Why Haven’t Loan Officers Been Told These Facts?
Underwriting Social Security Disability Income (SSDI) and Supplemental Security Income (SSI)
The Consumer Financial Protection Bureau administers the Equal Credit Opportunity Act under Regulation B. The ECOA is a fair lending law that prohibits unlawful discrimination.
Almost ten years ago, the CFPB published a compliance bulletin (CFPB Bulletin 2014-03) to remind creditors of their obligations under the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, concerning consideration of public assistance income. That guidance still stands with respect to the lender’s consideration of Social Security disability income (SSDI) and Supplemental Security Income (SSI).
Social Security Disability Insurance provides monthly payments to people with disabilities that stop or limit their ability to work. Supplemental Security Income provides payments to people with limited income and resources who are 65 or older, blind, or have a qualifying disability. Children with a qualifying disability can also get SSI.
Fair Lending Violations
Under the ECOA, discriminating against income derived from public assistance is unlawful.
15 USC 1691(a) Activities constituting discrimination
It shall be unlawful for any creditor to discriminate against any applicant concerning any aspect of a credit transaction based on race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract) or because all or part of the applicant’s income derives from any public assistance program.
Regulation B 1002.4 Comment 4(a)-1 The general rule covers, for example, application procedures and criteria used to evaluate creditworthiness . . . Thus, whether or not expressly prohibited elsewhere in the regulation, a credit practice that treats applicants differently on a prohibited basis violates the law because it violates the general rule. Disparate treatment on a prohibited basis is illegal whether or not it results from a conscious intent to discriminate.
Ability To Repay
Yet the prohibition against unlawful discrimination does not absolve the lender from making sound decisions about the applicant’s ability to repay based on the sufficiency of or stability of the applicant’s income.
15 USC §1639c. Minimum standards for residential mortgage loans (a) Ability to repay (3) Basis for determination
A determination under this subsection of a consumer’s ability to repay a residential mortgage loan shall include consideration of the consumer’s credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than the consumer’s equity in the dwelling or real property that secures repayment of the loan.
12 CFR § 1026.43(c)(1)(c) Repayment ability —
(1) General requirement. A creditor shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms.
Between a Rock and a Hard Place
Naturally, the Social Security Administration provided no help regarding the benefit’s continuance. Lenders seeking to establish the income’s stability or duration would ask applicants for medical records, physician statements, and all manner of documentation in vain attempts to establish that the income would continue for at least three years. Such medical information requests could be unnecessarily burdensome to applicants. Additionally, such lender information requests violate the ECOA and the Fair Credit Reporting Act (FCRA).
Regulation V (FCRA)
§ 1022.30(b)(1) General prohibition on obtaining or using medical information —
(1) In general. A creditor may not obtain or use medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit, except as provided in this section.
1022.30(d)(1) (d) Financial information exception for obtaining and using medical information —
(1) In general. A creditor may obtain and use medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit so long as (iii) The creditor does not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of any such determination.
In practice, before the 2014 CFPB SSDI clarifications, lenders often considered public assistance income unstable as the award was contingent on complex variables such as the beneficiaries’ age, disability, disability duration, income, and other factors. Frequently, benefit letters referred to ongoing byzantine requirements that lenders could not comprehend or accept. Due to the difficulty in determining public assistance stability, MLOs would often eschew this income when prequalifying loan applicants. If a lender’s general practice refuses to consider public benefits as qualification income or discourages applicants from seeking credit based on this income, such practices violate the ECOA.
Appendix Q is Sunsetted, But CFPB Bulletin 2014-03 SSDI/SSI Guidance Still Applicable
The complexities of the administration of SSDI/SSI benefits haven’t changed, but the lender’s required approach to determining the stability of this public benefit income has. With the advent of Dodd-Frank, the CFPB was charged with developing guidance for implementing the TILA ATR requirements. In response to the ambiguity surrounding existing underwriting benchmarks, the CFPB published the since abandoned Appendix Q to Regulation Z, which provided lenders with fundamentals for credit analysis relative to the QM requirements from that time. Appendix Q was gleaned from the HUD 4155 FHA lenders 203(b) handbook.
In 2020, the CFPB amended the QM rules. Before 2020, for a residential mortgage loan to fit within the General QM category, the ratio of the consumer’s total monthly debt to total monthly income (DTI ratio) must not exceed 43 percent, and the creditor must calculate, consider, and verify debt and income to determine the consumer’s DTI ratio using the standards in Appendix Q of Regulation Z.
The 2020 General QM Final Rule amended the General QM definition. It replaced the existing 43 percent DTI limit with a price-based limit (225 BPS over APOR) and removed Appendix Q and any requirements to use Appendix Q for General QM loans.
2024 Complaints – What the Law Requires
Surprisingly, stakeholders still receive complaints that lenders do not know what to do with public benefits income.
Essentially, the guidance states that unless the Social Security Administration letter (award letter) states that benefits will expire within three years of loan origination, lenders should treat the benefits as likely to continue.
Lenders are directed not to ask a consumer with a disability for documentation about the nature of their disability under any circumstances.
A check of the relevant credit policy for federal agencies and the GSEs reveals that the fundamental approach to discerning public benefit income continuity is consistent for all agency programs.
CFPB Announcement On Social Security Disability Income
Social Security Disability Income Bulletin
Do you have a great value proposition you’d like to get in front of thousands of loan officers? Are you looking for talent?
BEHIND THE SCENES – CFPB Takes Aim At Overpriced Mortgage Junk Fees, Director Chopra Determined to End the “Down Payment Drain.”
President Biden has been after the FHFA to take the initiative with the GSEs and do something to lower closing costs and expand homeownership opportunities. Let’s take a look a what’s cooking.
As announced by the FHFA
FHFA recently approved a pilot program by Fannie Mae that would waive the requirement that lenders obtain title insurance or AOLs (Attorney Opinion Letters) on certain refinance loans with low risks of title defects. Such a waiver is prudent, as title to the property would have been verified during the initial purchase. In addition, a title records search will be conducted, and Fannie Mae will be prepared to resolve any title defects discovered after closing.
Once offered, this pilot program could save homeowners seeking to refinance $500 to $1,500 in closing costs. We believe this flexibility will make the refinancing process more affordable, without introducing any significant risk to Fannie Mae, the lender, or the borrower.
In order to test this concept in a controlled manner, the pilot will be limited in size and duration. We expect this pilot to provide valuable information about a potentially significant cost related to refinancing a loan. Borrowers who recognize savings and are able to refinance may not only save hundreds of dollars at closing, but thousands of dollars over the life of the loan.
Who needs a lender’s title insurance policy on a refi anyway? The FHFA suggests that “as title to the property would have been verified during the initial purchase,” what could go wrong since then?
But wait a minute. How does lowering refi costs do anything to attenuate the housing crisis? Dropping refinancing costs does zilch to expand homeownership opportunities. For refinancing, financing another $1000 or so for lender title coverage bumps the monthly housing costs by nearly nothing. Come on, Director Thomson, get creative.
Let’s say the FHFA effort gets a C- for the no-lender title insurance brilliance. Batter up. This time, the CFPB is at the plate. It’s time for a new regulation.
Enter The Dragon – The Art of Fighting Without Fighting, Stop Down Payment Drain
The CFPB has coined a new term. Pay attention to this novel metaphor, “Down Payment Drain.” When federal regulators innovate a new moniker for an old problem, that indicates they plan on saying it again. And again. What lies ahead? Maybe another crusade? Perhaps a united effort by key stakeholders to move against the brutal status quo that denies homeownership to far too many Americans.
Consider What the CFPB is Saying (Channelling Chopra, a Loose Paraphrase)
Everyone knows how hard it is to save money these days. Housing affordability and housing insecurity have reached near-crisis proportions. As usual, greedy mortgage providers are front and center in this drama and likely to blame for this dilemma of runaway closing costs. However, as an enlightened bureaucrat, I, Director Chopra, am open to the possibility that lenders may be the face of the problem and not the actual root cause.
A pernicious canker on the face of homeownership opportunities has come to my attention. What is this darkness, and from whence does it come? We have uncovered parasitic vendors feeding from the manger of the American Dream. A rot in the fabric of our hopes. Who are these hellish fiends, and where do they hide? There is always a man behind the curtain. Data brokers, consumer credit agencies, and even title insurance companies. They hide behind every dream of homeownership.
Okay, perhaps that is more than a paraphrase. You can decide for yourself. See Director Chopra’s remarks below. Note that the same day Director Chopra delivered the down payment drain statement from the White House – the CFPB issued a Request For Information (RFI) for addressing mortgage junk fees.
CFPB RFI On Inflated Mortgage Closing Costs and How Such Costs Impact Borrowers
The CFPB’s request for information seeks input from the public, including borrowers and lenders, about how mortgage closing costs may be inflated and constraining the mortgage lending market. Specifically, the CFPB asks for information about:
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- Which fees are subject to competition: The CFPB is interested in the extent to which consumers or lenders currently apply competitive pressure on third-party closing costs. The CFPB also wants to learn about market barriers that limit competition.
- How fees are set and who profits from them: The CFPB wants to learn about who benefits from required services and whether lenders have oversight or leverage over third-party costs that are passed onto consumers.
- How fees are changing and how they affect consumers: The CFPB wants information about which costs have increased most in recent years and the reasons for such increases, including the rise in cost for credit reports and credit scores. The CFPB is also interested in data on the impact of closing costs on housing affordability, access to homeownership, or home equity.
The CFPB welcomes stakeholders to submit stories, data, and information about mortgage closing costs. To assist commenters in developing responses, the CFPB has crafted the below questions that commenters may answer. However, the CFPB is interested in receiving any comments relating to mortgage closing costs.
- Are there particular fees that are concerning or cause hardships for consumers?
- Are there any fees charged that are not or should not be necessary to close the loan?
- Provide data or evidence on the degree to which consumers compare closing costs across lenders.
- Provide data or evidence on the degree to which consumers shop for closing costs across settlement providers.
- How are fees currently set? Who profits from the various fees? Who benefits from the service provided? What leverage or oversight do lenders have over third-party costs that are passed onto the consumer?
- Which closing costs have increased the most over the past several years? What is the cause of such increases? Do they differ for purchase or refinance? Please provide data to support if possible.
- What is driving the recent price increases of credit reports and credit scores? How are different parts of the credit report chain (credit score provider, national credit reporting agencies, reseller) contributing to this increase in costs? What competitive forces are or can be brought to bear on these costs? What are the impacts on consumers of the increased costs?
- Would lenders be more effective at negotiating closing costs than consumers? Are there reports or evidence that are relevant to the topic?
- What studies or data are available to measure the potential impact closing costs may have on overall costs, housing affordability, access to homeownership, or home equity?
Anyway, take a gander for yourself. The Domestic Policy Council and National Economic Council are executive branch agencies spearheading the implementation of President Biden’s economic policies and goals.
Prepared Remarks of CFPB Director Rohit Chopra at a White House Event Convening on Mortgage Closing Costs
By Rohit Chopra – MAY 30, 2024
Thank you to the Domestic Policy Council and the National Economic Council for bringing us together today.
Saving up for a down payment is a big obstacle when buying a home, and for many families the process takes years. This morning, the Consumer Financial Protection Bureau launched an inquiry into junk fees that drain down payments and push up the cost of closing on a mortgage for borrowers.
In a true competitive marketplace, people can clearly compare the full price and the key features upfront to select the best option. However, junk fees have been creeping across the economy for years, jacking up the prices we pay for all kinds of products and services. Sometimes, junk fees are charged for fake or worthless services that the customer never wanted. In other cases, junk fees are unavoidable charges imposed on captive customers who have no meaningful choice. Many junk fees are wildly inflated relative to the provider’s cost. Junk fees aren’t just an inconvenience or a nuisance. They represent what happens when companies exploit their customers, rather than competing for them.
Closing costs are the various fees tacked on to a mortgage transaction that are due by the time the loan closes or when the borrower signs the loan agreement. They include charges for things like credit reports and credit scores, title search and title insurance, and other settlement fees.
This wide assortment of fees—which can go by over 200 different names—can add up. These costs have recently risen sharply: from 2021 to 2023, median total loan costs increased by over 36 percent on home purchase loans.
While some of these fees may be providing a legitimate service at a fair price, many of these closing costs may not be subject to fair competition. These fees don’t just affect the consumers who face higher monthly mortgage costs and depleted down payments. Mortgage lenders themselves are battling junk fees, and when costs for things like credit reports increase it becomes more expensive for lenders to even consider an applicant.
There is broad concern from lenders and borrowers about credit report junk fees. Three conglomerates — Equifax, Experian, and TransUnion — dominate the market for credit reports. And they in turn rely on another company, the Fair Isaac Corporation, for the proprietary FICO score.
Mortgage lenders have told the CFPB that costs for credit reports and scores have increased, sometimes by 400%, since 2022. But because investors require the FICO score to analyze pools of mortgage and mortgage-backed securities, lenders are a captive customer base. They have no choice but to pay the fees if they hope to be able to sell the loan on the secondary market and continue to make more loans.
The Fair Credit Reporting Act limits fees charged to consumers for credit files to $15.50, but lenders pay way more. In certain circumstances, the CFPB has the authority to establish a “fair and reasonable” price for some of these reports.
Title insurance fees are a major expense at closing for homeowners, often costing thousands of dollars. Title insurance is an unusual product, typically paid in one big fee rather than regular monthly premiums. Many mortgage lenders require that the borrower purchase the lender’s title insurance—which protects the lender, not the borrower—against problems with the property’s title.
Homebuyers typically have few options when it comes to title insurance. And in many cases, the price borrowers are charged for lender’s title insurance is significantly greater than the risk.
Finding ways to reduce these and other costs will help more Americans cross the finish line when it comes to buying a home.
As many of you know, the CFPB has been focused on reining in junk fees across the board. Our work is saving Americans billions of dollars. We are pleased to build on this work and join this multi-agency effort to combat junk fees in housing.
Too many Americans already face sky-high housing costs because of recent increases in interest rates and home prices. Junk fees in closing costs can add substantial out-of-pocket expenses for households. By draining down payments, they also make monthly mortgage costs even higher.
We want to hear from homebuyers and homeowners about how these fees are further straining their tight budgets. And we want to better understand from lenders how certain costs—like those associated with screening applicants’ creditworthiness—may affect their ability to offer loans to some prospective borrowers. We especially want to hear from mortgage lenders, who are already prohibited from inflating fees and paying kickbacks, about ways to stop down payment drain.
The CFPB administers many laws and regulations related to mortgage lending and real estate settlement, including the Truth in Lending Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act. Our inquiry will help to inform how we update rules, develop guidance, and pursue other policy initiatives with other federal and state agencies. We look forward to reviewing the public input we receive from as part of this inquiry.
CFPB Mortgage Closing Costs RFI
FHFA On Mortgage Closing Costs
Tip of the Week – Get Some Children Before Committing Mortgage Fraud
Mosby Escapes Jail
The mortgage fraud saga of Marilyn Mosby has come to a close. The Judge had mercy on Mosby, noting that “her crimes didn’t involve any taxpayer money” and said the prospect of separating Mosby from her two young daughters “weighed very heavily” on her decision. Nice. If you commit mortgage fraud, get some kids first.
Judge Griggsby questioned Assistant U.S. Attorney Sean Delaney when he argued for a 20-month sentence. “Are there victims, and who are they?” she asked. The prosecutor was either sleepwalking or exceedingly ignorant and answered, “It’s a good question, your honor,” Delaney said, “I get it. This isn’t an embezzlement case.”
“Are there victims, and who are they?” It’s a good question? Mortgage fraud is a victimless crime? Mr. Delaney, are you kidding? Trillions of dollars in lost wealth and thousands of ruined lives due to mortgage fraud and excess. Those affected stakeholders, like homeowners and mortgagors, were not victims? Committing fraud against the GSEs does not involve taxpayer money?
What about maintaining the integrity of the mortgage industry? What about vindicating the standards for public officials who are lawyers and know better than to commit fraud? That is some serious ignorance in the federal courts. If Mosby were an MLO, she’d already be at Danbury Federal.
In light of this dopey sentencing decision, the federal government should apologize to anyone who is or has been incarcerated due to a federal mortgage fraud prosecution.