In the News
This article originally appeared in American Banker on July 8, 2008 at the following URL (username and password required):http://americanbanker.com/article.html?id=20080707NIB1AZM7&queryid=1915642444&hitnum=1
FHA Paying More Attention to 'Thin File' Applicants
By Harry Terris
The Federal Housing Administration is sharpening its focus on mortgage borrowers without traditional credit scores, a group the agency says has suffered from a pullback in available credit.
Under the FHA's risk-based pricing scheme scheduled to go into effect next week, borrowers qualified using nontraditional credit data will generally pay lower insurance fees than borrowers with FICO scores below 560, though they will pay more than borrowers with scores of 600 or higher.
In April the FHA issued guidance for verifying and evaluating nontraditional credit data. Last week, Lemar Wooley, a spokesman for the agency, said the guidance was prompted by a gap the FHA perceived in the availability of mortgages for borrowers who lack "traditional credit histories."
About 5% of the mortgages in the FHA's portfolio were underwritten using nontraditional credit data, Mr. Wooley said.
Fannie Mae and Freddie Mac have guidelines for lending to borrowers without sufficient traditional credit data. Neither government-sponsored enterprise would disclose its volume of such loans.
The FHA has long allowed the use of nontraditional credit data, such as rental and utility bill-payment histories. "The problem has been that the way that the bill-payment histories were being documented, in practice, in the origination process, was just rife with fraud," said Michael Nathans, the chairman of Pay Rent Build Credit Inc., an Annapolis, Md., credit bureau that provides verified nontraditional credit data.
Poor loan performance led "some in the industry" to question "whether it's wise to even use this information," he said.
The April guidance says the FHA prefers that "all nontraditional credit references be verified by a credit bureau and reported back to the lender as a nontraditional mortgage credit report in the same manner as traditional credit references." Only if such a report "is impractical or such a service is unavailable may a lender choose to obtain independent verification of trade references."
The guidance also says the "FHA has no objection to the use of … a score by obtaining rental payment history, utility trade-lines, and other common recurring nonreporting bill payments." Mr. Nathans said that passage "opens the door" to scores like one his bureau offers in partnership with Fair Isaac Corp.
Pay Rent Build Credit's data comes from creditors and self-reporting consumers. The company is also trying to expand a system under which bank and credit union bill-payment providers feed it data. As part of its verification process, the bureau does reverse phone-number look-ups on reported landlords, and it checks that the landlords own the reported properties.
Angelo Rea, a first vice president with the $15.9 billion-asset Flagstar Bancorp Inc. of Troy, Mich., applauded the guidance's preference for vetted data, saying it would protect the FHA insurance fund from losses and keep borrowers out of loans they cannot afford.
Flagstar already used bureaus to create nontraditional credit reports for FHA loans, Mr. Rea said, so the guidance "changes very little with us." The banking company has "some additional underwriting overlays above and beyond FHA guidelines." The lender does not track how many of its FHA borrowers lack sufficient traditional credit data, he said, but it would be "a lower percentage."
Many borrowers "are trying to purchase a home where they really haven't built up a huge credit portfolio," Mr. Rea said. "They could be first-time borrowers.... They may be... living with parents while they're saving up to purchase a home. So they may only have one credit card or a car payment."
