The U.S. Department of Housing and Urban Development (HUD) is taking action against mortgage companies who discriminate against expectant mothers applying for a loan or home mortgage insurance.

Multiple investigations of lending practices last July triggered HUD’s recent action to enforce the Federal Fair Housing Act (FFHA), which prohibits discriminatory actions in housing based on a variety of factors, including an individual’s sex or familial status. HUD’s investigations revealed pregnant women or their families were denied a loan or delayed in the process of obtaining one. Lenders cited their reason being the expectant mother and her household would not have the sufficient income to make mortgage payments due to the mother’s maternity leave.

In a recent settlement agreement between HUD and national mortgage lender Cornerstone Mortgage Company, the lender agreed to:

  • compensate a woman $15,000 who claimed she had been denied a mortgage loan even though she was on paid maternity leave and planned to return to work;
  • create a $750,000 fund for other borrowers who claimed the lender discriminated against them due to their pregnancy or maternity leave at the time of their loan application process;
  • notify all borrowers of their right to seek compensation if they had experienced discrimination due to their pregnancy or maternity leave;
  • pay up to 100 claimants $7,500 each, and for every claimant after that, pay a prorated share of the $750,000 fund; and
  • adopt a new policy which clarifies lending practices towards borrowers on maternity or parental leave.

first tuesday take: Prohibited discriminatory practices are unacceptable when carried out by lenders who are in the business of making mortgages. However, for the family involved, the current landscape of anemic job recovery and real estate pricing woes solicits prudent financial planning by the family itself.

Fair lending laws such as the federal Equal Credit Opportunity Act (ECOA) and the California Unruh Act prohibit discriminatory lending practices towards individuals regardless of their race, color, religion, national origin, sex, marital status or age. Under those protections, lenders may not deny a loan if a woman is expecting, on maternity leave or of childbearing age. [For more information on recent mortgage lending practices with expectant parents, see the August 2010 first tuesday article, Expectant parents may not qualify for a home loan.]

Lenders are held to this legal justice towards prospective borrowers, no questions asked – but what about a borrower’s financial justice towards himself?

Raising a child is an added expense on top of other financial obligations, so if an expectant parent or family is looking to buy a home, it is imperative for them to realistically determine whether they are financially competent to handle the costs of homeownership no matter how underpriced and great a bargain the property may be. Flexibility provided by renting may well be the prudent housing decision.

Important questions for prospective homebuyer-parents facing a birth need to consider are:

  • Will the household income during maternity or parental leave be sufficient to make and continue mortgage payments, in spite of lender loan approval?
  • If the expectant parents plan to return to work after the birth, how long will it be until they do?
  • Will the added costs of raising a child (ex: food, healthcare, childcare, etc.) significantly stress the household budget?
  • Are cash reserves or resources sufficient to cover any emergency expenditure due to the birth?

Wanting to own a home to house your family is commendable if job and family conditions are stable and will remain local. Go ahead and bring the baby home. Just avoid bringing the bundle of joy to household finances that will go underwater for failure to consider the risks posed by foreseeable costs associated with birth. You are not able to control the real estate market but you do have control over the welfare of your family.

Buyer’s agents working with buyers need to pay attention to the financial commitment they are negotiating on their client’s behalf by simply asking questions, including those noted above.

RE: “HUD Acts Against Pregnancy Discrimination in Home Mortgages” from the U.S. Department of Housing and Urban Development