The U.S. Department of Justice recently entered into a consent order with Evolve Bank & Trust to settle charges that the bank discriminated against mortgage loan applicants on the basis of disability and receipt of public assistance in violation of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA).  

The DOJ's complaint alleged that the bank's policy was to require some mortgage applicants with a disability to document the continuation of Social Security Disability Insurance (SSDI) or other disability income by providing a doctor's letter or other information about the borrower's disability. The DOJ claimed that, in some cases, the bank denied the applications of borrowers who refused or were unable to provide such a letter or other information while not requiring borrowers with wage or salary income to document the continuation of income. The DOJ brought the action, which was the result of a referral from the Federal Reserve's Board of Governors, despite the complaint's apparent acknowledgment that the bank discontinued the challenged policy in March 2013.

The complaint alleged that the bank's written policy stated that it used industry standard automated underwriting systems, including those provided by Fannie Mae. According to the DOJ, while Fannie Mae's 2010 and 2011 selling guides required lenders to document the likelihood of continued receipt of income for at least three years, the guides indicated that lenders could conclude that SSDI income was likely to continue and were not expected to require additional documentation from applicants because SSDI benefits did not have defined expiration dates. 

The FHA prohibits lenders engaged in "residential real estate-related transactions" from discriminating against any person "in making available such a transaction" because of "handicap." The ECOA prohibits lenders from discriminating against an applicant "with respect to any aspect of a credit transaction…because all or part of the applicant's income derives from any public assistance program." The complaint alleged that SSDI income constituted a "public assistance program" for purposes of the ECOA prohibition, and that by requiring additional documentation from mortgage applicants with SSDI or other disability income, the bank engaged in a pattern or practice of discrimination in violation of the FHA and ECOA prohibitions. 

The consent order requires the bank to establish a settlement fund of $86,000 to compensate 50 borrowers or mortgage loan applicants identified by the DOJ as having been affected by the bank's disability income policy. Any funds not distributed to borrowers or applicants must "be distributed to one or more organizations that provide services including credit and housing counseling, legal representation of borrowers seeking to obtain a loan modification or to prevent foreclosure, financial literary, or other related programs." In addition, the bank must adopt and publish new policies regarding proper documentation of SSDI and other disability income when underwriting mortgage loans and conduct training of its employees involved in mortgage lending to ensure mortgage applicants with disability income are treated in a nondiscriminatory manner consistent with FHA and ECOA requirements. 

The ECOA prohibition regarding discrimination based on an applicant's receipt of public assistance income was the subject of a Consumer Financial Protection Bureau (CFPB) bulletin. The bulletin discusses the fair lending concerns that can arise from requirements imposed by a creditor on mortgage loan applicants receiving SSDI income and other issues relevant to the consideration of applicants' SSDI income. While the DOJ action and the CFPB bulletin are focused on mortgage lending, it is important to note that the ECOA prohibition applies to both mortgage and non-mortgage credit.

Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm’s Consumer Financial Services Group, which is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

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