The End of the Pre-Approval
While many lenders focus upon the new integrated disclosures, one of the less-cited aspects of the regulations prohibits lenders from requiring borrowers to submit any verification documentation prior to providing the borrower with the disclosures.
Under the new rules, a lender would not be able to require a borrower to submit any information verifying income prior to issuing a pre-approval. While the lender could require a borrower to provide information as to income and identifying institutions and account numbers, the lender could not require the borrower to verify the representations or information. Notably, the lender would still be permitted to obtain the borrower's credit score.
Ultimately this means that pre-qualifications — which by definition do not require verification — will become the only assurance for builders and real estate agents seeking to determine whether a borrower has the means to undertake a contemplated transaction. In order for lenders to require the borrower to provide verification, the specifics of the transaction will be necessary, meaning that such verification will only be obtainable in connection with a specific loan application.
For lenders who have typically utilized pre-approvals this will potentially mark a sea-change in their practices affecting everything from marketing to the processing of loans. Moreover, given the strictures of the ability-to-repay laws, more frequently transactions could fail because of a lack of supporting documentation despite the fact that the borrower may have accurately stated their actual income in the pre-qualification stage.
Indeed, lenders could see an increase in pre-qualified loans not being closed, upsetting relationships that rely upon their expertise in pre-approving the loan. This is especially true for borrowers who are self-employed, and may state their income in absolute terms as opposed to documentable income.
Lenders should carefully evaluate their business practices and the importance of an actual pre-approval process in the context of their operations.