Earlier this week the Consumer Financial Protection Bureau (CFPB) published a article and issued a bulletin on the topic of Social Security disability income. In our November 10th article on the same topic we warned you of the discrimination risk involved in verifying this type of income. Now you can hear the same message from the CFPB.
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 creditors 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, including, but not limited to, Social Security disability income. Regulation B further provides that “[i]n a judgmental system of evaluating creditworthiness, a creditor 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 creditor may take into account, for example, “[t]he length of time an applicant will likely remain eligible to receive [public assistance] income.”
Disparate treatment prohibited under ECOA and Regulation B may exist when a creditor treats applicants differently on a prohibited basis, for example, when a creditor imposes additional documentation requirements on public assistance recipients not imposed on other applicants, such as a letter from an applicant’s physician. 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 creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.
The bulletin cites sources of typical underwriting standards, such as:
- Appendix Q of Regulation Z, which provides 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 “[i]f the Social Security Administration benefit verification letter does not indicate a defined expiration date within three years of loan origination, the creditor shall consider the income effective and likely to continue.”
- HUD’s FHA guidelines, which provide that if the SSA Notice of Award or equivalent document “does not have a defined expiration date, the lender shall 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 “[u]nder no circumstance may lenders inquire into or request documentation concerning the nature of the disability or the medical condition of the borrower.”
- VA guidelines, that provide that “[t]he 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 “[l]enders may use income from this source as qualifying income.” The VA also emphasizes that “[i]t is not necessary to seek a statement from a physician about how long the medical condition will last.”
- 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 creditors 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 “[l]ong-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.”
The standards and the guidelines provided by the Bureau, HUD, VA, Fannie Mae, and Freddie Mac may help creditors 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 creditors avoid policies and practices that may violate ECOA and Regulation B. A creditor’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.
A copy of the article is available here.
A copy of the bulletin is available here.