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The US Dept of Housing and Urban Development announced on December 8 that it will launch an investigation into the lending policies of 22 providers of FHA-insured lenders, as requested by the National Community Reinvestment Coalition.
According to the NCRC, a recent “mystery shopper test” found that “the majority of top FHA lenders failed to offer applications for federal-guaranteed loans to potentially qualified borrowers with credit scores below 620 or 640, even though FHA guarantees loans with credit scores to 580.”
The NCRC alleges that lenders’ so-called “overlay policies” requiring higher credit scores than the FHA minimum violate the Federal Fair Housing Act, because the policy has a disparate impact on African-American and Latino communities.
While low down payments and low credit scores may seem like a recipe for disaster in the current housing market, in fact, the NCRC reports that the FHA maintains a solid (and improving) delinquency track record.
Unlike FNMA and FNMC, it has never offered or insured low/no documentation loans, interest-only loans, or low-entry ARMs.
The key question seems to be about the impact of the scoring cut off; can NCRC demonstrate the differential impact on minority communities?
Are the banks participating in the FHA programs obligated to extend the government-guaranteed loans to all prospective borrowers who meet the baseline requirements?
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