The following (second of) 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.
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 can be found in GFE-General – FAQ #34 of HUD’s FAQs. HUD’s FAQs can be found at http://www.hud.gov/offices/hsg/rmra/res/respa_hm.cfm