Written By: Bonnie Wilt-Hild
As we are all aware, FHA Lending has come back with a vengeance. As a rule I am underwriting 4 government loans to every one conventional case, which quite frankly is fine with me. You have heard me say it before, I love the government loans, they just make more sense.
Recently, we have all seen a move to more conservative underwriting practices. The secondary market has implemented minimum credit score requirements where FHA is concerned and a few investors are actually applying declining market LTV restrictions to the government stuff as well. With this mind, underwriters are now faced with not only the responsibility of determining if we are approving a loan that will perform as an asset but also is the case based on new credit criteria as set by the secondary market, is saleable. I, as I am sure the rest of you are, am feeling a little stressed.
Now I want to add a new responsibility which comes to light in a world of not only AUS approvals such as that of Total Scorecard, but also the world of Manual Underwriting, and that is insuring that the loans that we approve and decline do not pull us into the realm of disparate lending practices. This is something that I am sure a lot of underwriters have not given much thought to as you would compliance issues.
Compliance issues hit us everyday because ultimately underwriters are reviewing the disclosures etc. However issues like Fair Lending and Disparate Lending Practices do not seem to be issues that the underwriting staff would assume responsibility for. This is a big misconception when you consider that both of these issues are tied directly to loan approval and loan rejection. Underwriters are the individuals that issue both. Agreed, from a corporate perspective, it is usually management that is dealing with regulators but the ultimate responsibility of insuring that disparate lending practices do no occur falls to the underwriters. We are the decision makers.
Given current market conditions, awareness of these is far more important then they were in the past. To lend an example of how easily this type of thing can occur: Two borrowers, one minority or other protected class and the other not. The borrowers apply for a similar mortgage product in terms of purchase price and loan amount. The overall profile of the borrowers’ is similar however one of the borrowers has a median credit score of 580 and the other 578. Both borrowers received a refer eligible within Total Scorecard however the borrower with the 580 credit score is still eligible for sale to certain investors because their credit score is greater then the secondary market placed minimum of 580. The borrower with the 580 is approved manually and sold on the secondary market with reasonable loan terms in regard to interest rate etc. The other borrower however, is declined because of secondary market requirement.
As it happens the borrower that was declined was in a protected class. This is disparate lending practice. Worse yet, the borrower with the 578 credit score is also approved manually but because they must be sold to a different investors who will accept credit scores less then 580 they receive an interest rate and are charged loan fees that are significantly higher than the first borrower in our scenario. Now we have unfair lending practices. If this scenario occurs once, there may not be a problem. On the other hand if it occurs regularly, there will be big problems.
Unfortunately this is occurring more often than not. When you consider how Automated Underwriting Systems behave in terms of what mortgage approvals are based on, it is easy to rationalize that certain borrowers that fit similar criteria as borrowers that are receiving approve/eligible’s or accepts, are being declined. From an economic standpoint as wealth is not distributed equally, neither are loan approvals.
To take it a step further, individuals that fit into low to moderate-income classes are predominantly the individuals that are being denied and for the most part, these individuals will fall into protected classes. When overall performance is reviewed by regulators, what is seen is a pattern of disparate or unfair lending practices even if not intentional.
I have recently researched this issue and have determined that many factors play into these actions. Things as basic as two marginal borrowers, one receiving the benefit of being allowed the ability to demonstrate certain compensating factors where as the other was not would fall under disparate lending practices. Consider manual underwriting for instance and how many underwriters just go with the gut feeling.
Well if it so happens on that day that the underwriters gut was to approve once case with a back end DTI of 46% because they had significant reserves and were reducing their present housing expense by $200.00 however they rejected the next case with similar ratio’s and reserves listed on the 1003 but not verified, with the same reduction in housing expense, you could have problems. The question will be, why didn’t the underwriter not request that the assets be verified. Even in a case where the ratio was higher, why did the underwriter not ask for the assets to be verified and suggest that the borrower pay off some debt in order to qualify. Fair Lending equals a fair chance to all borrowers.
I understand from an underwriting standpoint that sometimes-marginal borrowers are simply not approval for one reason or another. I have turned those loans down myself. I will also confess that I have approved loans for a borrower that demonstrated just one significant compensating factor that I thought made the deal a fair risk. I do however think that now, more then ever, is a time that we all need to realize that portfolio performance is not the only issue. We as underwriters need to not only practice prudent underwriting methods but also need to be consistent in our decision-making process regardless of how difficult that might be. We need to remember that our low to moderate income borrowers are not going to be plain vanilla cases that meet all credit criteria and address this by developing consistent underwriting methods that will serve these groups of individuals as well as traditionally qualified borrowers.
Accepting manual underwriting methods with consistent risk analysis may be a start. Developing the attitude that all groups, protected or not, deserve to own a home is the next step. We as underwriters need to do what it takes to make sure that everyone has a fair chance to demonstrate that they are worthy to be approved for a mortgage. That’s what fair lending is about.
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at: email@example.com.