Credit Scoring And Fair Mortgage Lending

T he Third insiaikmenl a F a F ive inslal Imeni aeries h y ihe Federal Reserve System's Martgoge Credit Farlnership Credit Scori ng CommiMee

Credit scoring is an underwriting tool used to evaluate the creditworthiness of prospective borrowers. Used for several decades to underwrite certain forms of consumer credit, scoring has come into common use in the mortgage lending industry only in the past 10 years. Scoring brings a high level of efficiency to the underwriting process, but it also has raised concerns about fair lending among historically underserved populations.

The purpose of the Federal Reserve System's Mortgage Credit Partnership Credit Scoring Committee is to collect and publish perspectives on credit scoring in the mortgage underwriting process, specifically with respect to potential disparities between white and minority homebuyers. The introductory article provided the context for the issues addressed by the series. The second article dealt with lend-ing-policy development, credit-scoring model selection and model maintenance.

The topic of the third article is how lenders oversee the practices of their third-party brokers, especially for compliance with fair-lending laws, pricing policies and the use of credit-scoring models. We solicited feedback from industry, consumer and regulatory representatives to ensure a variety of perspectives. The following individuals participated.

EDWARD KRAMER

The Housing Advocates Inc.

Mr. Kramer is a civil rights attorney and director and co-founder of The Housing Advocates Inc. (HAI), a fair-housing agency and public-interest law firm in Cleveland. The organization, founded in June 1975, receives money from the U.S. Department of Housing and Urban Development, private foundations and various local governments. One of the programs operated by HAI is the Predatory Lending Project. The project provides legal assistance to low- and moderate-income residents to prevent predatory lending activities and other consumer fraud problems, especially in Wards 5 and 15 of the city of Cleveland. When violations of the law are identified, they are referred to private attorneys or to the Fair Housing Law Clinic. The clinic is a joint venture between HAI and Cleveland-Marshall College of Law at Cleveland State University. The program gives second- and third-year law students from Cleveland-Marshall an opportunity to work on real-life cases.

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Secrets of the Credit Industry

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