Most FHA lenders aren’t offering mortgages to would-be borrowers with credit scores under 620, the National Community Reinvestment Coalition alleges in complaints filed with federal regulators against 22 lenders.
The NCRC said "mystery shopping" tests of the nation’s top FHA-approved lenders found that two-thirds — 32 lenders in total — would not offer applications for FHA-guaranteed loans to potentially qualified borrowers with FICO scores below 620.
NCRC’s findings are consistent with an analysis Zillow.com conducted in September, which found most borrowers with credit sores below 620 were unlikely to receive even one loan quote on Zillow’s Mortgage Marketplace, even if they offered to make large downpayments of 15 to 25 percent.
While borrowers with FICO scores below 620 are often characterized as "subprime," the FHA will guarantee loans to qualified borrowers with FICO scores of 580 who meet other underwriting requirements and are able to make a minimum 3.5 percent downpayment.
On Oct. 4, FHA began requiring that qualified borrowers with scores between 500-579 make downpayments of at least 10 percent, and those with scores below 500 don’t qualify for the program at all.
Before the change was instituted, FHA had no minimum FICO cutoff, although lenders had their own minimum standards, often referred to as "overlays."
The NCRC said its tests revealed that some lenders’ credit overlays establish minimum FICO score requirements as high as 640. Eleven lenders tested by the group — 22 percent — refused to offer loan applications to consumers with scores below 640.
The tests found that only 10 percent of lenders had overlays in place that served consumers with credit scores down to 580.
NCRC has filed complaints with the U.S. Department of Housing and Urban Development against 22 lenders, alleging that their policies violate the Federal Fair Housing Act because they have a disparate impact on African-American and Latino communities.
HUD promptly issued its own press release announcing that it is launching "multiple investigations" in response to NCRC’s complaints.
"FHA is an important vehicle for Americans who want to purchase or refinance a home," said HUD Assistant Secretary for Fair Housing and Equal Opportunity John Trasviña. "We thank NCRC for bringing these complaints to HUD. For lenders to deny responsible home seekers this source of credit, without regard for their capacity to repay the loans, would raise serious fair housing concerns and, if proven, undermine our nation’s recovery efforts."
Trasviña said HUD will take action against any lender found to be engaging in discriminatory practices.
Data collected from lenders under the Home Mortgage Disclosure Act (HMDA) suggests that the FHA insured mortgages for 60 percent of all African-American and Latino homebuyers in the U.S. in 2009, HUD said last month in its annual report to lawmakers.
Together, FHA, USDA and VA government loan-guarantee programs insured nearly 80 percent of purchase mortgages taken out by African Americans and 71 percent of Latinos, the report said, compared to 47 percent for whites.
The NCRC said one-third of all Americans have credit scores under 620, and that the ability for that group to refinance existing loans or buy vacant houses is critical to an economic recovery.
"The decision by some banks to not follow the FHA’s policy is cutting qualified borrowers off from accessing credit, and in doing so, causing harm to their ability to prosper, build wealth and for our economy to grow," said NCRC President and CEO John Taylor in a press release.
The decision is arbitrary, Taylor said, because the FHA’s loan guarantees mean loans to borrowers with lower credit scores don’t pose additional risk to the company — unless loans are fraudulently or improperly originated in violation of FHA’s underwriting criteria.
The FHA is currently insuring nearly 40 percent of all home-purchase loans and about one in 10 refinancings, HUD said in its annual report to Congress.
Loans insured this year have the best credit characteristics in FHA’s history, with 57.2 percent of borrowers having FICO scores above 680, and only 1.3 percent under 600, the report said.
Some critics say that in tightening its underwriting standards to shore up capital reserves, FHA has shifted its focus from helping low- and moderate-income borrowers to providing mortgage insurance for more affluent buyers.