First, we note that the Real Estate Settlement Procedures Act (RESPA) and its regulations do not require a bank to verify income, and they prohibit a bank from requiring income verification as a prerequisite for issuing a good faith estimate (GFE). 12 CFR 1024.7(a)(5).

We understand your concern in rejecting an applicant with public assistance income, as such an applicant is part of a protected class under Regulation B. 12 CFR 1002.2(z). Generally, you need to avoid the appearance of discriminatory treatment, and the best way to do that is to treat all applicants the same way. If loan originators normally provide further assistance to applicants who show insufficient income, such as by asking applicants if they have any additional income, and they fail to assist an applicant who is in a protected class, you may have a fair lending problem. See Comptroller’s Handbook for Compliance, Fair Lending, pages 7, 42Appendix: Compliance Management Analysis Checklist, page 73. (However, examiners routinely check only marginal transactions and not transactions in which an applicant clearly does not qualify. Id., page 41.)

As with any credit decision, you should document that you rejected the applicant for a permissible reason — that the applicant’s income was insufficient for amount of credit requested (Appendix C to Part 1002 — Sample Notification Forms, Form C-1, Part I) — and that you considered the applicant’s public assistance income only to “determine a pertinent element of creditworthiness” (12 CFR 1002.6(b)(2)(iii)).