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Lenders are unfairly snubbing borrowers with poor credit scores, group alleges [Updated]

December 8, 2010 | 12:54 pm

A national housing group has filed complaints with regulators against 22 lenders alleging they are violating federal policies by not providing government-backed loans to borrowers with poor credit scores.

FHAThe National Community Reinvestment Coalition said these lenders had implemented policies that require borrowers to have scores higher than the minimum established for certain loans insured by the Federal Housing Administration.

FHA-backed loans have been a major source of funding for home purchases since the private market for mortgages dried up during the housing bust and credit crunch. In Southern California, for instance, government-insured FHA loans accounted for 35.8% of all mortgages used to purchase homes in October, according to San Diego research firm MDA DataQuick.

“Critical to our nation’s economic progress is the ability of homeowners to get quality refinancing, and for home buyers to reclaim vacant houses by accessing quality mortgage credit, ” said John Taylor, chief executive of the coalition.

Lenders could be violating the Federal Fair Housing Act, according to the complaints, because their policies disproportionately penalize African Americans and Latinos.

[Updated at 1:41 p.m. PST] In response to the complaints, the U.S. Department of Housing and Urban Development, which oversees the FHA, said it is launching “multiple investigations” into the practices of the mortgage lenders named by the NCRC.

“FHA is an important vehicle for Americans who want to purchase or refinance a home,” said John Trasviña, HUD assistant secretary for fair housing 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.”

John Courson, chief executive of the Mortgage Bankers Assn. in Washington, said lenders have the authority to use their own credit standards when making a decision whether or not to originate an FHA-insured loan.

“Lenders make their credit decisions based on objective credit criteria designed to ensure a borrower will be able to make their monthly payment," Courson said.

If a loan from the FHA goes bad, Courson said, a lender can be on the hook for indemnification from government, face the costs associated with putting the property back on the market and even be kicked out of the program altogether.]

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-- Alejandro Lazo

Photo credit: The Truth About Mortgage via Flickr

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