The federal government said it was investigating 22 mortgage providers after a national housing group accused them of engaging in unfair lending practices toward borrowers with poor credit scores.
The National Community Reinvestment Coalition said Wednesday that the lenders had implemented policies that require borrowers to have scores higher than the minimum established for certain loans insured by the Federal Housing Administration. The U.S. Department of Housing and Urban Development, which oversees the FHA, said it would investigate the allegations.
"FHA is an important vehicle for Americans who want to purchase or refinance a home," said John Trasvina, an assistant secretary with the housing department. "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."
FHA-backed loans have become 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.
John Courson, chief executive of the Mortgage Bankers Assn. in Washington, said lenders have the authority to use their own credit standards when deciding whether 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 the government, face the costs associated with putting the property back on the market and even be kicked out of the program.
California-based lenders included in the coalition's complaint are Bank of the West, Paramount Residential Mortgage Group, Prospect Mortgage, Stearns Lending Inc. and Sierra Pacific Mortgage Co.