02 Dec Federal Regulatory Update
CFPB COMPLIANCE BULLETIN 2014-03
The Consumer Financial Protection Bureau (the “CFPB”) issued a Compliance Bulletin on November 18, 2014, to remind lenders of their obligations under the Equal Credit Opportunity Act (“ECOA”) with respect to consideration of public assistance income and relevant standards and guidelines regarding verification of Social Security Disability Insurance (“SSDI”) and Supplemental Security Income (“SSI”) income (collectively, Social Security disability income) received by mortgage applicants.
In the past, Social Security disability income recipients have faced special challenges in providing proof that their disability payments are likely to continue. The Social Security Administration (“SSA”) provides these benefits for individuals with serious disabilities, but generally will not provide documentation regarding how long benefits will last. Some applicants have reported being asked by mortgage lenders or their agents for information about their disabilities or for statements from their physicians about the likely duration of their disabilities.
ECOA and Regulation B prohibit lenders from discriminating in any aspect of a credit transaction against an applicant because all or part of the applicant’s income derives from a public assistance program. Such income includes, but is not limited to, Social Security disability income. Regulation B further provides that “in a judgmental system of evaluating creditworthiness, a lender may consider . . . whether an applicant’s income derives from any public assistance program only for the purpose of determining a pertinent element of creditworthiness.” Thus, a lender may take into account, for example, “the length of time an applicant will likely remain eligible to receive public assistance income.”
Fair lending concerns may arise under ECOA and Regulation B when a lender requires additional documentation beyond that required by lawful applicable agency or secondary market standards and guidelines to demonstrate that Social Security disability income is likely to continue, such as information about the nature of an applicant’s disability or a letter from an applicant’s physician. Disparate treatment prohibited under ECOA and Regulation B may exist when a lender treats applicants differently on a prohibited basis, for example, when a lender imposes additional documentation requirements on public assistance recipients not imposed on other applicants. ECOA and Regulation B may also be violated if an income verification standard has a disproportionately negative impact on a prohibited basis, even though the lender has no intent to discriminate and the practice appears neutral on its face, unless the lender practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.
The issue of verification of Social Security disability income has been addressed by the CFPB in determining Qualified Mortgage status:
- On July 24, 2013, the CFPB published a final rule that, among other things, clarifies the verification requirements for Social Security income used in the debt-to-income ratio that determines whether a loan is a Qualified Mortgage under the Ability-to-Repay and Qualified Mortgage Standards Rule (“Ability-to-Repay Rule”). Specifically, the Appendix to the Rule was amended to provide for verification of Social Security income by means of “a Social Security Administration benefit verification letter (sometimes called a ‘proof of income letter,’ ‘budget letter,’ ‘benefits letter,’ or ‘proof of award letter’).” The Appendix explains that “if the Social Security Administration benefit verification letter does not indicate a defined expiration date within three years of loan origination, the lender must consider the income effective and likely to continue.” The Appendix further notes that “pending or current re-evaluation of medical eligibility for benefit payments is not considered an indication that the benefit payments are not likely to continue.”
The Department of Housing and Urban Development (“HUD”) has taken a similar approach for loans insured by the Federal Housing Administration (“FHA”), as has the Department of Veterans Affairs (“VA”) for loans it guarantees.
- HUD standards provide that if the SSA Notice of Award or equivalent document “does not have a defined expiration date, the lender must consider the income effective and likely to continue.” HUD emphasizes that lenders “should not request additional documentation from the borrower to demonstrate continuance of Social Security Administration income” and “under no circumstance may lenders inquire into or request documentation concerning the nature of the disability or the medical condition of the borrower.” HUD also notes that “pending or current re-evaluation of medical eligibility for benefit payments is not considered an indication that the benefit payment is not likely to continue.”
- VA standards provide that “the Social Security Administration has a program that pays benefits to individuals who cannot work because they have a medical condition that is expected to last at least one year” and that “lenders may use income from this source as qualifying income.” The VA also emphasizes that “it is not necessary to seek a statement from a physician about how long the medical condition will last.”
The Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) provide similar guidelines for loans that are eligible for their purchase.
- Fannie Mae’s Selling Guide explains that “Social Security income for . . . long-term disability that the borrower is drawing from his or her own account/work record will not have a defined expiration date and must be expected to continue.” The Selling Guide further provides that lenders must verify this income by obtaining either a copy of the Social Security Administration’s award letter or proof of current receipt and, for SSI, by obtaining both forms of documentation.
- Freddie Mac’s Single-Family Seller/Servicer Guide provides that “long-term disability income,” including “Social Security disability benefits,” “may be considered qualifying income that has a reasonable expectation of continuance unless there is a pre-determined insurance and/or benefit expiration date that is less than three years.” Further, the Guide provides that “[p]ending or current re-evaluation of medical eligibility for insurance and/or benefit payments is not considered an indication that the insurance and/or benefit payment will not continue.”
The standards and the guidelines provided by the CFPB, HUD, VA, Fannie Mae, and Freddie Mac described above may help lenders avoid unnecessary documentation requests and increase access to credit for persons receiving Social Security disability income. In addition, following these standards and guidelines may help lenders avoid policies and practices that may violate ECOA and Regulation B. A lender’s clear articulation of verification requirements for Social Security disability income, proper training of underwriters and mortgage loan originators, and others involved in mortgage-loan origination, and careful monitoring for compliance with underwriting policies can all help manage fair lending risk in this area.