The previous parts of this article have documented the issue of maternity leave discrimination and the typical regulatory response to the problem. Now we focus on steps to avoid the problem.
Underwriting guidelines should provide detailed instructions on the consideration and calculation of temporary leave income. Most investors have such guidelines in place. A typical set of guidelines for temporary leave income are contained in the Fannie Mae Selling Guide (Published December 14, 2014). The guidelines are contained in Part B, Origination Through Closing, Subpart 3, Underwriting Borrowers, Chapter 3, Income Assessment, Employment and Other Sources of Income.
Temporary Leave Income
Temporary leave from work is generally short in duration and for reasons of maternity or parental leave, short-term medical disability, or other temporary leave types that are acceptable by law or the borrower’s employer. Borrowers on temporary leave may or may not be paid during their absence from work.
If a lender is made aware that a borrower will be on temporary leave at the time of closing of the mortgage loan and that borrower’s income is needed to qualify for the loan, the lender must determine allowable income and confirm employment as described below.
- The borrower’s employment and income history must meet standard eligibility requirements as described in Section B3–3.1, Employment and Other Sources of Income.
- The borrower must provide written confirmation of his or her intent to return to work.
- The lender must document the borrower’s agreed-upon date of return by obtaining, either from the borrower or directly from the employer (or a designee of the employer when the employer is using the services of a third party to administer employee leave), documentation evidencing such date that has been produced by the employer or by a designee of the employer.
- Examples of the documentation may include, but are not limited to, previous correspondence from the employer or designee that specifies the duration of leave or expected return date or a computer printout from an employer or designee’s system of record. (This documentation does not have to comply with the Allowable Age of Credit Documents policy.)
- The lender must receive no evidence or information from the borrower’s employer indicating that the borrower does not have the right to return to work after the leave period.
- The lender must obtain a verbal verification of employment in accordance with B3-3.1-07, Verbal Verification of Employment. If the employer confirms the borrower is currently on temporary leave, the lender must consider the borrower employed.
- The lender must verify the borrower’s income in accordance with Section B3–3.1, Employment and Other Sources of Income. The lender must obtain the amount and duration of the borrower’s “temporary leave income,” which may require multiple documents or sources depending on the type and duration of the leave period, and the amount of the “regular employment income” the borrower received prior to the temporary leave. Regular employment income includes, but is not limited to, the income the borrower receives from employment on a regular basis that is eligible for qualifying purposes (for example, base pay, commissions, and bonus).
Note: Income verification may be provided by the borrower, by the borrower’s employer, or by a third-party employment verification vendor.
Requirements for Calculating Income Used for Qualifying
- If the borrower will return to work as of the first mortgage payment date, the lender can consider the borrower’s regular employment income in qualifying.
- 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 his or her regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves (see B3-4.1-01, Minimum Reserve Requirements). Following are instructions on how to calculate the “supplemental income”:
Supplemental income amount = available liquid reserves divided by the number of months of supplemental income
- Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount.
- Number of months of supplemental income: the number of months from the first mortgage payment date to the date the borrower will begin receiving his or her regular employment income, rounded up to the next whole number.
Acceptable Sources of Reserves (B3-4.1-01, Minimum Reserve Requirements)
Examples of liquid financial assets that can be used for reserves include:
- checking or savings accounts;
- investments in stocks, bonds, mutual funds, certificates of deposit, money market funds, and
- trust accounts;
- the amount vested in a retirement savings account; and
- the cash value of a vested life insurance policy.
After determining the supplemental income, the lender must calculate the total qualifying income.
Total qualifying income = supplemental income plus the temporary leave income
The total qualifying income that results may not exceed the borrower’s regular employment income.
Regular income amount: $6,000 per month
Temporary leave income: $2,000 per month
Total verified liquid assets: $30,000
Funds needed to complete the transaction: $18,000
Available liquid reserves: $12,000
First payment date: July 1
Date borrower will begin receiving regular employment income: November 1
Supplemental income: $12,000/4 = $3,000
Total qualifying income: $3,000 + $2,000 = $5,000
For loan case files underwritten with DU, refer to B3-3.3-01, Income and Employment Documentation for DU, for data entry guidance.
Note: These requirements apply if the lender becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, the lender must not ask if he or she intends to take leave in the future.
As with so many issues related to lending compliance there are layers of complexity. It is easy to believe that a quick talk with lending staff regarding proper handling of temporary leave income will prevent problems. Many conclude the issue doesn’t come up that often and surely our lenders have the proper instincts to avoid the problems.
That this type of income is not seen often increases the risk of a problem. If a lender handles temporary leave income every day the level of proficiency should be high. But when handling such income on an infrequent basis, clearly written underwriting guidelines are essential to avoiding violations.
If the regulators finds errors in handling temporary leave income they will order the development of proper procedures and training. Don’t wait for the problem to arise develop the procedures and conduct the training now. What’s that old saying about an ounce of prevention is worth a pound of cure.