Prescreen, prequalification and preapproval. The terms sound similar, but lenders beware. These credit solutions are quite different and regulations vary depending on which product is utilized.
Let’s break it down …
What’s involved with a Prescreen?
Prescreen is a behind-the-scenes process that screens consumers for a firm offer of credit without their knowledge. Typically, a Credit Reporting Agency, like Experian, will compile a list of consumers who meet specific credit criteria, and then provide the list to a lending institution. Consumers then see messaging like, “You have been approved for a new credit card.” Sometimes, marketing offers use the phrase “You have been preapproved,” but, by definition, these are prescreened offers and have specific notice and screening requirements. This solution is often used to help credit grantors reduce the overall cost of direct mail solicitations by eliminating unqualified prospects, reducing high-risk accounts and targeting the best prospects more effectively before mailing. A firm offer of credit and inquiry posting is required. And, it’s important to note that prescreened offers are governed by the Fair Credit Reporting Act (FCRA).
Specifically, the FCRA requires lenders initiating a prescreen to:
- Provide special notices to consumers offered credit based on the prescreened list;
- Extend firm offers of credit to consumers who passed the prescreening, but allows lenders to limit the offers to those who passed the prescreening;
- Maintain records regarding the prescreened lists; and
- Allow for consumers to opt-out of prescreened offers. Lenders and the Consumer Reporting Agencies must scrub the list against the opt-outs.
Finally, it is important to note that a soft inquiry is always logged to the consumer’s credit file during the prescreen process.
What’s involved with a Prequalification?
Prequalification, on the other hand, is a consumer consent-based credit screening tool where the consumer opts-in to see which credit products they may be qualified for in real time at the point of contact. Unlike a prescreen which is initiated by the lender, the prequalification is initiated by the consumer. In this instance, envision a consumer visiting a bank and inquiring about whether or not they would qualify for a credit card. During a prequalification, the lender can actually explore if the consumer would be eligible for multiple credit products – perhaps a personal loan or HELOC as well. The consumer can then decide if they would like to proceed with the offer(s).
A soft inquiry is always logged to the consumer’s credit file, and the consumer can be presented with multiple credit options for qualification. No firm offer of credit is required, but adverse action may be required, and it is up to the client’s legal counsel to determine the manner, content, and timing of adverse action. When the consumer is ready to apply, a hard inquiry must be logged to the consumer’s file for the underwriting process.
How will a prequalification or prescreen invitation/offer impact a consumer’s credit report?
Inquiries generated by prequalification offers will appear on a consumer’s credit report, but can only be seen by the consumer when they specifically request a report from the credit bureaus. Soft inquiries are never included in credit score calculations.
For “soft” inquiries, in both prescreen and prequalification instances, there is no impact to the consumer’s credit score.
However, once the consumer elects to proceed with officially applying for and/or accepting a new line of credit, the hard inquiry will be noted in the consumer’s report, and the credit score may be impacted. Typically, a hard inquiry subtracts a few points from a consumer’s credit score, but only for a year, depending on the scoring model.
Each of these product solutions have their place among lenders. Just be careful about using the terms interchangeably and ensure you understand the regulatory compliance mandates attached to each.