Preapproval letters or notification requires additional disclosures from a loan originator in Virginia.
The question to ask yourself is, ‘am I getting what I think I am getting or expecting?’
Mortgage originators or companies licensed in Virginia who provide consumers with a pre-approval for a mortgage loan must also provide consumers with a separate written disclosure. Virginia Regulation 10 VAC 5-160-20 (6) requires the disclosure to be given at the same time the pre-approval letter is provided and must be in at least 10-point type.
The pre-approval disclosure must:
- provide an explanation of what preapproved means;
- inform the consumer that the consumer’s loan application has not yet been approved;
- state that a written commitment to make a mortgage loan has not yet been issued; and
- advise the consumer what needs to occur before the consumer’s loan application can be approved.
If a preapproval is initially communicated to the consumer by telephone, the written disclosure must be provided to the consumer within three business days.
Virginia’s Bureau of Financial Institutions (BFI) adopted its stance in response to a final rule issued by the Federal Reserve Board (FRB) in February, 2002. The FRB defined a preapproval as a written commitment issued by a lender after a comprehensive analysis of the creditworthiness of the applicant which is conditioned solely upon
- identification of a suitable property;
- no material change in the applicant’s financial condition or creditworthiness prior to closing; and
- limitations not related to the financial condition or creditworthiness of the applicant that a lender ordinarily attaches to a traditional mortgage application (such as completion of a home inspection, an acceptable title insurance binder, certification of a clear termite inspection, etc.
The analysis includes verification of income, assets, credit and other matters as is typically done as part of a normal credit evaluation program.
PreApproval v. conditional commitment letters
The issuance of a preapproval letter implies that it is being issued by a lender who has rendered a credit decision and furnished a written commitment (subject to the limited conditions described above) to extend a home purchase loan up to a specified amount for a designated period of time. In the absence of a credit decision and written commitment from a lender, BFI would view the issuance of a preapproval letter by a broker without the attendant disclosure as potentially misleading and/or deceptive.
In addition, brokers are cautioned that this practice may be a violation of the Virginia Consumer Protection Act, § 59.1-196 et seq. of the Code of Virginia.
In contrast to a preapproval letter, brokers may provide consumers with prequalification letters without a binding commitment from a lender. According to the Federal Reserve Board,
…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 loan applicant would likely qualify for credit under an institution’s standards, or for a determination on the amount of credit for which the prospective applicant would likely qualify.
Consumers are encouraged to carefully review the type of documentation they receive from their loan originator. As discussed above, “preapprovals” and “prequalifications” have very different standards and meanings. Therefore, these terms may not be used interchangeably.