Magazine article American Banker

Fed: Low-Income Areas Get Good Credit Scores

Magazine article American Banker

Fed: Low-Income Areas Get Good Credit Scores

Article excerpt

People in low-income neighborhoods are almost as likely to have strong credit scores as those in high-income neighborhoods.

That's one conclusion embedded in a study by researchers at the Federal Reserve Board. Specifically, the study found that neighborhood income levels of mortgage holders, isolated from other factors, were not especially useful for predicting default. Neighborhood income was used in the study because figures on individual incomes were not available.

A description of the study, which focused on the usefulness of credit scoring in predicting loan performance, appeared last month in the Federal Reserve Bulletin.

"The data consistently show that credit scores are useful in gauging the relative levels of risk posed by both prospective borrowers and those with existing mortgages," the article said.

It added, "Most households have relatively high scores, regardless of the income or home-value characteristics of the areas in which they reside." Households in neighborhoods with low incomes or low home values do tend to have lower credit scores, but one researcher said the impact was minor.

In fact, the study found that the principal problems with low-income loans have been "concentrated among loans in which underwriting flexibilities have been layered and in which third-party down-payment assistance has been permitted."

The implication for lenders seems clear: that low-income neighborhoods don't in themselves pose inordinate risks and in fact could be relatively untapped markets, a point that some lenders dispute. …

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