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CFPB Provides Guidance to Avoid Disability Income Discrimination

December 22, 2014

The Consumer Financial Protection Bureau (CFPB) recently issued a bulletin reminding lenders that requiring unnecessary documentation from consumers who receive Social Security disability income may raise fair lending risk. The bulletin calls attention to standards and guidelines that may help lenders comply with the law, and help ensure that recipients of Social Security disability income receive fair and equal access to credit.

The bulletin is available at: http://files.consumerfinance.gov/f/201411_cfpb_bulletin_disability-income.pdf

According to the CFPB, more than 15 million people receive Social Security disability income every year, including many who are veterans of the U.S. armed forces. For those relying on this income, qualifying for a mortgage can be a challenge when lenders ask for proof of how long they will receive their benefits. 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 for information about their disabilities or even for doctors’ notes about the likely duration of their disabilities.

The bulletin discusses standards and guidelines on verification of Social Security disability income, including under the CFPB’s Ability-to-Repay rule, the Department of Housing and Urban Development’s (HUD) standards for Federal Housing Administration-insured (FHA) loans, the Department of Veterans Affairs (VA) standards for VA-guaranteed loans, and guidelines from Fannie Mae and Freddie Mac.

To verify income for Qualified Mortgage debt-to-income ratios under the Ability-to-Repay rule, lenders are required to look at whether the Social Security benefit verification letter or equivalent document includes a defined expiration date for payments.  Unless the SSA letter specifically states that benefits will expire within three years of loan origination, lenders are advised to treat the benefits as likely to continue.

Under HUD’s standard for documenting income for FHA-insured mortgages, lenders are directed not to ask a consumer with a disability for documentation about the nature of his or her disability under any circumstances.  The VA standard for VA-guaranteed loans emphasizes that lenders do not need to get a statement from a consumer’s physician about how long a medical condition will last.  Fannie Mae and Freddie Mac have issued similar guidelines for loans that are eligible for their purchase, allowing consumers to use Social Security disability benefits as qualifying income for a mortgage.

The Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against an applicant because some or all of the applicant’s income is from a public assistance program, which includes Social Security disability income. As the CFPB bulletin notes, lenders can consider the source of an applicant’s income for determining pertinent elements of creditworthiness.  However, lenders may face fair lending risk if they require documentation beyond that required by applicable agency or secondary market standards and guidelines to demonstrate that Social Security disability income is likely to continue.
 
The bulletin reminds lenders that following the applicable standards and guidelines may help them avoid policies and procedures that violate ECOA.  Additionally, clear articulation of verification requirements for Social Security disability income, proper training of employees involved in mortgage origination, and careful compliance monitoring can all help manage fair lending risk in this area.

This article is taken from a CFPB press release on the publication of its bulletin. The CFPB is an agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.

 





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