Statement Of Kathleen Muller

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The use of credit scores alone does not ensure that credit remains available to persons who would qualify for a low-interest loan. Lenders should always have multi-criteria that help to balance or offset shortfalls in a person's credit score, which could be reduced by the use of subprime lenders or by a hesitancy to use credit at all. For example, if a customer scores 10 to 25 points less than the minimum score determined to be necessary for loan qualification but he has three or more years on the job, that strength of character could offset the low score. In addition, third-party mortgage brokers who do not try to look at credit scoring in a flexible way—such as looking at work history—and rely on poor scores without honest subjective analysis may benefit from higher-cost loans.

During a recent training session in Evansville, Ind., on "Predatory Lending: A Professional Alert" for brokers, appraisers, inspectors, title agents—all those who deal with the consumer along the path to getting a mortgage—Nick Tilima of Education ReSources suggested that "most consumers who contact a mortgage broker expect the broker to arrange a loan with the best terms and at the lowest possible rate. Most mortgage brokers do just that and charge a reasonable fee for their services. However, in the subprime market, there are mortgage brokers who do just the opposite. That is, the broker will attempt to sell the borrower on a loan with the most fees and highest rate possible so that the broker will get more compensation. Some of these brokers may charge fees of 8 to 10 points. In addition, the broker may get additional compensation from arranging a higher-than-necessary interest rate for the consumer. For example, the consumer may qualify for an 8 percent interest rate, but if the broker can sell the consumer a 9 percent rate, he can keep the differential." To address this issue, standardized fee schedules would go a long way toward providing fair lending to individuals with lower credit scores.

Brokers and lenders also should be aware that high credit scores do not necessarily mean a loan is guaranteed. What may have generated the score to begin with—the ability to handle many credit lines on a timely basis—enhances most credit scores. However, the lender is ignoring the fact that multiple obligations also burden the person's ability to repay a new debt.

Because lenders and brokers may take advantage of a consumer's lack of knowledge or poor credit rating to charge high interest rates and hidden fees, disclosure and pre-loan education is a must. At a minimum, everyone should be required to have some sort of education before buying or refinancing a house. Consumers would be well-advised to address the credit problems that keep them from being considered for a prime loan, but if they cannot correct these problems, they should be aware of the availability of subprime loans that are not predatory.

Code of Ethics

As part of its efforts to fight predatory lending in Evansville, the Tri-State Best Practices Committee, of which I am a member, developed a Code of Ethics for Lenders. Lenders should require their third-party brokers to adopt this code to help ensure compliance with fair-lending laws:

  • Protect all they deal with against fraud, misrepresentation or unethical practices of any nature.
  • Adopt a policy that will enable them to avoid errors, exaggeration, misrepresentation or the concealment of any pertinent facts.
  • Steer clear of engaging in the practice of law and refrain from providing legal advice.
  • Follow the spirit and letter of the law of Truth in Advertising.
  • Provide written disclosure of all financial terms of the transaction.
  • Charge for their services only such fees as are fair and reasonable and which are in accordance with ethical practice in similar transactions.
  • Never condone, engage in or be a party to questionable appraisal values, falsified selling prices, concealment of pertinent

information and/or misrepresentation of facts, including the cash equity of the mortgagor in the subject property. Not knowingly put customers in jeopardy of losing their home nor consciously impair the equity in their property through fraudulent or unsound lending practices. Avoid derogatory comments about their competitors but answer all questions in a professional manner.

Protect the consumer's right to confidentiality. Disclose any equity or financial interest they may have in the collateral being offered to secure the loan. Affirm commitment to the Fair Housing Act and the Equal Credit Opportunity Act.

This concludes the third installment in our series. The Federal Reserve System's Mortgage Credit Partnership Credit Scoring Committee thanks the respondents for their participation. The fourth installment will deal with training of staff, with the level and consistency of assistance provided to prospective borrowers in the loan application process and with correcting credit history. It also will deal with the degree to which applicants are informed about the ramifications of credit scoring in the mortgage application and underwriting process, including loan pricing.

The views expressed in this series are not necessarily official opinions of the Federal Reserve System or of the Federal Reserve Bank of St. Louis.

The Premier Association of Real Estate Finance

Mortgage Bankers Association of America

1919 Pennsylvania Avenue, NW Washington, DC 20006-3438

April 24, 2002

Dear Credit Scoring Committee:

The Mortgage Bankers Association appreciates the opportunity to comment on issues being considered by the Federal Reserve's Mortgage Credit Partnership/Credit Scoring Committee. The Mortgage Bankers Association of America ("MBA") is a trade association representing approximately 3000 members involved in all aspects of real estate finance. Our members include national and regional lenders, mortgage brokers, mortgage conduits, and service providers. MBA encompasses residential mortgage lenders, both single-family and multifamily, and commercial mortgage lenders.

In order to adequately assess the fair lending responsibilities of mortgage bankers in brokered transactions with regard to the underwriting or pricing of mortgage loans, it is imperative to fully understand the structure of the mortgage banking transaction and distinguish among the roles of the different players involved.

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