The National Community Reinvestment Coalition alleges that lenders are blocking blue-collar workers and minorities from getting Federal Housing Administration loans by erecting high credit score thresholds. But the industry has a message for the nonprofit: “We’re just trying to protect ourselves.”
The coalition of community groups recently filed fair lending complaints against 22 lenders with HUD, which promptly launched an investigation.
NCRC president and chief executive John Taylor said housing counselors were finding that they couldn’t help struggling borrowers get into affordable FHA loans because some lenders had drawn the line at a 620 or 640 credit score. (HUD only requires borrowers to have a 580 score to qualify for a low-downpayment FHA loan.)
So, NCRC initiated its own probe. These policies are preventing blue-collar people from applying for a FHA loan, Taylor said. “We are not going to tolerate that. That happens to be against the law,” he said.
But FHA lenders are under no obligation to rubberstamp loans if the borrower has a 580 credit score, according to Glen Corso, managing director of the Community Mortgage Banking Project. “FHA expects them to exercise their judgment and discretion,” he said.
Corso noted the FHA’s own figures show that loans with downpayments of less than 10% down and credit scores from 620 to 679 have an 8.6% default rate.
But FHA loans with credit scores between 580 and 619 have a 19.6% default rate. Some lenders consider that to be “too risky,” Corso said. Several CMBP members have been named in the NCRC complaints. And NCRC maintains it is investigating other lenders and may file more complaints.
Meanwhile, HUD was ready to launch its investigation the same day that NCRC filed its 22 complaints. “We thank NCRC for bringing these complaints to HUD,” said John Trasvina, HUD assistant secretary for fair lending and equal opportunity. “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,” Trasvina said.
Many lenders have raised their minimum score requirements to protect themselves from defaults and buyback risks.
They began raising their credit standards following the subprime meltdown in 2007 when the FHA still allowed borrowers with a 500 credit score to qualify for its government guaranteed loans.
If lenders continued to make those risky loans, the FHA “would be toast today,” said mortgage banking consultant Brian Chappelle. Currently, the FHA is in the black with a razor-thin 0.5% capital reserve.
Credit scores below 620 are considered to be in subprime territory by many in the industry. Even the FHA has tightened its credit underwriting standards over the past year. In October of this year it raised its downpayment requirement to 10% for borrowers with credit scores from 500 to 577. Borrowers with credit scores below 500 can no longer qualify for FHA-insured mortgages. (Qualified borrowers with a credit score of 580 and higher can still get a FHA loan with a 3.5% downpayment.)
But the NCRC chief dismisses claims that lenders have to worry about buybacks and indemnifications in making loans today. He noted that the FHA’s high default rates and credit losses are due to legacy loans originated in 2006, 2007 and 2008. “There are no buybacks” on FHA loans originated today that follow the agency guidelines, said Taylor.
Lenders need to “open the window wide enough to include anyone who is eligible,” he said. “We are going to make sure this is done fairly.”
