Does Your Financial Institution Have a HMDA Reportable Preapproval Program?

In today’s competitive home buying market, real estate agents are often reluctant to spend time showing homes until they know a buyer has financing lined up. Many agents have been burned by prequalification letters and now insist on preapproval letters instead.

That distinction makes sense from a business perspective, but from a compliance standpoint, preapprovals can quickly become complicated for financial institutions subject to the Home Mortgage Disclosure Act (HMDA) and required to file a Loan Application Register (LAR).

The key question isn’t what your institution calls the process. It’s whether your process meets HMDA’s specific definition of a preapproval program.

What is a preapproval from a HMDA perspective?

A preapproval is typically issued when a borrower applies for a home purchase loan before identifying a specific property. The goal is to confirm the loan amount the borrower would qualify for, giving both the buyer and the real estate agent a realistic price range.

Under 12 CFR § 1003.2(b)(2), however, HMDA defines a preapproval program much more narrowly.

To qualify as a HMDA reportable preapproval program, the financial institution must, after a comprehensive analysis of the applicant’s creditworthiness, issue a written commitment that:

1. Is valid for a designated time period; and
2. Commits to extending a home purchase loan up to a specified amount

That written commitment may only be subject to very limited conditions.

Permissible conditions under HMDA

A HMDA reportable preapproval may only include the following conditions:

1. Identification of a suitable property

This refers to confirming the identified property is eligible for financing under the institution’s guidelines. Examples include:

• Property type eligibility (e.g., mobile homes aren’t allowed)
• Minimum habitability standards
• No required repairs that would disqualify the property

2. No material change in the applicant’s financial condition or creditworthiness

This condition allows the institution to rely on the applicant’s financial profile as approved, assuming no significant changes occur prior to closing. For example:

• Loss of employment or significant reduction in income
• Depletion of down payment funds
• Bankruptcy or other major credit events

3. Limited non-credit conditions typically attached to mortgage loans

These are conditions unrelated to the applicant’s income, assets, employment, or creditworthiness and generally relate to:

• Appraisal meeting loan-to-value requirements
• Clear title and ability to obtain title insurance
• Standard closing requirements such as the buyer being able to obtain homeowners insurance

Where financial institutions commonly go wrong

We frequently see clients reporting preapprovals on their HMDA LAR that don’t actually meet HMDA’s definition of a preapproval program.

In most cases, one or more required components are missing, meaning the institution is reporting applications that don’t need to be reported at all.

The most common issues include:

The “preapproval” isn’t a written commitment

Often, the letter remains subject to credit underwriting, which disqualifies it as an HMDA preapproval. Typical scenarios include:

• Loan officer reviews a credit report
• A paystub may be collected
• A quick debt-to-income calculation is performed
• Maybe an automated underwriting system is run

However:

• The file isn’t underwritten
• Income, employment, and assets (including downpayment funds) aren’t verified, consistent with the institution’s normal credit evaluation process

This is not a comprehensive analysis of creditworthiness under HMDA.

The letter explicitly disclaims any commitment

Another red flag is language stating:

• “This isn’t a commitment to lend,” or
• “Approval is subject to further underwriting and verification”

If the letter says it’s not a commitment, it’s not a commitment.

No defined validity period

A preapproval must be valid for a designated time period. Letters omitting an expiration date or timeframe don’t meet HMDA’s definition.

Despite using the term “preapproval,” any one of these issues means the process doesn’t constitute a HMDA reportable preapproval program.

Why would a financial institution want a HMDA preapproval program?

There are legitimate reasons to maintain a HMDA reportable preapproval program. From a data perspective:

• Denied and approved not accepted preapproval requests are reportable
• Withdrawn preapproval requests (prior to approval or denial) are not reportable
• Any preapproval resulting in a closed loan is reported as an origination regardless

This data can be valuable for fair lending risk assessments and analysis purposes.

Why many financial institutions choose not to have a HMDA preapproval program

Let’s be honest — HMDA reporting is complex. Every additional application reported increases:

• Data integrity risk
• Scrubbing and validation workload
• Examiner scrutiny

If examiners identify a material number of errors on your HMDA LAR, your institution may be required to correct and resubmit the data — an exercise no one enjoys.

For many institutions, the risk-reward tradeoff simply isn’t worth it.

Making a deliberate choice on HDMA preapproval programs

When designing or evaluating your preapproval process, the key is intentionality. It’s not difficult to structure a preapproval process that is not HMDA reportable. For example, you likely don’t have a HMDA preapproval program if:

• The letter states it’s not a commitment to lend
• Income, assets, or employment remain subject to verification
• The request doesn’t receive credit underwriting approval

Conversely, you may have a HMDA reportable preapproval program if:

• Income, assets, and employment are verified consistent with your normal underwriting process, prior to issuing the preapproval letter
• Creditworthiness is comprehensively analyzed
• The request is approved by an individual with lending authority
• A written commitment is issued for a defined period

How CLA can help financial institutions with HDMA preapproval programs

Whether or not your financial institution offers preapproval letters, the compliance risk lies in misalignment between process, documentation, and HMDA reporting. Understanding where your program falls under HMDA’s definition allows you to:

• Report only what’s required
• Reduce unnecessary HMDA data error risk
• Defend your approach confidently during examinations

If you’re unsure where your institution stands, a targeted review of your preapproval letters and workflows can provide clarity and help avoid reporting more than you have to. CLA advises financial institutions on many situations and can assist with this evaluation.