Public officials must make it clear once and for all that the law forbids them to deny or delay a loan because an applicant is pregnant or on parental leave.
There was already confusion about this part of the Fair Housing Act in past years, and the ability-to-repay rule that took effect in January has made it worse.
Lenders aren't even supposed to ask about an applicant's family status, but many consumers often volunteer the information, says Stephen Lewis, president and chief executive of the Mansfield, Texas, counseling agency Making Acceptable Homeowners. Starting a family is a natural and common reason to buy a house, after all.
Despite this, some lenders apparently have improperly considered pregnancy or maternity in loan decisions, a recent HUD action and several similar ones over the years suggest. They may even be more apt to do so now due to Dodd-Frank Act rules holding lenders responsible for assessing borrowers' ability to repay, if a response to my last blog on borrower pregnancy is any indication.
It's not the first time the ATR has raised concerns related to its potential conflict with fair lending, and unfortunately, it is unlikely to be the last.
In this case, these concerns are rooted in the fear that maternity leave will affect a borrower's ability to repay. Most troublesome and dangerous in this regard are the assumptions that borrowers definitely won't return to work, or that leave will definitely reduce their pay.
"I think that there is a fundamental problem with that," says Hillary Benham-Baker, a founding partner at Campins Benham-Baker LLP, a San Francisco law firm that represents employees. "One assumption that we hear about in doing this work, and doing discrimination work in investigating these issues, is that lenders and their agents in some cases are really employing stereotypes in making that ability-to-repay assessment rather than applying any sort of data."
Assuming a pregnant borrower or borrower on maternity leave definitely won't have any chance of going to back to work is "a pernicious stereotype that we find really problematic because it's not based on any individualized assessment of her creditworthiness," she says. You can't assume a borrower's maternity leave will affect qualifying income, either.
About 62% of workers qualify to take leave under the Family and Medical Leave Act, according to the American Association of University Women. The law gives qualifying workers who need to provide essential family care—including women who give birth or adopt—the right to up to 12 weeks of unpaid leave and to return to work. Certain states also require employers to keep paying at least a reduced level of compensation depending on the length of the leave.
However, there are several ways for a woman on maternity to receive full pay. Some employers provide it, particularly if a leave is short term, and people also may use earned paid sick and vacation days for their leaves.
It's difficult to make a blanket statement about how lenders treat short-term leaves in underwriting because each has its individual criteria. Fannie Mae, the larger of the two government-sponsored enterprises that dominate the market, evaluates borrowers who take short-term leave based on documented return-to-work income, unless the loan payments start before the leave ends, a spokeswoman said. Fannie, which detailed its temporary short-term leave criteria in a May 27 seller guide update (see page 363), requires that the borrower and the employer verify and commit to the return date and income. If borrowers need to start making payments while on leave, they may still be able to qualify at their return-to-work pay rate if they show they have other liquid assets sufficient to keep paying during the leave period.
Virtually any loan accepted by Fannie's Desktop Underwriter software is considered to have qualified mortgage status under ATR rules, according to a Fannie spokesman. (There are some extra prohibitions added by Fannie's regulator that match the QM requirements for non-agency loans, such as those for interest-only and 40-year loan products.) QM affords the highest protection from liability under ATR rules.
Public and private entities in the mortgage market should get comfortable enough underwriting loans to pregnant borrowers and those going on maternity leave so they don't ever delay or deny loans to them for no good reason. As I've said before, I think lenders are cutting off their nose to spite their face if they do. One of the most motivated mortgage borrowers you'll ever see is an expectant mom because she needs the space for a new baby. Make her wait for a loan because of a pregnancy or maternity leave and you are likely to miss the window in which she was most likely to buy.
Bonnie Sinnock is the capital markets editor for National Mortgage News. The views expressed are her own.