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The Consumer Financial Protection Bureau issued Bulletin 2015-02 (Section 8 HCV) advising lenders of the pitfalls of excluding a consumer’s income derived from assistance received under the “Section 8 Housing Choice Voucher Homeownership Program” (now there’s a mouthful).
They also highlighted information on their website for consumers that it is illegal for lenders not to use this voucher income (CFPB Notice). This program is the federal government’s major program for assisting very low-income families, the elderly, and the disabled to afford decent, safe, and sanitary housing in the private market.
The CFPB has become aware that some lenders may be choosing not to use this income when qualifying a potential first time home buyer, or restricting its use to limited lending programs. Either way could be considered discriminatory lending practices and a violation of the fair lending rules. A violation may also occur when a lender’s underwriting practices treat such income negatively as compared to other income, or income sources, normally used in qualifying a borrower.
For all intents and purposes, this assistance should be treated the same as normal borrower income unless there is some legitimate business reason for exclusion or limited use. For an FHA loan, the amount of the assistance may be used to offset the monthly mortgage payment for determining the qualifying ratios.
However, such an offset is only allowable when the assistance funds are either paid directly to the lender, assigned servicer, or deposited directly into a financial account to which only the lender, or servicer, has access. Otherwise, the amount may be treated as “income”, and, when deemed non-taxable, grossed up by the allowable FHA rate. The same holds for Fannie & Freddie loans under this voucher program.
As I mentioned in a prior blog, the CFPB is on the lookout for fair lending violations wherever they may exist. When found, they will take swift action to prosecute offenders and remediate the problems.
Don’t be caught in the dragnet. Are you sure your programs, pricing and underwriting criteria do not violate any fair lending rules and/or create a disparate impact on consumers? Are all applicants treated equally and fairly? You may believe so, but you had better be sure.
Analyze all denials, cancelations and withdrawals to make sure they are justified, and that all approval criteria is applied equally across all applicants. Document, document, document…
If CFPB or DOJ find any evidence of possible lending discrimination you may find yourself behind the 8 ball. The game has changed; play different, and play fair.
