Lenders Fair Housing Standards Under Investigation

The National Community Reinvestment Coalition has filed multiple complaints to the Department of Housing and Urban Development against 22 banks throughout the country for discriminating against eligible Latinos and African-American borrowers --resulting in a nationwide investigation.

According to the coalition, lenders denied Federal Housing Administration-insured loans to borrowers whose credit scores met the federal standard of 580 for insurance qualification against default. Lenders were said to have set higher credit score thresholds.

NCRC claims those requirements disproportionately harm Hispanic and black communities, since many minority borrowers' credit scores fall between the federal threshold of 580 and the higher benchmarks set by the banks.

The Washington-based group also said the banks don't have a legitimate business reason to withhold mortgages from borrowers who meet FHA credit guidelines, being that the government's insurance eliminates their risk.

"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," NCRC President and CEO John Taylor said in a statement.

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The complaints seek unspecified monetary damages and an injunction forcing banks to change their lending policies.

Lenders took issue with the coalition's allegations against Bank of the West, Paramount Residential Mortgage Group Inc., and MetLife Bank N.A., among others.

John Courson, president and CEO of the Mortgage Bankers Association, said lenders have always had the power to use their own credit principles that exceed FHA's standards, noting that if an FHA loan goes bad, the lender is on the hook to pay back the FHA, as well as other costs.

FHA lenders "can, and should, have the ability to look at a borrower's complete credit profile when making a decision whether or not to give them a mortgage," Courson said.

San Francisco-based Bank of the West said its policy is "fair and prudent lending" based on customers' complete credit profiles.

"Through objective credit underwriting criteria based on a borrower's complete credit profile, Bank of the West has been able to approve FHA borrowers with credit scores below 600, even in the current difficult housing market," spokesman Jim Cole said.

A phone message seeking comment from Corona-headquartered Paramount was not returned. David Hammarstrom, a spokesman for Bridgewater, N.J.-based MetLife, said he could not comment because the company had not seen the complaint.

Guy Cecala, publisher of the trade magazine Inside Mortgage Finance, said banks are reluctant to lend to some borrowers because of fears that the government won't deliver on its insurance if it believes their standards are too relaxed.

"If a lender doesn't want the FHA knocking on its door about problems, they need to make sure they have less delinquencies and less defaults and the easiest way to do this is just to hike the credit score," he said.

To back up their claims, NCRC had some borrowers phone lenders applying for mortgages. These borrowers claimed to have credit scores which fell between 580 and 615.

The FHA program insures loans for borrowers who make a 3.5 percent down payment toward their homes, allowing people with lower savings to become homeowners.

Borrowers pay extra fees to take advantage of the program, which has become the primary source of mortgages for first-time home buyers.

In recent years the market has grown increasingly dependent on FHA-backed loans, as banks continue to fear lender defaults following the subprime lending crisis.

Inside Mortgage Finance, a residential mortgage publication said that mortgages written this year so far have had FHA backing. By comparison, FHA loans' market share ranged from 2 percent to 12 percent between 1990 and 2007.

The Associated Press Contributed to this report. 

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