An investigation into whether lenders may have illegally denied mortgages to pregnant women and persons on temporary disability is being launched by the Department of Housing and Urban Development (HUD).

The agency has announced that will investigate whether such denials may have violated the Fair Housing Act, which prohibits discrimination in lending based on family status, including pregnancy, and disability.

The investigation follows a report earlier this week in the New York Times that some lenders appeared to be denying mortgage applications because pregnant borrowers were on maternity leave and not working, or because they were receiving temporary disability payments.

"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," said HUD Secretary Shaun Donovan. "Having a child should be a time for a family to celebrate and must not be a cause for unfair lending practices."

HUD will also look into lending guidelines of Fannie Mae and Freddie Mac to see if they violate Fair Housing Guidelines. According to the New York Times report, lenders may have been responding to new guidelines from the two government-supported secondary lenders when they turned down pregnant women and applicants on temporary disability.

According to the report, the guidelines require that lenders verify employment before closing a loan and ascertain that the borrower's income is likely to continue for at least three years. Because many pregnant women take temporary disability payments while on maternity leave, some banks may assume that income does not meet the three-year requirement.

Banks may be applying similar reasoning to injured workers receiving temporary disability payments but who are expected to return to work, according to the report.

The Fair Housing Act prohibits discrimination against a borrower on maternity leave if she can demonstrate that she intends to return to work and can meet the income requirements of a loan while on leave.

Published on July 19, 2010