Many in the mortgage industry use the
In its Winter/Spring Consumer Services Newsletter, the
The 1st Alliance case in Connecticut where the state's
"Issuing mortgage 'preapprovals' without actually having a valid underwriting result is misleading, deceptive, and a violation of the fiduciary duty mortgage brokers have to their clients," the Washington state bulletin said. Since the start of 2023, the state has conducted at least one enforcement action in this area.
Washington state regulators were the first to cite mortgage originators for the use of deceptive advertising phrases for marketing Veterans Affairs-guaranteed loans, something the Consumer Financial Protection Bureau picked up on. Thomas Morgan, a compliance consultant, is warning the same thing can happen with implying a prequalification is actually a preapproval.
"The simple solution for mortgage industry participants is to say, just okay, we can give you a prequalification right now," Morgan said.
But circumstances can come up, like on a weekend when a real estate agent is pressuring the loan officer for a preapproval so their client can make an offer. The originator is just trying to get something done, but issuing a preapproval without any underwriting could be deceptive, Morgan said.
"When I train people I say, 'you're missing a huge opportunity to build a deeper relationship with the customer, and help your referrals sources by instead of waiting until somebody finds a property to try and get a preapproval at that stage,'" Morgan said. "Get them involved in the loan process early, get a legitimate preapproval, and go from there and then you have a deeper relationship."
That benefits everyone, including the buyer who is able to walk in with a strong offer.
"There's no financing contingency," Morgan said. "So if there are two contracts being offered, and one has the financing in place, and one does not, unless there's a vast difference in price, the seller is likely to accept the one that's already got financing in place."
Another term that is associated with preapproval and prequalification is the mortgage commitment letter, in which the issuer has reviewed the borrower's application and finances and is willing to make the loan, similar to a preapproval. But the commitment letter might be a legal document, unlike the preapproval.
A page on the CFPB's
In a market where there is competition between homebuyers for the limited inventory on the market and between originators — broker versus broker and lender versus lender as volume shrinks — these letters are a marketing tool that can shift the dynamic.
On average, 34% of loan applications transacted through SimpleNexus have had a pre-qualification letter, pre-approval letter or both issued during the loan process. SimpleNexus issued 137,846 letters in the first quarter, the company said.
During its first quarter earnings call, Rocket Cos. issued
Rocket's product is called a verified approval letter, explained Mike Fawaz, executive vice president of Rocket Pro TPO, which has had the program in this channel for the past year, first rolling it out as a pilot. Now it is available nationwide.
"We have an underwriter to review upfront, and do a full verification of the client's credit, income and assets," before issuing the letter, Fawaz said.Rocket has to report the findings as part of its Home Mortgage Disclosure Act filings and if the borrower does not qualify, it has to issue a denial letter, Fawaz continued. Those compliance concerns can give some other lenders pause.
"What this letter does is it gets the brokers certainty and the confidence they want out there in the market when they're going with a client to shop for a home," Fawaz said.
A prequalification letter is issued based on the client's statements, with no underwriting conducted, noted Lori Brewer, chief technology officer at SimpleNexus. If a credit report is pulled, it is usually what's termed a "soft credit." Since it is not tied to a specific offer, it doesn't affect the credit score.
A prequalification letter provides enough data to go shopping for a house, Brewer said, but doesn't supply that certainty of a preapproval letter.
Typically, a real estate agent doesn't necessarily want to spend time driving around town with you unless you have at least a prequal letter," Brewer said. "And through SimpleNexus we can issue based on verbals a prequalification letter."
A real estate agent can reissue this letter through SimpleNexus as long as the dollar amount goes down.
However, because it's based on verbal information, "once you dig into the details it may not be the true financial picture of that individual," Brewer said. Or since the letter was issued, marketplace conditions have changed, and that affects how much the buyer could afford.
Brewer can understand why Washington state regulators are flagging this.
"A lot of people use those terms interchangeably, and I can only imagine somebody's upset," Brewer continued. "They wanted a house that they thought they were approved for before and then lo and behold, the lender actually is trying to protect you as a consumer in saying you can't actually afford this."
And as a result, the industry gets scrutinized.
Furthermore, in extreme circumstances, the confusion between these types of letters can be used to commit fraud.
"It's misleading to the seller. It's misleading to the listing agent who spent all this time thinking this deal is going to close, only to find that they've wasted precious time, money and resources, taking the property off the market and everything else when the person couldn't buy a six pack of Budweiser on credit," said Marx Sterbcow, a mortgage industry compliance attorney.
With real estate transaction and mortgage origination activities down, some participants are getting desperate.
"So if you have a buyer's agent and they're pressuring the loan officer even though they haven't done anything, it's because they want to get this property into a contract," said Sterbcow. "You do have a lot of these marketing practices that folks push to get that business."
It may not be just the CFPB and state mortgage regulators that could be coming after this practice, Sterbcow said, warning the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the National Credit Union Administration could take an interest for the institutions they oversee.
But when they are used properly, the preapproval letter, such as what Rocket Pro TPO offers in its program, can put the mortgage broker and their client over the top.
"This is a differentiator for them and puts them in a position to be able to go out there and compete in the market with a verified approval letter," Fawaz said. The broker can go out "saying 'hey, we have a fully approved client based on the information that we're seeing from clients, based on their income, based on the credit we've reviewed with underwriters,' [and so] we can shop with confidence."
