Why Haven’t Loan Officers Been Told These Facts?
Fraudulent CPA Statements
The self-employed continue to face significant challenges with lenders. Investor requirements can be intimidating, particularly for marginal transactions.
The FNMA Seller Guide “B3-3.5-01” outlines various requirements that some lenders deem too risky (due to compliance uncertainty that could result in unacceptable liability). Yet even if an audit of a self-employed business were obtained, underwriters generally lack the necessary skills to analyze a business’s cash flow or sustainability.
Look at what lenders face when evaluating self-employed individuals. From the Seller Guide:
The following factors must be analyzed before approving a loan for a self-employed borrower:
- the stability of the borrower’s income,
- the location and nature of the borrower’s business,
- the demand for the product or service offered by the business,
- the financial strength of the business, and
- the ability of the business to continue generating and distributing sufficient income to enable the borrower to make the payments on the requested loan.
To overcome an uncomfortable transaction decision, lenders often seek a qualified and reliable third-party record to support their assessments of income availability and stability when making credit decisions for self-employed individuals. The five universal considerations outlined in “B3-3.5-01” make this process difficult, especially when dealing with multiple risks. The FNMA standards are highly subjective and devoid of meaningful metrics. Factors such as having fewer than two years of self-employment history or tax returns, or using business assets to close, can create significant discomfort for lenders.
An income statement hardly suffices for a proper cash flow analysis. But that is what some lenders will look for when alleviating risk. Understand that income analysis remains a major source of investor dissatisfaction with lender quality control. Know what you are dealing with when you submit as self-employed and fail to check off all the boxes.
With all these headwinds, some loan originators may be tempted to take matters into their own hands to address lenders’ misgivings. Learn how one loan officer incorrectly addressed the challenges of self-employment in the story below.
From FHLMC
When one of our Seller/Servicers observed suspicious behavior coming from a mortgage brokerage, they followed Freddie Mac’s requirements for suspected fraud and reported their concerns to our Single-Family Fraud Risk (SFFR) team.
Our SFFR investigator opened an investigation, focusing on ten loans with several aspects in common:
– All ten loans were originated by the same loan officer.
– The borrowers were all either self-employed or owned or managed a restaurant.
– Each borrower’s loan file contained a letter from the same certified public accountant (CPA).
The letters appeared authentic, including the CPA’s letterhead and signature. Some of the letters mentioned use of funds, stating that borrowers could withdraw money from their business’s profits to help pay for a home without negatively affecting the business.
However, when our investigator interviewed the CPA − whose name appeared in both the letterhead and as his signature − the CPA confirmed that the letters were not from him.
Employees involved in the origination of the ten loans claimed that they couldn’t find a CPA who would validate the use of the borrowers’ business funds to qualify them for their loan.
The falsification of the letters themselves cast doubt on the information contained in the letters and other information in the loan files.
The falsification of documentation in these ten loans didn’t end with the CPA letters; the investigator also learned that, in some cases, borrowers’ loan files included altered profit and loss statements and at least one falsified verification of employment (VOE).
If you’re not certain whether a letter from a CPA is valid, contact the person whose name appears on the letterhead and ask them to verify that they wrote the letter and confirm that the borrower in question is actually one of their clients.
A Few Relevant Sections of the Seller Guide From FNMA
B3-3.5-01, Underwriting Factors and Documentation for a Self-Employed Borrower (12/13/2023)
When a borrower is using self-employment income to qualify for the loan and also intends to use assets from their business as funds for the down payment, closing costs, and/or financial reserves, the lender must perform a business cash flow analysis to confirm that the withdrawal of funds for this transaction will not have a negative impact on the business. To assess the impact, the lender may require a level of documentation greater than what is required to evaluate the borrower’s business income (for example, several months of recent business asset statements in order to see cash flow needs and trends over time, or a current balance sheet). This may be due to the amount of time that has elapsed since the most recent tax return filing, or the lender’s need for information to perform its analysis. See B3-4.2-02, Depository Accounts, for requirements when self-employment income is not being used to qualify, but business assets are being used for the down payment, closing costs, and/or financial reserves.
B3-3.7-04, Analyzing Profit and Loss Statements (04/01/2009)
The lender may use a profit and loss statement—audited or unaudited—for a self-employed borrower’s business to support its determination of the stability or continuance of the borrower’s income. A typical profit and loss statement has a format similar to IRS Form 1040, Schedule C.
A year-to-date profit and loss statement is not required for most businesses, but if the borrower’s loan application is dated more than 120 days after the end of the business’s tax year, the lender may choose to require this document if it believes that it is needed to support its determination of the stability or continuance of the borrower’s income.
BEHIND THE SCENES: FEDS DIS LONGSTANDING DISCOURAGEMENT PROSCRIPTIONS
No Hablamos Español.
In last week’s LOSJ, we wrote about the executive branch’s push to discard the decades-old legal theory of disparate impact, also known as the effects test, under the Equal Credit Opportunity Act (ECOA).
The Consumer Financial Protection Bureau (CFPB) is the administrator of the ECOA and is primarily responsible for any necessary rule-making related to the ECOA.
On November 13, 2025, the CFPB issued a proposed rule that would amend Regulation B. In addition to eliminating federal investigations of disparate impact, the new rule amended the prohibition on discouraging applicants or prospective applicants. The new rule prohibits statements of intent to discriminate that violate ECOA. In the Final Rule, the CFPB stated that “Violations are not triggered merely by negative consumer impressions. To clarify, encouraging statements by creditors directed at one group of consumers is not prohibited discouragement as to applicants or prospective applicants who were not the intended recipients of the statements.”
Excerpted From the CFPB Final Rule as Published in the Federal Register
Under this proposed revision, prohibited discouragement would occur only “when the creditor’s statement was the proximate [actual and primary] cause of the applicant’s or prospective applicant’s belief about their ability to obtain credit on non-discriminatory terms.” The proposed revision thus would narrow the prohibition to cover only statements that themselves would cause a reasonable person to believe that the creditor would make a different decision about credit terms or availability based on the applicant or prospective applicant’s prohibited basis characteristic(s).
Current Rule 12 CFR 1002.4 (b) General Rules
Discouragement. A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.
New Rule 12 CFR 1002.4 (b) General Rules
Discouragement. A creditor shall not make any oral or written statement, in advertising or otherwise, directed at applicants or prospective applicants that the creditor knows or should know would cause a reasonable person to believe that the creditor would deny, or would grant on less favorable terms, a credit application by the applicant or prospective applicant because of the applicant or prospective applicant’s prohibited basis characteristic(s). For purposes of this paragraph (b), oral or written statements are spoken or written words, or visual images such as symbols, photographs, or videos.
Current Regulation (Official Commentary)
1. Prospective applicants. Generally, the regulation’s protections apply only to persons who have requested or received an extension of credit. In keeping with the purpose of the Act – to promote the availability of credit on a nondiscriminatory basis – § 1002.4(b) covers acts or practices directed at prospective applicants that could discourage a reasonable person, on a prohibited basis, from applying for credit. Practices prohibited by this section include:
i. A statement that the applicant should not bother to apply, after the applicant states that he is retired.
ii. The use of words, symbols, models or other forms of communication in advertising that express, imply, or suggest a discriminatory preference or a policy of exclusion in violation of the Act.
iii. The use of interview scripts that discourage applications on a prohibited basis.
2. Affirmative advertising. A creditor may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit, especially groups that might not normally seek credit from that creditor.
Final Rule, New Official Commentary, Paragraph 4(b)
1. Discouragement. Generally, the regulation’s protections apply only to persons who have requested or received an extension of credit. In keeping with the purpose of the Act—to promote the availability of credit on a nondiscriminatory basis—§ 1002.4(b) prohibits creditors from making oral or written statements directed at applicants or prospective applicants that the creditor knows or should know would cause a reasonable person to believe that the creditor would deny their credit application, or would grant it on less favorable terms, because of their prohibited basis characteristic(s). For purposes of § 1002.4(b), encouraging statements directed at one group of consumers cannot discourage other consumers who were not the intended recipients of the statements.
i. Statements prohibited by § 1002.4(b) include:
A. A statement that the applicant should not bother to apply, after the applicant states that he is retired.
B. Statements directed at the general public that express a discriminatory preference or a policy of exclusion against consumers based on one or more prohibited basis characteristics in violation of the Act.
C. The use of interview scripts that discourage applications on a prohibited basis.
ii. Statements not prohibited by § 1002.4(b) include:
A. Statements directed at one group of consumers, encouraging that group of consumers to apply for credit.
B. Statements in support of local law enforcement.
C. Statements recommending that, before buying a home in a particular neighborhood, consumers investigate, for example, the neighborhood’s schools, its proximity to grocery stores, and its crime statistics.
D. Statements encouraging consumers to seek out resources to develop their financial literacy.
Analysis
Noticeably, affirmative advertising is missing from the new official commentary. The current interpretation of affirmative advertising states, “A creditor may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit, especially groups that might not normally seek credit from that creditor.” The terms “solicitation” and “encouragement” are not defined.
In the past, national origin, race, and ethnicity have been closely linked to a person’s native language. Lenders could confidently target native Spanish speakers, given the affirmative advertising prescription under Regulation B without fear of federal reprisal. In tandem with the federal government’s new efforts to exclude language from national identity associations, we may see a chilling effect on efforts to target underserved communities, notably those impacted by limited English proficiency (LEP).
Secondly, the government has raised the bar on discriminatory conduct. Complaints must now establish that the creditor would deny, or would grant on less favorable terms, a credit application by the applicant or prospective applicant because of the applicant or prospective applicant’s prohibited basis characteristic(s).
The federal government’s enforcement of the ECOA will require proof of animus, as well as definitive and measurable harm at the loan level. Previously, enforcement could focus on how a lender’s practices discouraged certain groups from obtaining credit. For instance, in the past, if a lender showed little interest in providing services to underserved communities, they could be held accountable under the disparate impact or discouragement doctrines. However, under the new discouragement rule, the impact of a lender’s actions is no longer significant unless the government can demonstrate that the lender’s policies were malignantly intentional or negligently irresponsible. Proof of animus is now the standard, and evidence must be in writing, pictures, or words.
Additionally, a plaintiff’s ability to prove that the creditor’s discouraging statement was the proximate (actual and primary) cause of the applicant’s or prospective applicant’s belief about their ability to obtain credit on non-discriminatory terms sounds reasonable, but in a legal proceeding, this tilts the table in the defendant’s favor a lot.
While the CFPB’s position on disparate impact and discouragement is not exactly novel, covered persons should recognize that other ECOA interpretations by stakeholders carry equal or greater weight than the CFPB’s. Starting with the federal courts.
The HUD Memo (Untangling Language from National Origin)
On September 19, 2025, John Gibbs, the Principal Deputy Assistant Secretary for Fair Housing and Equal Opportunity, issued a memo to FHEO enforcement personnel reversing years of HUD policy on language accommodations.
“This memorandum provides guidance to Office of Fair Housing and Equal Opportunity (FHEO) staff in processing current and future complaints of national origin discrimination based on language proficiency under the Fair Housing Act (Title VIII) or Title VI of the Civil Rights Act of 1964. In the past, FHEO premised investigations, conciliations, and voluntary compliance agreements on the mistaken notion that the Fair Housing Act and Title VI of the Civil Rights Act categorically require Respondents to provide language assistance in order to avoid discriminating based on national origin. This memorandum rescinds and supersedes all prior conflicting FHEO guidance involving Limited English Proficiency (LEP) and national origin discrimination under the Fair Housing Act and Title VI.”
“FHEO is now prioritizing cases where the Respondent acted for discriminatory reasons, i.e., “because of” national origin. Language is not a protected trait and, by itself, does not identify members of a suspect class. Thus, under Title VI of the Civil Rights Act, language proficiency is
not interchangeable with national origin or race.”
Plaintiffs Lining Up Against the CFPB
Naturally, the CFPB is already getting sued in federal court over the rule change. The lawsuit asserts regarding changes to the discouragement prohibitions, “… the Final Rule dramatically narrows existing prohibitions against discriminatory actions that would discourage prospective applicants from applying for credit. The Final Rule purports to usurp a court or jury’s responsibility to determine whether, when viewed in context, certain facially innocuous statements are in fact code-words or dog-whistles indicating discriminatory intent. In so doing, the Final Rule permits creditors to exclude consumers from applying for credit because of their protected class status, and it effectively immunizes many practices that contribute to the “redlining” of neighborhoods and communities, i.e., intentionally avoiding lending in communities of color and otherwise discouraging people in those communities from applying for credit.”
The Impact
The federal government is advocating that lenders adopt a color-blind approach, as if class status were no longer relevant. This new regulation implies that credit administration should operate as a uniform process applicable to all individuals, thereby neglecting the specific needs of historically underserved communities within their lending jurisdictions. As a result, the rule legitimizes lending practices that fail to address the unique challenges these communities face.
Tip of the Week: Sign up for 2026 CE
The LOSJ is celebrating five years of exceptional service to the mortgage industry, offering insights you won’t find anywhere else. To celebrate, enjoy our gift to you! Use the promo code “newsletter” when placing your class order.
Expanding your product offerings is an effective way to enhance your business’s vitality. This year, the Loan Officer School is surveying non-Qualified Mortgage (non-QM) financing options. We will review the various types of underwriting required for non-QM financing, including higher-priced mortgage loans (HPML), balloon-payment features, and interest-only options.
Presenting non-QM solutions to consumers improperly can lead to serious consequences. Understand the essentials of compliant and ethical subprime mortgage origination. Attend the Loan Officer School 2026 continuing education classes.
Please use the promo code “newsletter” when you sign up.
Have a Question About Operations, Sales, Marketing, or Compliance? Email Your Questions to the Loan Officer School Journal.
We invite LOSJ readers to submit questions on any topic to the editor. Topics can include compliance, sales, marketing, implementation, and other areas that may be helpful to our customers. If we use your question, we will include only your first name in our response. Please send your questions to: losjmailbag@gmail.com.
Necessary Mailbag Disclosure: The LOSJ is a periodic publication from LoanOfficerSchool.com designed to educate and inform our readers. Please note that we do not provide legal advice, and nothing in the LOSJ should be construed as a legal opinion on specific facts or circumstances. The content serves strictly for informational purposes. We strongly advise readers to consult legal counsel regarding any legal matters or specific questions.