Know Before You Owe (KBYO or TRID)

A written estimate of terms or costs (pre-application estimate) is authorized prior to providing the Loan Estimate. If a pre-application estimate is used there are specific requirements for its use.

Conspicuous Statement: "Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan." This statement must be clear and conspicuous on the top of the front of the first page of the pre-application estimate in a font size that is no smaller than 12-point font, using a black background and white color font.

Note: This statement is not required for providing the consumer with a preprinted list of closing costs common in the area, or a preprinted list of available rates for different loan products. Likewise the statement is not applicable to advertisements as defined under §1026.2(a)(2).

The pre-application estimate is also prohibited from having headings, content, and format substantially similar to model Loan Estimate forms.

Refer to the response to the previous question.

Under Regulation Z and therefore for purposes of providing a Loan Estimate, receipt of ALL six pieces of information defined as an application include:

• Consumer’s Name
• Consumer’s Monthly Income
• Consumer’s SSN/ITIN (to obtain a credit report)
• Property Address (ZIP CODE)
• Estimated Property Value
• Estimated Mortgage Loan Amount Sought

You may need to analyze your processes and policies regarding the difference between a preapproval and a prequalification (presently and on the effective date of October 3, 2015). Also refer to the questions below regarding obtaining verification documents prior to issuance of a Loan Estimate (and presently the GFE). Providing a preapproval under the definitions indicated below could possibly place yourself in a difficult position to defend that providing a "true" preapproval is not an application for credit to a regulatory agency, particularly if you are collecting documents prior to issuance of the Loan Estimate. You should request clarity from your compliance expert or attorney.

HMDA – a preapproval program under Regulation C is defined as:

"A request for preapproval for a home purchase loan is an application under Regulation C (Application means an oral or written request for a home purchase loan, a home improvement loan, or a refinancing that is made in accordance with procedures used by a financial institution for the type of credit requested) if the request is reviewed under a program in which the financial institution, after a comprehensive analysis of the creditworthiness of the applicant, issues a written commitment to the applicant valid for a designated period of time to extend a home purchase loan up to a specified amount. The written commitment may not be subject to conditions other than:

• Conditions that require the identification of a suitable property;
• Conditions that require that no material change has occurred in the applicant’s financial condition or creditworthiness prior to closing; and
• Limited conditions that are not related to the financial condition or creditworthiness of the applicant that the lender ordinarily attaches to a traditional home mortgage application (such as certification of a clear termite inspection)."

In addition, the CFPB has defined preapprovals and prequalification in this manner within its Frequently Asked Questions (FAQ): Note: HUD also provided comments regarding preapprovals in its FAQ’s (dated 4/1/2010, page 11) regarding issuance of the current GFE identified as "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."

However, the preamble to the rule makes it clear that the CFPB indicates their intention not to prevent preapprovals by the consumer “voluntarily” providing documents to verify provided information, where the six items defined as an application have not been provided. The industry is calling this scenario a “loophole” in the rule. This is a sticky issue when you’re operating with a scenario of “requiring” versus “voluntarily” receiving documents from a consumer for this purpose. It’s recommended you proceed with caution and seek legal counsel or your compliance experts’ input in order to provide this service.

This depends on how your organization defines an application (see previous questions above on this subject). If based on a policy that receipt of the six items under Regulation Z is the basis for when an application has been received, Commentary ¶37(d)(6)-1 identifies requirements for the use of zip codes and lot numbers by stating, "Section 1026.37(a) (6) ("Property") requires disclosure of the address including the zip code of the property that secures or will secure the transaction. A creditor complies with §1026.37(a)(6) by disclosing a complete address for purposes of the U.S. Postal Service. If the address is unavailable, a creditor complies with §1026.37(a)(6) by disclosing the location of such property including a zip code, which is required in all instances. Location of the property under §1026.37(a)(6) includes location information, such as a lot number. The disclosure of multiple zip codes is permitted if the consumer is investigating home purchase opportunities in multiple zip codes."

Since the Residential Loan Application (1003) is not a regulated form under either RESPA or TILA, but rather a widely-used industry form (remember that an "Application" could occur orally as well) to document a written application due to its required use regarding specific products (such as government loans) and/or investor guidelines (GSE and private investors), we would refer you to the guidelines established by those entities.

However, your internal policies should dictate when your organization has "taken an application" based on a careful analysis of various regulatory definitions of an application under Regulations B, C, G, H, X & Z, FCRA (and don’t forget state law), as applicable. When the appropriate actions occur, based on such a policy, and an "Application" has been taken would be your application date for such purposes. You should refer to your compliance expert or attorney for details on this policy.

Note: The definition of application under Regulation Z (TILA) contains the six items; in contrast, under Regulation X (RESPA) the definition of an application is unchanged by this rule and continues to contain the seven items (including the existing "catch all" provision).

Regulation Z prohibits the collection of any documentation to verify information contained on the application prior to providing the Loan Estimate (effective on October 3, 2015).

However, this is likewise prohibited today. Regulation X contains language that also prohibits the collection of such documentation. This is also restated in HUD’s Frequently Asked Questions regarding use of the current GFE. Here is the language contained in Regulation X today: "The lender may at any time collect from the loan applicant any information that it requires in addition to the required application information. However, the lender is not permitted to require, as a condition for providing a GFE, that an applicant submit supplemental documentation to verify the information provided on the application."

See also the previous question regarding the collection of documents prior to delivering a Loan Estimate.

Other than the required use of the APR in an oral response to a consumer’s inquiry regarding the cost of credit (both closed-end and open-end credit) under §1026.26(a) & (b), or the provisions associated with disclosure of the APR on the Loan Estimate and Closing Disclosure, the rule does not identify how to disclose the APR on a pre-application estimate, if subject to §1026.19(e), (f) & (g). However, even though not applicable to APR disclosure under §1026.19(e), (f) & (g), it would certainly be recommended to consider provisions contained under §1026.37(l)(2) and §1026.38(o)(4) in crafting a policy for disclosure of the APR on a pre-application estimate. Commentary also identifies, “if the creditor provides a document showing the estimated monthly payment for a mortgage loan, and the estimate was based on the estimated loan amount and the consumer’s estimated credit score, then the creditor must include the statement on the document. In contrast, if the creditor provides the consumer with a preprinted list of closing costs common in the consumer’s area, the creditor need not include the statement. Similarly, the statement would not be required on a preprinted list of available rates for different loan products. This requirement does not apply to an advertisement, as defined in 26.2(a)(2).

This scenario could be problematic for several reasons:

• The prohibition against verifying any information contained on the application prior to issuing either disclosure (in other words, verifying the value versus sales price);
• The restriction on imposition/incurring fees upon the consumer prior to receipt of either disclosure and providing their intent to proceed. If the broker pays the fee and the loan request is denied the fee could not be incurred by the consumer since it was imposed prior to receipt of the disclosure and before the consumer provided intent to proceed. If the broker pays the fee in anticipation of collecting it after receipt of the disclosure by the consumer and provided intent to proceed, or at the loan closing, it could be construed as "imposed on" or "incurred by" the consumer prior to receipt of the disclosure and providing the intent to proceed; and,
• Various other conflict of interest considerations under valuation independence provisions; such as, avoiding any affiliate relationships the broker may have with the appraiser, or perhaps provisions regarding multiple settlement services, etc.

Although receipt of the six items constitutes an "Application" under Regulation Z, you are not restricted from requesting the additional information necessary to compliantly provide the Loan Estimate. A mailing address would clearly be necessary to place the disclosure in the mail. The six items dictate that the Loan Estimate must be issued as Commentary ¶2(2)(a)(3)-1 states, "This definition does not prevent a creditor from collecting whatever additional information it deems necessary in connection with the request for the extension of credit. However, once a creditor has received these six pieces of information, it has an application for purposes of the requirements of Regulation Z.

That depends on how your organization defines an application (see previous question above and the note regarding the Regulation X definition). If based on a policy that receipt of the six items under Regulation Z determines that an application has been received and receipt of the last item occurs on October 4th, 2015, then the Loan Estimate would be appropriate (if the loan is for closed-end credit secured by real property).

If you are taking the application from the consumer via internet, then you would want to capture as much information necessary for you to compliantly provide a Loan Estimate, as well as other disclosures required at the time of providing a loan application form (e.g., ARM disclosures), as well as any state-required disclosures at the time of loan application as opposed to those that can be provided within three general business days. Refer also to questions below regarding preapprovals.

After consultation with your compliance expert or attorney it may be prudent to consider providing the ability for a consumer to choose between a prequalification and an actual application for credit via the website. This way a limit can be placed on the information requested and obtained to only that necessary for a prequalification, or providing a pre-application estimate, and not trigger an application. Refer also to questions below regarding a prequalification and the definition of an application.

The six items listed above define an "Application" under Regulation Z and if those items are received a Loan Estimate must be issued; however, you are not prohibited from issuing a Loan Estimate prior to receipt of all six items. If you decide to issue a Loan Estimate prior to receipt of all six items, you are bound by that Loan Estimate, barring any future changed circumstance, as well as assumed to have had the appropriate six items at the time you provided the Loan Estimate. For instance, if issued without a property address, the identification (addition) of a property address is not a changed circumstance. In addition, you must provide the minimum of a zip code when you provide the Loan Estimate to the consumer.

There are limited reasons where someone might elect to provide a Loan Estimate prior to receipt of all six items, such as: under a preapproval program (see question below regarding preapproval programs); under provisions contained in the Fair Credit Reporting Act regarding permissible purposes an application may have been taken and that would require either disclosure of the Loan Estimate or adverse action; or provisions regarding oral or written applications under Equal Credit Opportunity Act if the creditor has such procedures for the type of credit requested. There are also provisions under both Regulations G & H that define "taking a loan application" under Appendix A.