If you’ve taken Real Estate Institute’s 2014 CE class, you know there have been some questions raised regarding the borrower providing documentation to the creditor before receiving the new Loan Estimate under the rules that take effect on August 1, 2015. Specifically, the question was how pre-approvals would be conducted given the language in Section 1026.19(e)(2)(iii) of Regulation Z going into effect next year, which 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 paragraph (e)(1)(i) of this section.” (Referring to the Loan Estimate.)
The official comments to the rule further state:
“A mortgage broker may ask for the names, account numbers, and balances of the consumer’s checking and savings accounts, but the mortgage broker may not require the consumer to provide bank statements, or similar documentation, to support the information the consumer provides orally before the mortgage broker provides the disclosures required by § 1026.19(e)(1)(i).” (Comment 19(e)(2)(iii) to the TILA-RESPA Rule)
As our instructors have mentioned in class, I wrote a letter to the Consumer Financial Protection Bureau some months ago asking for clarification on this section of the rule. Specifically, I was concerned about the CFPB’s interpretation of the word “required” and whether a lender or broker would be in violation of the rule if we went through the typical pre-approval process as it exists in 2014.
I’m pleased to report that I received a call from Jeff Riley at the CFPB and had a lengthy discussion with him about this issue. Jeff provided verbal clarification* that it is permissible for creditors/brokers to REQUEST information and documentation from the borrower prior to providing a loan estimate, including at the pre-approval stage. However, the borrower cannot be REQUIRED to provide documentation before a creditor (or broker on behalf of a creditor) provides a loan estimate, nor can the collecting any of the six pieces of information that constitute an application be intentionally delayed until the borrower provides the documentation. Put simply, if borrowers verbally provide you the six pieces of information (name, income, Social Security number, subject property address, estimate of value of the subject property and the desired loan amount), you must provide a loan estimate within three business days even if they refuse to furnish any documentation to substantiate what they verbally disclose.
What’s the takeaway here? Carry on with your pre-approvals as you normally would after August 1, 2015. Obtaining documentation from the borrower in order to issue a pre-approval would not appear to put you in violation of the TILA-RESPA rule (although I would certainly avoid giving the impression through verbal or non-verbal clues that any documentation is “required” or “mandatory”). Also, if borrowers want to give you all of the required information verbally, don’t stop them from doing so until you’ve seen documents, as that would be a violation of the rule.
*NOTE – Verbal clarification is NOT official staff guidance or an official interpretation of the rule by the CFPB. I encourage all readers to consult with a qualified attorney on all matters of law or regulation. I am not an attorney (nor do I play one on TV), and no blog post can or should substitute for competent legal counsel.