Written by Angela Meyster, Senior Regulatory Affairs Counsel
Two weeks ago, the CFPB released a bulletin providing guidance for lenders using consumers’ Social Security disability insurance and Supplemental Security Income (collectively, Social Security disability income) to determine whether to provide mortgage loans. The guidance stems from the recurring issue that many consumers relying on Social Security disability income cannot provide proof of how long they will continue to receive their benefits and lenders are worried that, without this proof, they cannot adequately determine a consumer’s ability to repay. Generally the Social Security Administration (SSA) will provide proof that a consumer is currently receiving benefits, but will not forecast for how long the consumer will continue to receive the benefits.
The Bureau in its bulletin cites critically to instances where, in an effort to address this issue, applicants have been asked by mortgage lenders for information about their disability or a statement from their physician about the duration of their disability.
According to the Bureau, to verify income under the CFPB’s Qualified Mortgage debt-to-income ratios, a lender must look at whether the SSA benefit verification letter or equivalent document includes a defined expiration date for payments. If there is no explicit mention that benefits will expire within three years of loan origination, the lender can treat the benefits, for purposes of being compliant with the Qualified Mortgage rule, as likely to continue.
The CFPB’s bulletin also highlights that if a lender places “unnecessary documentation requirements” (such as those mentioned above) on a consumer who is receiving Social Security disability income, the CFPB may subject the lender to a fair lending violation. Specifically, fair lending concerns may arise under the Equal Credit Opportunity Act (ECOA) and Regulation B. Under the ECOA and Regulation B, creditors cannot discriminate against an applicant on the basis that the applicant’s income derives from a public assistance program. A creditor may only take into account the length of time an applicant will remain eligible to receive income from such a program. Creditors should also avoid creating a disparate impact by imposing a different set of requirements for applicants deriving income from public assistance programs. The CFPB encourages creditors to spell out clearly their verification requirements for Social Security disability income, train their personnel in fair lending practices, and ensure strict compliance with underwriting policies.
Finally, the Bulletin outlines a similar approach the Department of Housing and Urban Development, Department of Veterans Affairs, Fannie Mae, and Freddie Mac have taken with respect to Social Security Disability Income.
For more information about compliance with the fair lending requirements of ECOA and Regulation B, see CFPB Bulletin 2012-04: Lending Discrimination.