HUD Will Investigate Mortgage-Discrimination Claims

The U.S. Department of Housing and Urban Development said it will probe a fair-housing coalition’s complaint that 22 lenders failed to offer Federal Housing Administration mortgages to borrowers who should have qualified.

HUD said it will investigate claims filed today by the National Community Reinvestment Coalition accusing the lenders of violating the Fair Housing Act, which prohibits racial discrimination against borrowers. The companies could face fines if they are found to have violated fair-lending rules.

“By denying access to FHA loans to qualified, creditworthy individuals, without regard for the actual risk posed to the institution, lenders are discouraging the flow of credit and capital into working-class communities,” David Berenbaum, the NCRC’s chief program officer, said in a statement.

A coalition study found that the companies -- including MetLife Bank NA of Bridgewater, New Jersey, American Equity Mortgage Inc. of St. Louis and PHH Corp. of Mount Laurel, New Jersey -- didn’t offer applications for U.S.-backed loans to borrowers with credit scores below 640, even though the FHA guarantees loans to people with scores as low as 500. The higher standards disproportionately hurt blacks and Latinos, NCRC said.

“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,” HUD Assistant Secretary John Trasvina said in a statement.

David Hammarstrom, a spokesman for MetLife, said the company hasn’t received a copy of the complaint and declined to comment further. PHH and American Equity didn’t immediately respond to telephone calls and e-mails seeking comment.

Tougher Standards

The FHA sets standards for loans that the government agency guarantees. Under its guidelines, borrowers with a credit score of 580 or higher can qualify for loans with down payments of as little as 3.5 percent.

Lenders have toughened their standards for FHA-insured loans beyond what the agency requires, creating a higher hurdle to home ownership. Several lenders, including the two biggest, Bank of America Corp. and Wells Fargo & Co., require minimum credit scores between 620 and 640. Those two companies weren’t among those targeted by the NCRC today.

“We’re continuing to gather information about them,” NCRC President and Chief Executive Officer John Taylor said in an interview.

Credit profiles, not racial profiles, guide lending practices, said Glen Corso, managing editor of the Community Mortgage Banking Project, an Alexandria, Virginia-based trade group that represents lenders. One in five borrowers with credit scores between 580 and 619 fall behind on their mortgages, Corso said, citing FHA data.

“There is no place for discrimination based on a borrower’s race or ethnicity,” Corso said in a statement. At the same time, “to ask mortgage lenders to ignore risk factor for certain loans is reckless and misguided,” he said.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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