United States

CFPB cautions discrimination in income verification of mortgage applicants


The Consumer Financial Protection Bureau (CFPB or Bureau) has issued CFPB Bulletin 2014-03 reminding creditors of their obligations under the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, regarding the consideration of public assistance income, and relevant standards and guidelines relating to the verification of Social Security disability income received by mortgage applicants.

It is a violation of the ECOA and Regulation B to discriminate against an applicant on a prohibited basis in any part of a credit transaction. This includes the fact that all or part of the applicant’s income may come from a public assistance program which would include, among other things, income from Social Security disability. 

The bulletin explains that fair lending violations under both the ECOA and Regulation B are possible when creditors require additional income related documentation, beyond the documentation required by lawful applicable agency or secondary market standards and guidelines, to document that Social Security disability income is likely to continue. This additional documentation may take many forms, including information about the nature of the applicant’s disability or a letter from the applicant’s physician relating to the nature, extent or longevity of the applicant’s disability. The Bulletin also warns of the possibility of disparate treatment in these situations. The bulletin in part states that “requesting additional documentation may lead to disparate treatment of the applicant because applicants are being treated differently based on a prohibited basis,” for instance, requiring additional documentation from applicants who receive public assistance income over what is required of other applicants. Disparate treatment may also arise if “income verification standards have a disproportionately negative impact on applicants based on a prohibited basis even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor can show a legitimate business need for the practice that cannot reasonably be achieved by a means that is less disparate in its impact.”

The Bureau has provided guidance on the issue of verification of Social Security disability income that does not raise these fair lending concerns. This guidance can be found in Appendix Q of Regulation Z, and although it is specifically used in the debt-to-income calculation to determine if a loan is a Qualified Mortgage under the Ability-to-Repay rule, the information is equally applicable to other types of consumer loans. The guidance is detailed, but generally provides for the use of a Social Security Administration benefit verification letter (also called a proof of income letter, budget letter or proof of award letter) to verify Social Security income, and allows the creditor to consider the income to be “effective and likely to continue” as long as the benefit verification letter does not indicate an expiration date of the benefits within three years of the loan’s origination. 

The bulletin also summarizes guidelines from the Department of Housing and Urban Development for loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, and from the National Mortgage Association and the Federal Home Loan Mortgage Corporation for loans they purchase. These guidelines are similar to those outlined above. A review of the summary information in the bulletin or the more detailed information available through links in various footnotes of the guidance may be helpful in developing policies and procedures that avoid unnecessary documentation requests and that can be one way to manage fair lending risk.