A national consumer coalition plans to file a series of complaints | Challenging several mortgage l

A national consumer coalition has announced its plans to file what it calls "a series of federal fair housing complaints challenging several lenders and banks of requiring African American and Latino borrowers who apply for mortgage loans to have FICO credit scores well above the 580 minimum set by the Federal Housing Authority (FHA) itself for qualified applicants with 3.5% down payments.



The complaints allege that the higher FICO requirements disproportionately discriminate against African American and Latino borrowers many of whom have credit scores above the 580 threshold set by the FHA but below the 620 to 660 minimums frequently imposed by private lenders. Because the FHA insures lenders against losses from serious delinquency or foreclosure, there is "no legitimate business justification" for rejecting applicants solely on the basis of FICO scores that are acceptable to the FHA, the complaints contend.



The identities of the 20-plus mortgage lenders reported to be targets have not been made available, however, But John Taylor, chief executive of the National Community Reinvestment Coalition, which plans to file the complaints, said banks of all sizes are among the group. He added that they are requiring borrowers to maintain minimum FICO scores higher than what the FHA requires. The coalition represents 600 local and regional consumer, economic development and civil rights groups, and has long been an advocate of equal opportunity in mortgage lending.



According to a draft complaint, the coalition conducted what it called "extensive" blind tests among a variety of mortgage lenders said to be "active" in the FHA program. Testers presented themselves to loan officers as financially qualified applicants for FHA-insured mortgages, with FICO scores between 601 and 605, however, according to the complaint loan offers repeatedly told them they could not accept applicants with FICOs less than 620.



Lenders with higher FICO policies "knew or should have known that African Americans and Latinos disproportionately have credit scores between 620 and 580, both within the FHA portfolio," the complaint states. In addition, the complaint also argues that these particular lenders’ policies have "the effect of discriminating" against both groups.



"The insidious part of these policies," Taylor said, is "not simply that they discourage" minorities from buying homes, but they also are "cutting off refinancings" that might be available via the FHA for homeowners who need loan modifications to avoid foreclosures.



The FHA, which was created during the Great Depression and has traditionally been relied upon as a critical resource of mortgage financing for moderate-income, minority and first-time home buyers in order to present a market of fairness and opportunity for all. There have been several reports recently regarding the negative effects that lenders trigger when they impose stricter credit-score standards on applicants than the minimum required by the FHA. In those cases when borrowers' scores are low due to unforeseen economic reverses such as recession-related job losses or uninsured medical bills, the practices of exclusion are even more critical.



Many FHA advisors suggest suggest banks set higher credit-score limits for sound economic reasons. They are concerned about their reputations in the investment community and what might happen to them if their FHA loans should fall through. In addition, they also do not want to lose valuable revenue they receive for servicing FHA-insured mortgages that remain current on payments.



Brian D. Montgomery, immediate past FHA commissioner, said "stricter credit" limits have some people asking whether the FHA is still serving its traditional borrower. He says the potentially heavy "incremental expenses of managing delinquent borrowers" are the key drivers of rising credit score standards.