In November, the Consumer Financial Protection Bureau issued a compliance bulletin (CFPB Bulletin 2014-03) reminding lenders of their legal obligations when underwriting mortgage loans for Social Security disability recipients. The agency outlined steps that creditors can take to avoid illegal discrimination in violation of the Equal Credit Opportunity Act (ECOA) and Regulation B.
Lenders in these situations frequently confront a dilemma: They must confirm that the money they lend will be repaid, while not imposing greater burdens on Social Security recipients than on non-recipients. ECOA and Regulation B prohibit creditors from discriminating against applicants whose income derives in any way from a public assistance program. Regulation B, however, permits creditors to consider the length of time an applicant will likely receive public assistance income in order to assess the applicant’s creditworthiness.
In the Bulletin, the CFPB warned creditors of possible liability if they require mortgage applicants receiving Social Security disability benefits to provide additional documentation revealing how long their benefits are likely to last. The Social Security Administration does not generally disclose such information. Applicants reported that lenders were asking them for more information about their disabilities and, in some cases, for doctor’s notes addressing the probable duration of their disabilities. The CFPB confirmed that fair lending violations may occur if such practices have a disproportionately harmful effect on those receiving public benefits.
The Bulletin advised creditors to manage their fair lending risk by looking to alternative regulatory sources for guidance. For instance, the CFPB’s Ability-to-Repay and Qualified Mortgage Standards Rule, 12 C.F.R. pt. 1026, Appendix Q, provides that “[i]f the Social Security Administration benefit verification letter does not indicate a defined expiration date within three years of loan origination, the creditor shall consider the income effective and likely to continue.” The Department of Housing and Urban Development and the Department of Veterans Affairs have issued similar directives regarding loans insured by the Federal Housing Administration. Finally, the Bulletin noted that the National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have advised lenders that they may reasonably expect Social Security benefits to continue indefinitely as long as there is no clear expiration date on such benefits.
The Bulletin marked the CFPB’s first formal guidance in this arena. Given past practice, it may indicate that CFPB enforcement actions in this area are on the horizon.