The Fourth Installment Of A Fiveinstallment Series

The Federal Reserve Bank of St. Louis

Mortgage Credit Partnership Credit Scoring Committee

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 become common 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 mission of the Federal Reserve System's Credit Scoring Committee is to publish a variety of perspectives on credit scoring in the mortgage underwriting process, specifically with respect to potential disparities between white and minority home buyers. To this end, the committee is producing a five-installment series of articles. The introductory article provided the context for the issues addressed by the series. The second article dealt with lending policy development, credit-scoring model selection and model maintenance. The third article explored how lenders monitor the practices of their third-party brokers, especially for compliance with fair-lending laws, pricing policies and the use of credit-scoring models.

The fourth article focuses on staff training, the level and consistency of assistance provided to prospective borrowers and the degree to which applicants are informed about the ramifications of credit scoring and data accuracy in the mortgage application and underwriting process.

Representatives of three organizations were asked to comment. They were selected because of their different perspectives on credit scoring and fair lending.

Borrowing Basics

Borrowing Basics

Some small business persons cannot understand why a lending institution refused to lend them money. Others have no trouble getting funds, but they are surprised to find strings attached to their loans.

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