by Jacob Adelman
LOS ANGELES (AP) — Federal officials launched an
investigation Wednesday to determine whether 22 mortgage lenders have been
discriminating against qualified African-American and Latino borrowers by
denying them government-insured loans.
The U.S. Department of Housing and Urban
Development said the inquiry is in response to complaints filed Tuesday by the
National Community Reinvestment Coalition accusing 22 banks nationwide of
violating fair housing laws.
The coalition said the lenders denied Federal
Housing Administration-insured loans to borrowers with credit scores that met
the federal standard of 580 to be eligible for the insurance against default,
but the lenders set higher credit score thresholds.
The Washington-based NCRC claims those requirements
disproportionately harm black and Hispanic communities, since many minority
borrowers' credit scores fall between the federal threshold of 580 and the
higher benchmarks set by the banks.
The policies have "the effect of discriminating
against African-Americans, Latinos, and residents of African-American and
Latino neighborhoods across the nation," the group wrote in the complaints
that it announced Wednesday.
The group also said the banks don't have a
legitimate business reason to withhold mortgages from borrowers who meet FHA
credit guidelines, since 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.
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 authority to use their
own credit standards 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 prepare its complaints, NCRC had borrowers
claiming credit scores between 580 and 615 call lenders to apply for mortgages.
Other banks turned down borrowers with scores above
580 but were not named in complaints because they agreed to consider revising
their policies or because the NCRC is still looking into their practices,
spokesman Jesse Van Tol said.
He said later complaints could be filed against
those banks, which he would not identify.
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.
The market has grown increasingly dependent on
FHA-backed loans in recent years, as banks remain fearful of lender defaults in
the wake of the subprime lending crisis.
Twenty percent of all mortgages written so far this
year have had FHA backing, according to Inside Mortgage Finance. By comparison,
FHA loans' market share ranged from 2 percent to 12 percent between 1990 and
2007.
Associated Press writer Christina Hoag contributed
to this report.
Copyright 2010 The Associated Press.
