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Mortgage lenders review loan applicants from all walks of life, including those previously convicted of a crime. Deciding whether or not to grant them the loan can be complicated. To learn more about the risks involved in these loans and the laws governing lending in these situations, read what these financial experts below had to say.
Table of Contents
Look for a Directly Related Conviction
Everyone needs a place to live. So, while it is legal to check an applicant’s criminal history, housing discrimination against a protected class is illegal. For example, if a lender was only checking the criminal histories of people of certain racial or ethnic backgrounds, that would be illegal housing discrimination.
California’s laws specify that you can only deny housing because of a directly related conviction. So, for example, if someone had a DUI ten years ago, that’s not directly related to your ability to buy a house. But, if someone was convicted of real estate fraud or arson [because] they burned an apartment down one year ago, that could reasonably be considered directly related to housing and safety, and it’s more recent. You have to consider how recent the crime was and how severe it was.
In California, it’s also illegal to consider someone who was arrested but not convicted [guilty of a crime] because you are innocent until proven guilty in court. If the crime is an ‘infraction,’ a minor crime like speeding, you can’t hold that against someone. You also have to make sure the information you’re considering is accurate. It can’t just be a rumor. You have to verify, and if it’s an adult, and they have a criminal record from when they were a juvenile, that’s also not considered fair game.
It can get a little complicated, what you can and can’t take into account, and it’s concerning if you find out someone has a criminal record. But generally, if you check in with the Department of Fair Housing and follow their advice, you’ll be in good shape.
Funding Crime
The most obvious risk of lending money to clients with criminal records is that they might use the loan to fund other crimes. If these clients engage in criminal activities after getting a loan, then the lender can also get in legal trouble. There are also bigger risks like the client being part of international money laundering and terror funding rings. Getting caught up in national security issues, even remotely, is enough to end someone’s lending career.
Fraud and Scams
There is a possibility that history may repeat, especially for someone convicted of fraud [or other scams]. It may be challenging to ask for a settlement on the lender’s part. There will be increased legal action and endless court battles that result in an influential impact on all operations. That’s why it’s crucial to define terms and conditions about your loan process and activities.
Job Stability
The biggest risk in loaning to a client with a criminal record is job stability. Job stability has a direct effect on a person’s income level, which is a requirement for most lenders to consider when providing loans. A criminal record may prohibit people from entering the workforce and creating an income/credit score that aligns with the lender’s qualifications.
