Lack of credit availability is a key concern for the housing market recovery. As we discussed in our latest report, lenders are tightening standards as foreclosures and other recession-related negative credit events are taking a hit on many borrowers’ credit scores. For example, the Federal Housing Administration recently changed their policy so that they will only insure loans to borrowers with a credit score of 580 or higher for their standard lending program. However, reports have shown that some FHA-approved lenders are requiring even higher standards for FHA loans. The National Community Reinvestment Coalition, on whose board our president Dory Rand sits, is taking issue with that practice. NCRC recently filed fair housing complaints with federal regulators alleging that many top FHA lenders have underwriting policies that disparately restrict people of color from access to credit.
Through a series of “secret shopper” investigations, NCRC discovered that many of the top 50 FHA lenders would not offer home loans to borrowers with scores between 580 and 620. A large percentage of people of color fall into that range of scores. NCRC found that, nationally, more than 17 percent of people with home loans in African-American communities had scores between 580 and 620, which is more than twice the 8 percent of home loan borrowers with scores in that range in white communities. Similarly, our report found that 54 percent of all people with credit scores in Illinois’ African-American communities had credit scores below 620; that’s more than three times the 16.5 percent of people in white communities who have scores below 620.
People with credit scores between 580 and 620 rely more on FHA loans for credit than people with higher credit scores. NCRC found that 18.5 percent of FHA loans went to borrowers with scores between 580 and 620, while only 1.5 percent of conventional loans went to borrowers in that range. This means that lenders who will not lend to borrowers with scores less than 620, a disproportionate number of whom are people of color, are limiting a major source of credit for a group with fewer options. NCRC concludes that since these policies disproportionately impact people of color, the policies are in violation of federal fair housing laws.
As NCRC notes, policies restricting credit to borrowers with scores under 620 “are in direct opposition to the purpose and intent of the FHA loan program, which was created during the Great Depression to help Americans secure access to credit in order to realize or sustain homeownership at a time when the private lending market was nearly frozen.” The FHA’s own regulations recommend taking a broader view of creditworthiness than simply looking at a credit score, and some lenders have shown that it is possible to successfully make loans to people with lower credit scores. With foreclosures continuing to rise, access to sustainable credit will be necessary to turn vacant houses back into homes and spur housing market recovery. Lenders cannot simply ignore borrowers with less-than-pristine credit scores, as they make up a significant portion of the pool of potential homeowners. When people of color are disproportionately being denied access without adequate consideration of their creditworthiness, these policies could not only be hampering a recovery—they could be breaking the law.