Many mortgage lenders offer formal or informal information to prospective mortgage loan applicants prior to the submission of a written loan application. Such activities may include:

• Formal prequalification or certification programs, in which lenders apply basic underwriting standards (such as housing and debt ratios) to the prospective applicant's situation. Frequently lenders provide certificates indicating the maximum loan for which borrowers would qualify, usually subject to a satisfactory property appraisal and further verification of income, employment and credit history. Some prequalification programs even provide a preliminary evaluation of credit history.

• Home buyers' forums and seminars, in which a variety of real estate experts (lenders, real estate brokers, lawyers, appraisers, etc.) provide information about the home buying process and what may be required at each step.

• Informal or undocumented conversations between prospective applicants and lender representatives, in which potential applicants may be encouraged, counseled or coached as to their qualifications and what information they might need to provide in order to strengthen their applications.

These and other similar activities allow consumers to shop more effectively for a property that they can afford. Such programs can also be a key element in the penetration of low and moderate income markets and the success of first time home buyer programs.

Lenders should note, however, that prequalification services must be provided equitably to all customers and that none of the criteria used to prequalify or advise the potential applicant may, explicitly or in effect, include illegal discriminatory factors. The Equal Credit Opportunity Act (ECOA) and Fair Housing Act (FHA) identify a number of factors that are illegal to use in evaluating a prospective applicant's qualifications:

Race                                                      (ECOA & FHA)

Color                                                     (ECOA & FHA)

Religion                                                  (ECOA & FHA)

Sex                                                       (ECOA & FHA)

National Origin                                           (ECOA & FHA)

Marital Status                                                  (ECOA)

Age (provided the applicant has the legal capacity to           (ECOA)
contract)                                                             

Source of income derived from public assistance                 (ECOA)

Good faith exercise of rights under the Consumer                (ECOA)
Credit Protection Act                                                 

Handicap                                                         (FHA)

Familial Status (families with dependents under age              (FHA)
18)                                                                   

Lenders, under both ECOA and FHA, have the discretion to decline oral or written applications, as long as the decision is based on legitimate underwriting standards and not one of the prohibited bases listed above. Lenders can also counsel prospective customers on possible credit or underwriting problems, even if this information discourages a customer from filing a formal application. It is important to recognize, however, that prequalification programs can generate "applications" for purposes of Regulation B, the implementing regulation for ECOA, and thus trigger notification and record keeping requirements under ECOA and HMDA. Appendix A, "Framework for Reviewing Mortgage Prequalifications for Regulations B and C Compliance," provides a simple chart that can be used as a tool to assess whether a prequalification program is in compliance.

- posted by Mark Pane @ 8:08 PM 0 comments