HUD to Investigate Mortgage Loan Denials

The Department of Housing and Urban Development said Wednesday that it would investigate the lending practices of certain mortgage lenders to see if any prospective borrowers had been illegally denied a mortgage because they were pregnant or on short-term disability.

Mortgage application
Mortgage application

“Lenders have every right to ascertain the incomes of families to determine whether they are eligible for a mortgage loan, but they have no right to use a pregnancy or a short-term disability as a cause to deny that family a mortgage they would otherwise qualify for,” Shaun Donovan, the agency’s secretary, said in a statement late Wednesday.

The move comes after an article in The New York Times on Tuesday, which reported that lenders were taking a harder look at prospective borrowers, like parents of new babies, whose income has temporarily fallen.

Fannie Mae and Freddie Mac , the two mortgage financing giants, have always required that borrowers have enough income to pay for the loan on closing day and that lenders document that the income is likely to continue for at least three years.

But since disability payments typically do not continue for that long, some lenders will not count it as qualifying income, several mortgage brokers have said. Some lenders may require new mothers, or others on short-term disability, to reapply for the mortgage once they return to work.

“Denying a mortgage to people just because they’re having a baby is flat wrong,” Vice President Joseph R. Biden Jr. said in the statement.

If a borrower is on leave at the time of closing, the housing agency said that “lenders must document the borrower’s intent to return to work, that the borrower has the right to return to work, and that the borrower qualifies for the loan taking into account any reduction of income due to their leave.”

The department said it was also reviewing Fannie Mae and Freddie Mac’s underwriting guidelines to ensure that they do not violate the Fair Housing Act.