Question: Can a lender refuse to close a loan on the basis that an applicant is pregnant or on maternity leave?
Bottom Line Up Front: No, not if the applicant qualifies for the loan and demonstrates the ability to repay. Lenders who refuse to consider income or employment just because a woman is pregnant or on maternity leave may be in violation of the Fair Housing Act’s prohibitions against discrimination on the basis of gender and familial status, and the Equal Credit Opportunity Act (ECOA) prohibitions against discrimination on the basis of gender.
A mortgage veteran with over 35 years in the industry informed me that she was once required to confirm whether women were on birth control as a prerequisite to applying for a mortgage—she called it the “pill disclosure.” Thankfully, those days are over and fair lending laws are increasingly addressing the remaining vestiges.
In its Single Family Selling Guide, published on Jan. 24, 2014, Fannie Mae clarified that maternity leave is defined as “temporary leave” analogous to short-term medical disability, parental leave, or other temporary leave types that are acceptable by law or the borrower's employer. Generally, lenders should be aware that:
►It is a Fair Lending violation to assume that a woman will not return to work after childbirth. Under Fannie Mae guidelines, the applicant on maternity leave must provide written notice of her intent to return to work, and the employer, or a third-party representative may verify the return date and whether the borrower has the right to return to work after the temporary leave period is over. Confirmation requires no particular formality and does not need to comply with Fannie Mae’s “Age of Allowable Credit Documents” policy—in other words, lenders should not impose expiration date standards applicable to other credit documents.
►Temporary Leave means “employed." Once the lender confirms that the borrower is on “temporary leave” the lender must consider the borrower as “employed.” The lender is prohibited from requiring a qualified applicant who is pregnant or on maternity leave to return to work, and thereafter earn a specified number of paychecks before her loan may be approved or closed. If the borrower will return to work by the date the first mortgage payment is due, the lender can consider the borrower's regular employment income for qualification purposes.
“If the borrower will not return to work as of the first mortgage payment date, the lender must use the lesser of the borrower's temporary leave income (if any) or regular employment income. If the borrower's temporary leave income is less than her regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves.”
[Fannie Mae Seller Guide, B3-3.1-09, 5/27/14]
►Lenders must establish underwriting policies that similarly consider employment and income for pregnant women and women on maternity leave, as it does other mortgage applicants. Temporary leave income that falls below the borrower’s regular income may be supplemented by the borrower’s available liquid financial reserves, subject to Fannie Mae’s underwriting guidelines. If the lender is aware that a borrower will be on maternity leave at the time of closing, and if the loan cannot be approved without the income of the borrower who will be on maternity leave, the lender must confirm employment and qualify income under standard eligibility requirements.
Lenders should understand Fair Lending risks and take the necessary steps to ensure compliance.
Wendy Bernard is director of legal and regulatory compliance for Long Beach, N.Y.-based Lenders Compliance Group.