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Residential Department: BackSpace: December 2014

 

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What to expect when your borrower is expecting

This past October, the U.S. Department of Housing and Urban Development (HUD) secured the largest-ever settlement from a mortgage lender over allegations of pregnancy discrimination.

Wells Fargo & Co. agreed to pay a total of $5 million to settle claims that it violated the Fair Housing Act by denying mortgages to families with women who were pregnant or on maternity leave. Wells Fargo did not admit wrongdoing, but the settlement was a stain for the No. 1 mortgage lender in the U.S.

This type of settlement is not unique, but part of a trend of pregnancy-discrimination settlements that have hit big and small lenders over the past four years. HUD advises lenders to obey the Fair Housing Act to the letter, as hard as that may be amid strict underwriting standards and concerns over putbacks.

HUD has seen between 30 and 50 individual claims each year since 2010, totaling close to 200 by end of 2014, and officials expect more are coming.

“We’ve seen this occur in every stage of lending,” HUD Assistant Secretary for Fair Housing Bryan Greene says. “We will investigate and take action against anyone in the process who has [perpetuated] a discriminatory practice.”

Origins in exposé

In July 2010, The New York Times published a story by reporter Tara Siegel Bernard titled, “Need a Mortgage? Don’t Get Pregnant.” Bernard’s article detailed multiple cases of women who lost mortgages because of pregnancy or maternity leave and quoted multiple lenders testifying to that.

“Maternity leave or any other leave of absence often prevents a person from obtaining a mortgage,” AMC Mortgage President John Councilman told the newspaper. “There are some who long for the days when such strict proof of incomes was not required.”

Two days after the story appeared, HUD announced it would investigate certain lenders “to determine if they illegally denied families mortgages because the mother is pregnant or a family member is experiencing a short-term disability.”

Some lenders have protested the discrimination allegations,
blaming the incidents on strict underwriting guidelines.

In June 2011, a married couple filed a complaint with HUD against Luxury Mortgage Corp. of Stamford, Connecticut. The complaint alleged that the company denied the loan because of the woman being on maternity leave; according to the settlement, Luxury claimed it was “merely seeking proof of income.”

Regardless, that case became the first publicly announced maternity settlement. In November 2011, the company agreed to pay the aggrieved couple $12,000.

The settlements have continued, hitting a dozen other institutions from credit unions to insurers like the Mortgage Guaranty Insurance Corp., and big banks like Bank of America.

Role of GSEs

Some lenders have protested the discrimination allegations, blaming the incidents on strict underwriting guidelines. They say the government-sponsored agencies (GSEs), Fannie Mae and Freddie Mac, may not buy a mortgage given to someone on maternity leave — or worse, the GSEs will force the lender to repurchase the mortgage. 

One lender says that Fannie and Freddie did not provide guidance on this specific issue until recently.

Fannie and Freddie say they have always provided guidance for situations where borrowers are on temporary leave. A check of updates to both GSEs selling guides show that the word “maternity,” specifically, did not appear until the end of 2011.

Fannie Mae says that it added a specific reference to maternity leave in 2011 under advice of HUD and the Federal Housing Finance Agency, the conservator of the GSEs.

Freddie Mac spokesman Brad German echoes that, reiterating that the company has always had a policy guiding lenders on how to allow a worker on temporary leave to get a mortgage.

“Our policy has always been that we would accept a loan if one borrower is on leave [from work],” German says. “[In 2011] we gave more specific guidance about qualifying incomes.”

Lenders familiar with law

The Fair Housing Act, part of the Civil Rights Act, became law in 1968. The law exists to protect against housing discrimination, whether for a rental or a mortgage, based on race, religion, gender and familial status. The law exists superiorly to anything enacted after the recent housing crash, and any underwriting policy of the GSEs or individual lenders.

The Family Medical Leave Act governs maternity leave, and applies to pregnant women and their spouses. Workers can take as long as three months off from work — most employers do not provide paid leave — during which an employer must hold their job for them.

Mortgage lenders may be more likely than underwriters or insurers to know about those laws. The 2008 Secure and Fair Enforcement for Mortgage Licensing Act (SAFE) requires lenders to seek eight hours of continuing education every year, one hour of which must be dedicated to fair lending.

Tyna-Minet Anderson, vice president at Mortgage Educators and Compliance (MEC), says her company offers specific classes based around discrimination. She says that what originators know about fair housing usually depends on where they work, and whether the compliance department is in shape.

“It is something we’ve had to point out in our training session — people don’t understand that some things they do [are] discrimination,” she says.

Underwriters and insurers sometimes take classes with MEC, Anderson says, but not often.

The extraordinary confluence of a housing bubble and subsequent recession may have caused underwriting standards to tighten, but that does not mean lenders can ignore fair-housing laws, regulators say.

“The lending climate of the last six to seven years contributed to this,” HUD’s Greene says. “As a result, the kinds of practices that lenders accepted before, they began to second-guess. Lenders that are engaging in an abundance of caution in many of these instances, should they just follow objective underwriting criteria, it would lead them to making a loan.”


 

Neal McNamara was a chief reporter with Scotsman Guide Media. For questions about this article, call (800) 297-6061 or e-mail articles@scotsmanguide.com.

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