application (e.g., the property address) and is not required to provide a GFE, the originator is not prevented from verifying information for which the customer voluntarily provides documentation. The loan originator can also always use its own sources to independently verify the information on a borrower’s application for a preapproval, regardless of whether it could also be treated as an application for a GFE. However, if a loan originator should have issued a GFE along with the preapproval - specifically, the prospective borrower’s application has sufficient information to be treated as an application for a GFE - then all the requirements of the GFE apply. These requirements include the prohibition on a loan originator requiring that a prospective borrower provide supplemental documentation to verify the information provided on the application as a condition of providing the GFE, and the limitation on fees that a loan originator can charge the prospective borrower as a condition of providing the GFE. Therefore, if a loan originator receives an application from a prospective borrower for a preapproval, and that application contains enough information to also provide a GFE, then the loan originator is prohibited from requiring supplemental documentation from that prospective borrower to verify the information as a condition for providing the GFE.
This answer has changed greatly from the one previously issued. HUD has backed off from their previous stance concerning preapprovals. In fact, HUD clearly states in the first sentence of #34 “the RESPA regulations do not address preapprovals.” However, HUD seems to contradict themselves as they try to regulate preapprovals. In #34, they state you are not “prevented from verifying information for which the customer voluntarily provides documentation.” So there are several questions that still beg to be answered:
It is clear (that might be pushing it) to us that RESPA does not apply to preapprovals. Therefore, there is no prohibition from asking the applicant to voluntarily provide verification documents on a preapproval. It’s also clear that RESPA does apply once the lender has received an “application” (most likely the house has been identified as the other pieces of information are easily obtained). The lender cannot require verification documents either during the preapproval OR application process (once RESPA is triggered). However, the lender can ask for verification documentation as long as it is voluntary. This is supported by FAQ #31 - specifically, the last sentence. This Q&A has not changed.
Q: May the originator require the borrower to sign consents to verify employment, income or deposits prior to issuing a GFE without violating 3500.7(a)(5)‘s prohibition on requiring the applicant to submit supplemental documentation to verify information provided on the application?
A: No, a loan originator may not require a borrower to sign consents to verify employment, income or deposits as a condition of issuing a GFE as such a requirement may inhibit borrowers from shopping for the best loan by leading borrowers to believe that they are committed to obtaining a loan from that loan originator (see 24 CFR Section 3500.7(a) (5) and (b) (5)). However, the borrower may voluntarily sign consents prior to the issuance of the GFE to facilitate the loan process.We believe this provides the key guidance on how lenders should handle the situation of “voluntary” documents. Design a letter that illustrates what verification documents you need to evaluate a preapproval or application. Make it clear that this is voluntary and have the applicant sign a statement attesting to the fact that they are providing this information voluntarily.
First published on BankersOnline.com 6/14/10
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