In a recent bulletin, the Consumer Financial Protection Bureau (CFPB) warned lenders against the dangers of requesting that mortgage applicants produce unnecessary proof of Social Security disability income. According to the CFPB, such requests may violate fair lending laws.
CFPB Bulletin 2014-03 explains that mortgage applicants who depend on Social Security disability income face challenges in proving that their income is likely to continue because the Social Security Administration (SSA) generally does not provide documentation of how long the benefits will last. The Bulletin reminds lenders that the proper way to verify Social Security disability income is addressed in the Bureau’s Ability-to-Repay and Qualified Mortgage Rule. Under that Rule, lenders should rely on the defined expiration date for benefits payments that is included in the SSA benefit verification letter or equivalent document. If the letter does not specify an expiration of benefits within three years of the loan origination, according to the Rule, “the creditor shall consider the income effective and likely to continue.”
The timing of the CFPB’s reminder is not surprising; in the last three months, three lenders have resolved allegations that they violated federal laws, including the Fair Housing Act and Equal Credit Opportunity Act, by requesting that mortgage applicants produce letters from doctors or the SSA to prove that their disability income would continue. In all three cases, the lenders executed enforcement agreements and were required to pay hefty fines:
- an August 2014 consent order requires a lender to pay $1.52 million;
- an August 2014 conciliation agreement requires a lender to pay $104,000; and
- a November 2014 consent order requires a lender to pay between $1,100 and $5,500 to each affected mortgage applicant.
The bulletin also provides three tips for lenders who are concerned about managing fair lending risk in this area:
- clearly articulate verification requirements for Social Security disability income;
- provide training to underwriters, mortgage loan originators, and others involved in mortgage-loan origination; and
- carefully monitor for compliance with underwriting policies.