No house for you…yet

A friend recently purchased a house.  The friend had solid credit and was leaving one job for another.  The friend had already sold her previous house.  Yet, the lender would not allow closing on the new house until the new job started. A letter indicating a contract was signed would not suffice.  A realtor friend contacted some lenders that verified this requirement and indicated that some lenders require a first paycheck rather than a first day of work before closing.  Now, having already sold the old home and not able to close on the new one at the same time leaves my friend and her family essentially homeless.  If the lender had required a first paycheck, then the new employee would have to find temporary housing until that first payday.[1]  Lenders created this type of stipulation to ensure that borrowers had sufficient income to pay their new mortgage.  From that perspective, the practice seems reasonable.  But is it constitutional?  Perhaps, depending upon the constitutional issue motivating the challenge.  Under the 14th Amendment, there are two viable choices.[2]  On the one hand, there is the frequently used equal protection clause of 14th Amendment.  On the other hand, there is the third sister of the 14th Amendment, the privileges and immunities clause.

Under the equal protection clause, the challenge would be weak despite the presence of state action.  Lenders and the federal government have a fairly cozy relationship. FDIC, the FED, OCC, OTS, and NCUA constitute the alphabet agencies that regulate all sorts of lending institutions.[3]  These relationships between lending institutions and the federal government seem to satisfy the ‘state action’ doctrine.[4]  If a federal agency, in this case a bank, uses classifications based upon wealth, then these would be examined using the rational basis test.  Lenders, particularly in these days of high foreclosure rates, have a legitimate reason to go beyond the usual requirements for providing a mortgage and force borrowers to wait in the wings until they begin their new positions.  If the position fails to manifest, then the bank can still pull the funding and forego the painful foreclosure process.

However, the lenders are not only treating individuals differently based upon their wealth or job status, they are impeding interstate travel.  My friend and her family would move months earlier to their new location if they didn’t have to wait for the new academic year to begin in order to “start” their new position.  For those with the additional requirement of a paycheck, temporary housing must be found until that first payday.  This requirement seems fairly similar to the welfare residency requirements struck down in both Shapiro v. Thomas (1969) and Saenz v. Roe (1999).  Individuals may not be able to relocate from one state to another due to the burden of finding temporary housing; paying for additional moving costs such as storage or a second move; and trying to move while beginning a new position.  Looked at from this perspective, the job requirement would be subject to strict scrutiny analysis because the right to travel is a fundamental right under the privileges and immunities clause.[5]  Given all the other indicators of a successful borrower that lenders have, it would be difficult to prove that their interest is compelling AND the least restrictive means needed since the requirement prevents travel or delays it significantly.  Thus, focusing on the impact of the policy on travel makes it less likely that the policy will prevail.


[1] Either way, the requirement means that you must be in place and working before you are able to move into your house.

[2] There is no due process issue here.

[3] The Federal Deposition Insurance Corporation (FDIC) regulates state-chartered banks not in the Federal Reserve System (the FED); the FED regulates state-chartered banks; the Office of the Comptroller of Currency (OCC) regulations national banks; the Office of Thrift Supervision (OTS) regulations federal savings and loans and federal savings banks; and the National Credit Union Administration (NCUA) regulations nationally-chartered credit unions.

[4] Lending institutions are certainly less interdependent on the federal government than the restaurant in Burton v. Wilmington Parking Authority (1961), but more so than the private club in Moose Lodge No. 107 v. Irvis  (1972).

[5] My co-blogger, Liane Kosaki, also thinks that the policy could be challenged under interstate commerce.

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