What’s the Difference Between Prequalification, Preapproval and Prescreening?
Prequalification, preapproval and prescreening — three terms that many of us are guilty of using interchangeably. But when it comes to regulatory compliance, the terms can have very distinct meanings and requirements depending on the context in which they are used. Also in today’s Anthem: Legal Briefs, and the Question of the Week: “Can a member cash a check made out to his/her spouse if that spouse is deceased?”
March 4, 2014
Prequalification, preapproval and, prescreening — three terms that many of us are guilty of using interchangeably. But when it comes to regulatory compliance, the terms can have very distinct meanings and requirements depending on the context in which they are used.
You’ll find the definition of prequalification in the Official Commentary for Regulation C:
Prequalification: 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 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. Some institutions evaluate prequalification requests through a procedure that is separate from the institution’s normal loan application process; others use the same process. In either case, Regulation C does not require an institution to report prequalification requests on the HMDA/LAR, even though these requests may constitute applications under Regulation B for purposes of adverse action notices.
As the commentary mentions, while you do not have an HMDA reporting requirement for a prequalification, the information gathered may be considered an application under Reg B and trigger an adverse-action notice if you determine the prospective applicant does not qualify for credit under your standards.
Preapproval is also defined in the Official Commentary section of Regulation C:
Requests for preapproval: To be a covered preapproval program, the written commitment issued under the program must result from a full review of the creditworthiness of the applicant, including such verification of income, resources and other matters as is typically done by the institution as part of its normal credit evaluation program. In addition to conditions involving the identification of a suitable property and verification that no material change has occurred in the applicant’s financial condition or creditworthiness, the written commitment may be subject only to other conditions (unrelated to the financial condition or creditworthiness of the applicant) that the lender ordinarily attaches to a traditional home mortgage application approval. These conditions are limited to conditions such as requiring an acceptable title insurance binder or a certificate indicating clear termite inspection, and, in the case where the applicant plans to use the proceeds from the sale of the applicant’s present home to purchase a new home, a settlement statement showing adequate proceeds from the sale of the present home.
One of the major differences between the prequalification and the preapproval is the written commitment. If you are providing your members with a written commitment after performing a review of their creditworthiness, you have issued a preapproval. Preapprovals are reportable on your HMDA/LAR. In fact, even denied preapprovals are reportable.
And then we get into prescreened offers, which are governed by the Fair Credit Reporting Act (FCRA). Prescreening is the process by which a Credit Reporting Agency compiles a list of consumers who meet specific credit criteria, and then provides the list to the credit union. The most common version we know are the “You have been approved for a new VISA card” offers. Sometimes, marketing offers use the phrase “You have been preapproved,” but, by definition, these are prescreened offers and have specific notice and screening requirements. The FCRA requires credit unions to:
- Provide special notices to members offered credit based on the prescreened list;
- Extend firm offers of credit to members who passed the prescreening, but allows credit unions to limit the offers to those who passed the prescreening;
- Maintain records regarding the prescreened lists; and
- Allow for members to opt-out of prescreened offers. Credit unions and the Consumer Reporting Agencies must scrub the list against the opt-outs.
Bottom line: Look at the context in which the words prequalification, preapproval and prescreening are being used, and think back to how the regulations differentiate between them.
Compliance Question of the Week
Q: Can our member cash a check made out to his/her spouse if that spouse is deceased?
A: Unless your member has a community property agreement (in Washington) or is the executor of the estate, you cannot cash that check for your member. Your member will have to either file a small estate affidavit or go through the probate process in order to have the funds applied to the estate, giving him/her access.
In Oregon, checks payable to deceased payees are subject to special rules, particularly government checks, and can generate losses if not handled properly.
The Oregon Uniform Commercial Code allows checks to clear for 10 days after learning of the death of a member, unless instructed otherwise by a properly appointed person.
National Credit Union Administration (NCUA)
The NCUA has released its latest economic video update.
The NCUA announced that it will be holding a free webinar on BSA compliance.
The NCUA published a notice of proposed rulemaking in the Federal Register to amend its voluntary liquidation regulation.
The NCUA published a proposed rule in the Federal Register that would amend the NCUA’s regulations regarding prompt corrective action (PCA).
Consumer Financial Protection Bureau (CFPB)
The CFPB released information on the types of complaints it is receiving from consumers regarding credit reporting companies. In an effort to make credit reports become more transparent, the bureau is asking credit card companies to start publishing members’ credit scores on their periodic statements.
The CFPB released a new financial tool to help individuals set a goal and plan for their finances. The tool helps individuals compare their actual monthly income versus their expected monthly income, list their current savings, and create a list of all bills that they currently pay.
Federal Trade Commission (FTC)
The FTC launched a new website to promote National Consumer Protection Week (March 2-8). The website helps consumers learn information on topics such as managing debt, online safety, stopping telemarketing calls, and the latest scams.
The FTC released its annual report detailing the top consumer complaints received in 2013. Identity theft continues to be the most reported consumer complaint, with close to 300,000 complaints filed.
Financial Crimes Enforcement Network (FinCEN)
FinCEN released guidance to financial institutions regarding the departure of Ukrainian officials.
Federal Deposit Insurance Corporation (FDIC)
The FDIC has released tips for consumers in response to National Consumer Protection Week.
The FDIC’s Consumer News is now available. The issue focuses on choosing credit cards, tax issues, and fraud prevention.
Federal Reserve Board (FRB)
The Federal Advisory Council and Board of Governors of the FRB released a report detailing certain aspects of the financial market, including loans, small businesses, and mortgages.
The FRB released its discount rate meeting minutes, which state that the existing rate will be maintained.
Office of Foreign Assets Control (OFAC)
OFAC has updated the SDN list as of Feb. 27. The last update prior to this was Feb. 20.
Questions? Contact the Compliance Hotline: 1.800.546.4465, email@example.com.