CFPB Issues Guidance to Mortgage Lenders on Verifying Disability Income
By: Melanie Brody, Stephanie C. Robinson, Jay M. Willis
On Tuesday, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued a compliance bulletin, CFPB Bulletin 2014-03, to help lenders avoid discrimination against recipients of Social Security Administration (“SSA”) disability income in violation of the Equal Credit Opportunity Act and its implementing regulation, Regulation B.
Creditors may occasionally feel stuck between a rock and a hard place when underwriting mortgage loans for disability income recipients. On the one hand, creditors have a legal obligation to ensure that applicants are able to repay any credit extended. When an applicant receives public assistance, Regulation B expressly allows creditors to consider the length of time that such assistance is likely to continue. On the other hand, while SSA provides recipients with disability benefits documentation, that documentation generally does not detail how long benefits will last. Creditors seeking to responsibly underwrite mortgage loans must somehow make that determination on their own.
Some lenders have addressed this gap by asking applicants for additional information about the applicant’s disability, such as a statement from a doctor about the disability’s likely duration. As the Bureau points out, though, this practice raises both disparate treatment and disparate impact concerns. First, by asking applicants for this documentation, creditors impose an additional burden on public assistance recipients not imposed on other credit applicants. Second, fair lending violations may occur, according to the bulletin, if a creditor’s practice of requesting additional documentation has a disproportionately harmful effect on applicants receiving public assistance.
The Bureau’s bulletin points to a few sources of regulatory guidance to help creditors walk this fine line. For example, the CFPB’s Ability-to-Repay (“ATR”) Rule provides that if an SSA benefit verification letter does not include an expiration date that falls within three years of the prospective loan origination date, the creditor shall consider the income to be likely to continue. The U.S. Department of Housing and Urban Development’s (“HUD”) and Department of Veterans’ Affairs’ (“VA”) standards similarly allow creditors to consider SSA income as likely to continue when determining ATR, and both agencies prohibit lenders from inquiring about or seeking additional documentation regarding an applicant’s disability. The Bulletin concludes by highlighting Fannie Mae and Freddie Mac guidelines that allow creditors to consider any disability benefits without an explicit expiration date or other temporal limitation to be qualifying income. By clearly articulating these income verification requirements to underwriters and mortgage loan originators, lenders will be better equipped to prospectively manage this aspect of fair lending risk.
While Tuesday’s release marks the Bureau’s first guidance on the subject, this particular issue has attracted the attention of other regulators in recent months. The CFPB’s bulletin does not mention the Fair Housing Act, but requests for disability-related documentation may also create fair lending risk under the Fair Housing Act, since that statute prohibits discrimination in home financing on the basis of, among other things, an individual’s disability. In August 2014, HUD announced a pair of settlements with two home lenders that had requested a physician’s note or other documentation from applicants regarding their disability income. These lenders agreed to provide $104,000 and nearly $1.6 million, respectively, in restitution to affected individuals. With the publication of this bulletin, we may see the Bureau announce its own enforcement actions on this subject in the near future; the Bureau has previously issued compliance bulletins around the same time that it finalizes enforcement actions on the same topic. Creditors should take a close look at their underwriting guidelines and practices related to public assistance income to ensure that potential fair lending risk is minimized.