The Consumer Financial Protection Bureau is warning lenders not to discriminate against borrowers who are receiving Social Security disability income.
According to the CFPB, more than 15 million people received Social Security disability income every year, and many of whom are veterans of the U.S. military. And for many of those, trying to obtain a mortgage loan based on their disability income can be difficult.
“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 CFPB said. “The Social Security Administration provides these benefits for individuals with serious disabilities, but generally will not provide documentation regarding how long benefits will last.”
The CFPB said that some applicants have reported being asked for information about their disabilities or even asked a doctor’s note about the duration of their disabilities.
In a bulletin to lenders, the CFPB reminded lenders that requiring unnecessary documentation from consumers who receive Social Security disability income may increase a lender’s fair lending risk.
In the bulletin, the CFPB tells lenders that they are required to verify income for Qualified Mortgage debt-to-income ratios as part of the Ability-to-Repay rule. As part of that verification process, lenders are also required to look at whether a borrower’s Social Security Administration benefit verification letter contains a defined expiration date for payments.
But the CFPB also warns lenders that unless the Social Security Administration letter “specifically states that benefits will expire within three years of loan origination,” lenders should treat the borrower’s benefits as likely to continue.
“Everyone deserves the opportunity to qualify for a mortgage that they can afford,” said CFPB Director Richard Cordray. “Consumers should not be put at a disadvantage just because they receive Social Security disability income. Lenders should continue to make fair and responsibly underwritten mortgages without imposing unnecessary requirements on consumers who receive these benefits.”
This very issue came to a head in August, in a case involving Freedom Mortgage. The lender was fined $104,000 by the U.S. Department of Housing and Urban Development to settle claims that the lender discriminated against loan applicants with disabilities.
HUD filed an initial complaint against Freedom Mortgage in 2013, alleging that the lender subjected persons with disabilities to different terms and conditions from other applicants by requiring, among other things, that they provide doctor’s notes or letters from the Social Security Administration that their disability income would continue for three years.
Through its investigation, HUD identified 69 applicants that were discriminated against by Freedom Mortgage because of their disability.
Now the CFPB is reminding lenders that they are required to treat borrowers on disability the same as other borrowers.
The CFPB also said that 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 U.S. Department of Veterans Affairs standard for VA-guaranteed loans also stresses that lenders do not need to get a statement from a consumer’s physician about how long a medical condition will last.
“As today’s bulletin notes, lenders can consider the source of an applicant’s income for determining pertinent elements of creditworthiness,” the CFPB said. “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.”
