Magazine article American Banker

FHA Paying More Attention to 'Thin File' Applicants

Magazine article American Banker

FHA Paying More Attention to 'Thin File' Applicants

Article excerpt


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. …

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