Pre-Approvals, Part Two: Yes, They Will Soon Be Worthless

There was an avalanche of responses to my recent piece, The End of the Pre-Approval. Many of those comments expressed concern or confusion about what's required under the amended laws, and what that means for lenders' obligations when delivering the new integrated mortgage disclosures.

The Truth in Lending Act now states: "The creditor or other person shall not require a consumer to submit documents verifying information related to the consumer's application before providing the disclosures required by" Regulation Z.

Hence, to the extent that the consumer is applying for a loan, the statutory text is clear that, prior to disclosures, no lender can require third-party verification documentation.

Of course, this begs the question as to what is "related to the consumer's application." For instance, what happens in the case of a lender that gives a blanket pre-approval to a generalized scenario nonspecific to a property where the borrower has not yet sought a mortgage from the lender? On one hand, there is no "application," so it can be argued that any verification request — again, provided there was no application — would be permissible.

However, such an interpretation would seem problematic given that a subsequent application would seem to retroactively create a violation. Moreover, it would create an incentive for a lender to require verification information initially — before any application was taken — and effectively circumvent the rule.

The CFPB's official interpretation of the rule states:

"The creditor or other person may collect from the consumer any information that it requires prior to providing the early disclosures before or at the same time as collecting the information," that triggers the three-business-day deadline for delivering the new Loan Estimate disclosure.

"However, the creditor or other person is not permitted to require, before providing the disclosures…that the consumer submit documentation to verify the information collected from the consumer"

This could be read in such a way that would prevent a creditor from requiring verification of an applicant's information. And when read this way, it would mean that even generic non-application pre-approvals would be disallowed.

Bottom line, here's where things stand:

Pre-approvals specific to a property address are effectively a thing of the past. Generic pre-approvals may or may not be permissible, depending on how one interprets the phrase "related to the consumer's application."

While on one hand the phrase "related to an application" can clearly be read as permitting generic non-application related pre-approvals, such an interpretation is problematic because of the practical difficulties it creates and problematic implementation of such an interpretation. It would be beneficial if the CFPB can clarify this conundrum prior to the effective date of the new rule.