Walking a Thin Line on Disability Income Verification

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Should a lender ask an FHA loan applicant the nature of their disability and how long they expect to be receiving any benefits? Be careful. A Michigan lender had to enter into an agreement with HUD to settle alleged discrimination against an applicant with a disability.

Under this agreement the lender, Mortgage One, is required to make a monetary settlement with the borrower, plus take other actions within the company to properly notify and train staff on discrimination. The loan officer involved is also required to attend specific training on Fair Housing Act requirements (Discrimination).

So what happened? It appears, in this case, that the LO asked the applicant to provide information from a doctor, or the Social Security Administration, to validate the nature of the applicant’s disability.

Although FHA requires a lender to verify any disability income, and that it should continue for at least 3 years from the date of the application, a lender may not ask for information on the nature of the disability, or for how long any benefits may continue, which is not voluntarily provided.

The fact that an applicant is disabled should have no bearing whatsoever on their qualification for a loan to buy a home. FHA requires a lender to verify any income received by an applicant being used to qualify for a loan. For any disability income, the FHA handbook clearly states a lender must verify the amount received and document the borrower’s receipt of the benefits. It also states that if this benefit is due to expire within 3 years from the application then it cannot be used to qualify. So, how does a lender determine the 3-year continuance?

In some cases, the Social Security Benefit Statement, a Verification of VA Benefits, or a private benefits source, may indicate the duration of the benefit on or within their verification document. In such cases, a lender may use this information for the 3-year continuance test.

However, if this information is not readily available or provided by the provider and it is verified that the borrower is currently receiving the benefits, a lender may consider that the benefit is likely to continue. No additional questions need be asked or answered, nor documentation required.

In this case, maybe the originator was being a little too diligent in trying to establish the 3-year continuance and determine the applicant’s ability to repay. Maybe not such a bad idea if this is the only or a major part of the income being received by the applicant.  If so, and the benefit will not continue for more than 3 years, the borrower may find themselves having trouble meeting the payment obligations down the road and in default, or worse, in foreclosure.

If so, will FHA investigate to determine if the lender did all that was needed to properly qualify the borrower for the loan? What about ATR rules?

Yeah, there may be a safe harbor for FHA qualified loans but that has yet to be fully tested, especially if the lender made any other minor errors when processing the loan.

Would it be considered prudent for a lender to grant a loan to a person on disability without having verified that the income used to qualify for the loan was to continue so as to allow the consumer to afford the payments?

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Specific FHA guidelines for the verification of disability income may be found in the new FHA Handbook 4000.1, Section II, A.(4)(c)(xii)(A).

Be careful…

About the Author

Michael Vitali

Michael L. Vitali – Independent Consultant to the Mortgage Industry Mike Vitali is an independent consultant to the mortgage industry on matters concerning compliance and mortgage lending. He most recently served as the Senior Vice President and Chief Compliance Officer for LoanLogics, monitoring regulatory developments and their practical implications for the mortgage lending industry. His duties included research, interpretation, and analysis of existing and proposed legislation related to the industry in support of recommendations for policy and/or procedure changes to maintain continued quality and compliance with all applicable laws, rules and regulations, investor requirements, and standard mortgage practices. In his more than 40 years in the mortgage industry, in senior level management, he has gained experience in all areas of mortgage lending, risk management, and compliance. Mike is a past President of the MBA of Greater Philadelphia, is a charter member and was the second Chairman of the MBA of Pennsylvania, and a past board member and Legislative Chair of both associations. He is a recipient of the 1998 Mortgage Banker of the Year Award from the MBA of Greater Philadelphia, and the 2003 Chairman's Award from the MBA of PA, and currently serves on several compliance related task forces for MBA.