Q&A: Here’s a question that a Wisconsin credit union recently asked The League’s Legal Affairs team, along with our answer. Do you have a compliance question? Contact The League’s Compliance Hotline at (608) 640-4050 or email.
Q: We had a beneficiary of a Rep Payee account recently submit a loan application using his social security income to try and qualify for the loan. Our understanding is that due to that income being given to the Rep Payee that income is not something the beneficiary is allowed to utilize as their income. It has been our policy to look to other income, if possible, for him to qualify for the loan. Is our understanding correct?
A: First, I want to stress that the Rep Payee is only authorized by the Social Security Administration to help your member handle his/her Social Security benefits. Only the beneficiary can apply for a loan; the rep payee can’t apply on the beneficiary’s behalf. A rep payee is not the same as a POA agent or court-appointed guardian, who might have authority to sign a credit agreement on the member’s behalf. With that in mind, there is no reason the Rep Payee needs to be involved with the loan. He/she is not authorized to sign loan papers on the member’s behalf, for example. The Rep Payee can apply to be a joint borrower or co-signer, if that’s what the parties want, but it’s not a requirement, and the credit union certainly can’t make them do the loan that way. If the member/beneficiary applies on his/her own for the loan, then you’d only do the loan to that individual.
The credit union can use the beneficiary’s social security income to help them qualify for a loan. Whether you should is another issue.
Some types of loans (including credit cards and many mortgage loans) are subject to federal ability-to-pay regulations, which require lenders to consider a loan applicant’s income and assets to help determine their ability to make the required payments on the loan. For example, Reg. Z §1026.51(a) requires a card issuer to consider a consumer’s ability to make the required minimum periodic payments under the terms of an account based on the consumer’s income or assets and current obligations.
The CFPB’s Official Staff Commentary to that section of Reg. Z says that “public assistance” (which we assume would include Social Security disability benefits) counts as “reasonably expected income.” It says:
A card issuer may consider any current or reasonably expected income or assets of the consumer or consumers who are applying for a new account or will be liable for debts incurred on that account, including a cosigner or guarantor.
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Current or reasonably expected income includes, for example, current or expected salary, wages, bonus pay, tips, and commissions. Employment may be full-time, part-time, seasonal, irregular, military, or self-employment. Other sources of income include interest or dividends, retirement benefits, public assistance, alimony, child support, and separate maintenance payments. Proceeds from student loans may be considered as current or reasonably expected income only to the extent that those proceeds exceed the amount disbursed or owed to an educational institution for tuition and other expenses. Current or reasonably expected income also includes income that is being deposited regularly into an account on which the consumer is an accountholder (e.g., an individual deposit account or joint account). Assets include, for example, savings accounts and investments.
In addition, the commentary for the ability to repay rules for mortgage lending says the same. This is from the CFPB’s commentary for Reg. Z sec. 1026.43(c)(2)(i):
Paragraph 43(c)(2)(i).
1. Income or assets generally. A creditor may base its determination of repayment ability on current or reasonably expected income from employment or other sources, assets other than the dwelling that secures the covered transaction, or both. The creditor may consider any type of current or reasonably expected income, including, for example, the following: salary; wages; self-employment income; military or reserve duty income; bonus pay; tips; commissions; interest payments; dividends; retirement benefits or entitlements; rental income; royalty payments; trust income; public assistance payments; and alimony, child support, and separate maintenance payments. The creditor may consider any of the consumer’s assets, other than the value of the dwelling that secures the covered transaction, including, for example, the following: funds in a savings or checking account, amounts vested in a retirement account, stocks, bonds, certificates of deposit, and amounts available to the consumer from a trust fund. (As stated in § 1026.43(a), the value of the dwelling includes the value of the real property to which the residential structure is attached, if the real property also secures the covered transaction.)
The above answers the question of whether you can include Social Security or other public assistance benefits in your debt-to-income calculation.
But the question remains whether you really should rely on that income – especially since there’s a rep payee and the beneficiary doesn’t have direct control over the money. At least one compliance “guru” from Bankers Online thinks you should decline an application in this scenario. He said: “The borrower, if deemed capable of entering into legally binding loan contract, still would not have control over these funds. So, unless they had other income over which they had control, you have no income to calculate a DTI on. You would deny them on that basis and not on the basis that there was a representative payee.”
Nothing in the 2010 CARD Act rules (which introduced the ability-to-repay concept), or any other authorities I can find, even discusses your question. But the credit union would probably have difficulty compelling the rep payee to make payments on a loan that goes into default. In fact, the Social Security Guide for Representative Payees says this about “How you must use monthly benefits:”
First, you must take care of the beneficiary’s day-to-day needs for food and shelter. Then, you must use the money for the beneficiary’s medical and dental care that’s not covered by health insurance. You can also pay for the beneficiary’s personal needs, such as clothing and recreation. You must save any money left after you pay for the beneficiary’s needs, preferably in U.S. Savings Bonds or an interest-paying bank account. This must be insured under either federal or state law.
Notice that it says nothing about having to use the benefits to pay bills the beneficiary has incurred. Based on all that, I’d be inclined not to count the benefits in your ability-to-repay analysis.
I have two other general thoughts about this situation:
- First, do you have reason to think that the member is incompetent to sign a binding application? The fact that he has a rep payee does not necessarily mean he’s incompetent, since the appointment of a rep payee involves no finding of incompetence. However, if he is legally incompetent, the loan agreement could be voided. The credit union should not enter into an agreement (like a credit card or loan agreement) with someone who lacks “legal capacity” to sign an enforceable contract.
- Second, you can’t discriminate against this applicant because he/she receives public assistance. That would violate the federal Equal Credit Opportunity Act. So, take care in handling a denial if you turn down the application, to avoid being accused of unlawful discrimination. This means you must consider the Social Security benefits just as you would consider other sources of income for any other loan applicant. However, the ECOA rules (Reg. B) do include an important exception: They allow you to consider whether you’d be able to attach or garnish the funds if the loan defaults. Social Security benefits are federally protected from garnishment (or setoff). The rep payee should be free to use the funds to pay the beneficiary’s expenses – including the bill for this new loan – but you couldn’t force the rep payee to do so, and the credit union would not be able to set off against the rep payee account if the loan defaults. That may impact your willingness to lend.
Here’s some explanatory material from ii Release No. B041:
Source of Income
A credit union may neither refuse to consider nor discount the income of an applicant or spouse on a prohibited basis or because the income is from part-time employment.
A credit union may not consider whether the applicant receives income from a state or federal public assistance program. Unemployment compensation, Social Security, SSI, food stamps and Aid to Families with Dependent Children are examples of the types of programs covered by this prohibition. But the Reg. B Commentary provides that when considering income derived from a public assistance program, a creditor may take into account, for example:
i. The length of time an applicant will likely remain eligible to receive such income.
ii. Whether the applicant will continue to qualify for benefits based on the status of the applicant’s dependents (as in the case of Temporary Aid to Needy Families, or social security payments to a minor).
iii. Whether the creditor can attach or garnish the income to assure payment of the debt in the event of default.