On Nov. 3, the U.S. Department of Housing and Urban Development announced a fair-lending settlement between a mortgage company and a loan applicant who alleged illegal discrimination in the denial of a mortgage loan based on gender and familial status. The applicant claimed that she was denied a loan because she was on maternity leave at the time of the application. She also claimed that her employer provided the lender with a letter stating that she was on paid maternity leave. She further claimed that the lender told her that the employer's letter was insufficient. 

Generally, the definition of "familial status" for purposes of fair lending discrimination laws involves the presence of children under 18 years old in the household. Familial status was added as a prohibited basis to the Fair Housing Act in 1989. Most of the examples of discrimination involving familial status that we read about involve situations where families with children are denied access to rental properties. Communities that cater to seniors and don't allow children have an exemption.

In this case, it wasn't the presence of children under 18 years in the household that was the issue. It was (apparently) the maternity leave status of the applicant.

Lessons from the Luxury Mortgage case

All of this discussion is based solely on what one can read from the HUD press release and the published settlement agreement with Luxury Mortgage Corp., from the HUD web site. I have no special inside information about the case or the facts surrounding the event. Just based on the published information, there are some good "take-aways" for all other lenders who want to avoid similar fair lending disasters. 

1. It doesn't have to be a pattern or practice to get you into trouble.

This was a single application, not a significant proportion of the lender's applications. There is a common misconception that a lender has to have a pattern or practice of prohibited basis discrimination before any action will be taken by the regulators. Not true. One instance of disparate treatment is enough.

And ... a single instance can also grow into a huge investigation looking for additional examples of similar treatment.

2. Delays can be as bad as denials.

If an application becomes subject to unreasonable (in the eyes of the applicant) delays and requests for more information, those delays and additional requests can be viewed as unfair treatment. If that applicant also happens to fall within a prohibited basis category (sex, race, marital status, age, religion, etc.), there is potential for a discrimination complaint.

The lender, in this case, according to the settlement, claimed that it was in the process of attempting to obtain proof of income documentation when the applicant became frustrated with the process and asked for a denial letter in order to pursue a loan elsewhere.

Was the delay due to lack of cooperation on the part of the employer or the applicant?

Was the delay due to the lender's lack of sufficient staff in relation to volume of applications at the time? 

Was the delay unusually long or standard practice for mortgage transactions? 

We don't know.

And, it doesn't matter.

This applicant believed that the delay was due to her maternity leave and because she was a female.

Does your loan process have delays or roadblocks that could frustrate applicants?  What causes them, and how can they be avoided?

3. Are all "leaves" considered equally?

The fact that an applicant is on maternity leave may not be a factor in the loan decision process. It also may not be used as a reason to delay a decision on a loan. If someone is on leave from their job for any reason, the lender's procedures for consideration of the legitimate issue of ability to repay should be consistent and neutral as to sex, race, and any other prohibited basis.

4. Examine your Proof of Income and Employment requirements.

As a matter of fact, it wouldn't hurt to examine what you require from applicants for proof of income and employment for a loan.

Maybe the industry is just reacting to past criticism that not enough was done to verify income and employment and qualify people for mortgage loans that they could actually afford.

Is it legitimate, reasonable and, most importantly, consistent?

5. Take a look at the practice of sending someone a denial letter upon request.

This lender claimed that a denial letter was sent to the applicants at their request and not because the loan had been denied. Perhaps it would be better to obtain documentation that the applicant wants to withdraw an application and send the applicant a letter to that effect instead of a letter stating that the lender is denying the loan.

Fair-lending compliance risk continues to be high for all lenders. If you have any additional suggestions for lenders, please share them below.

About Nancy Derr-Castiglione
“Lucy and Nancy’s Common Sense Compliance” is blogged by both Lucy Griffin and Nancy Derr-Castiglione, both ABA Banking Journal contributing editors on compliance.

Nancy, a Certified Regulatory Compliance Manager, is owner of D-C Compliance Services, an independent regulatory compliance consulting services business that has provided expertise in compliance training, monitoring, risk assessment, and policies and procedures to financial institutions since 2002.

Previously, Nancy held compliance positions with Bank One Corporation and with United Banks of Colorado.