Insights

Having a family is a source of both joy and stress, as a new baby brings change to a family unit. For some parents, that change can come with additional stress if they are also seeking mortgage financing to buy a new home for their growing family. Recognizing these realities, particularly acute in a poor economy, this year the U.S. Department of Housing and Urban Development has ramped up its enforcement of laws that ban discrimination based on maternity and pregnancy in mortgage lending. HUD enforces the Fair Housing Act, which prohibits discrimination in lending based on sex or familial status, including pregnancy or children in the family. The FHA protects consumers from being discriminated against when a borrower is on maternity leave if she can demonstrate that she intends to return to work and can otherwise continue to meet the income requirements to qualify for the loan.

The most recent lender clipped by HUD – Luxury Mortgage Corporation – settled accusations in early November that it discriminated against a woman by denying her mortgage loan because she was on maternity leave. The woman alleged that even though her employer provided a letter stating that she was on paid maternity leave, LMC told her that the letter was not sufficient. Rather, LMC relied on the website worknumber.com, which identified the complainant as “on leave.” Under the settlement, LMC agreed to pay the woman $12,000. In addition, LMC, while admitting no violation of the law, agreed to change its lending policy to approve mortgage loans to qualified women who are pregnant or on maternity/parental leave, including leave for adoptions.

In May, HUD settled a similar case with Cornerstone Mortgage Company, a national mortgage lender that HUD accused of engaging in discriminatory lending practices against expectant mothers. Cornerstone agreed to:

• Compensate Dr. Elizabeth Budde $15,000 based on her claims that she was initially denied a mortgage loan even though she was on paid maternity leave and planned to return to work;
• Create a $750,000 victims’ fund to compensate other Cornerstone borrowers who experienced discrimination because they were pregnant or on maternity leave at the time they applied for a loan;
• Notify all borrowers who applied during a 2-year time frame of their right to seek compensation if they experienced treatment that was discriminatory because a borrower or co-borrower was pregnant or on maternity leave; and
• Pay as many as 100 successful claimants a lump sum payment of $7,500 each.

Cornerstone also adopted a policy clarifying how it will treat loan applicants who are on parental leave, including maternity leave, when they apply for a loan. The policy would also include males on parental leave due to the birth or adoption of a child.

In July, HUD sued Mortgage Guaranty Insurance Corporation, the nation’s largest mortgage insurance company, and two of its underwriters, Elgina Cunningham and Kelly Kane, in a Pennsylvania federal court for engaging in pregnancy discrimination in issuing mortgage insurance in violation of the Fair Housing Act. Specifically, HUD claimed that MGIC discriminated against a Pennsylvania family by denying their application for mortgage insurance unless and until the wife returned to work from maternity leave. According to HUD’s complaint, MGIC wrote an email summarizing the status of the family’s loan: “rec’d updated bank statements along with email from Borrower that states she is on maternity leave....notifying her that we cannot proceed until borrower is back to work full-time.” At the time, MGIC did not have a written policy specifically addressing borrowers receiving maternity leave income. After the borrower filed a complaint with HUD, MGIC adopted a policy to specify that income from short-term disability or maternity/paternity leave may be used to qualify if the borrower submits written verification to indicate the amount of income received (or to be received) during the leave, the expected date range of the leave, and written verification from the borrower indicating the borrower’s intent to return to work following the leave. The MGIC case is pending.

These settlements and enforcement actions cap off a year of multiple investigations by HUD into the lending practices of mortgage lenders to determine if they illegally denied mortgages to families because the mother is pregnant or on pregnancy-related leave. HUD’s Federal Housing Administration requires its approved lenders to review a borrower’s income to determine whether the borrower can reasonably be expected to continue paying his or her mortgage. FHA-insured lenders cannot, however, inquire about future maternity leave. If a borrower is on maternity or short-term disability leave at the time of closing, 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 the borrower’s leave.

And it’s not just mortgage lenders that are facing HUD scrutiny; HUD is reviewing Fannie Mae’s and Freddie Mac’s underwriting guidelines to determine if they satisfy the Fair Housing Act, including income verification for persons taking maternity or parental leave. Given the heightened attention to maternity discrimination issues from the primary regulator, mortgage lenders would be wise to review and refresh their policies with regard to applicants experiencing a new addition to the family.

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Cathy can be reached at 410-865-5405 or by email at cbrennan@hudco.com.