Are banks unfairly denying certain loan applicants?, by Newstimes.com


WASHINGTON — A national consumer coalition plans to file a series of landmark federal fair housing complaints beginning Monday challenging a widespread practice by banks and mortgage lenders: Requiring borrowers who apply for FHA loans to have FICO credit scores well above the 580 minimum score set by the FHA itself for qualified applicants with 3.5 percent down payments.

The complaints allege that the higher FICO requirements disproportionately discriminate against African-American and Latino borrowers, many of whom have credit scores above the 580 threshold set by FHA but below the 620 to 660 minimums frequently imposed by private lenders. FICO scores run from 300 to 850, with higher scores correlated with lower future risk of default.

Since FHA insures lenders against losses from serious delinquency or foreclosure, there is “no legitimate business justification” for rejecting applicants solely on the basis of FICO scores that are acceptable to FHA, the complaints contend.

The identities of the 20-plus mortgage lenders who are expected to be the subjects of fair lending filings were not available in advance. But John Taylor, CEO of the National Community Reinvestment Coalition, which plans to file the complaints, said they include “large, medium and small banks,” all of whom maintain minimum FICO scores higher than what FHA requires. The coalition represents 600 local and regional consumer, economic development, and civil rights groups, and has long been an advocate of equal opportunity in mortgage lending.

According to a draft complaint that I obtained in advance, the coalition conducted what it calls “extensive” blind tests among lenders active in the FHA program. Testers presented themselves to loan officers as financially qualified applicants for FHA-insured mortgages, with FICO scores between 601 and 605. Loan officers routinely informed them that they cannot accept applicants with FICOs less than 620.

When applicants responded that they knew FHA is willing to insure loans for borrowers with credit scores as low as 580, often they were told the same: We require higher FICO scores on FHA loans than FHA does itself.

Lenders with higher FICO policies “knew or should have known that African-Americans and Latinos disproportionately have credit scores between 620 and 580, both within the FHA portfolio” and within the lender’s own market areas. As a result, the complaint argues, these lenders’ policies have “the effect of discriminating against African-Americans (and) Latinos.”

In an interview, Taylor said “the insidious part of these policies” is “not simply that they discourage” minorities from purchasing homes, but they also are “cutting off refinancings” that might be available via FHA for current homeowners who need loan modifications to avoid foreclosures.

FHA, which was created by the federal government during the Great Depression, traditionally has been a crucial source of mortgage financing for moderate-income, minority and first-time home purchasers.

Asked what he thinks about lenders’ independent credit score cutoff limits, David H. Stevens, the FHA commissioner, said the current FICO 580 minimum standard is “based on pretty in-depth analysis of performance data” by borrowers, and represents an acceptable level of risk for the agency consistent with its mission.

In an interview that did not touch on the upcoming fair-lending complaints, Stevens said he has “concerns” about the negative impacts lenders trigger when they impose stricter credit-score standards on applicants than the minimum required by FHA. This is especially the case when borrowers’ scores are low not because they are “habitual late payers,” but because they’ve experienced unforeseen economic reverses such as recession-related job losses or uninsured medical bills.

One of the country’s top advisers to FHA lenders, Brian Chappelle, a principal with Washington, D.C.-based Potomac Partners, said banks set higher credit-score limits for sound economic reasons: They are concerned about costly indemnification demands from FHA and “reputational risk” in the investment community if low-FICO loans go sour. Also, Chappelle said, they don’t want to lose valuable revenue they receive for servicing FHA-insured mortgages that are paying on time.

Terry H. Francisco, a spokesman for Bank of America, one of the highest-volume FHA lenders, confirmed that rationale and said the bank sets its own “credit standards based on our best analysis of an applicant’s capacity and willingness to repay the loan.”

Brian D. Montgomery, the immediate past FHA commissioner, agreed that the recent “stricter credit” limits have “some (people) asking if FHA is still serving (its) traditional type of borrower.” But, he emphasized, the potentially heavy “incremental expenses of managing delinquent borrowers” are the key drivers of rising credit score standards.

Ken Harney’s e-mail address is kenharney(at)earthlink.net.

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‘Run for wealth’ could mean hard time for teacher turned loan officer, by LEVI PULKKINEN, SEATTLEPI.COM


He was a teacher and a coach, and mortgage lending was the Wild West.

He became a loan officer — a crooked one — and the money came rolling in.

Now, Christopher DiCugno is a convicted felon and may be headed to federal prison.

Set to be sentenced Thursday in Seattle, DiCugno was a loan officer and branch manager at the now-defunct Pierce Commercial Bank. He previously admitted to taking part in a mortgage fraud led by disgraced Bellevue businessman Mark Steven Ashmore that contributed to the collapse of his former employer.

Court documents show that DiCugno — who left a career as a high school teacher and coach in 2005 to, in his words, “run after wealth” — found himself at the heart of two federal investigations.

Charged alongside Ashmore in a mortgage fraud scheme, DiCugno, 38, is also assisting authorities investigating activities at Pierce Commercial Bank, according to statements to the court from his own attorney.

Writing the court, defense attorney Stewart Riley said his client had provided information used by the government to seize a bag containing $102,000 in cash from Shawn Portmann, a former executive with Pierce Commercial Bank who as a loan officer originated nearly $1 billion in mortgage loans in less than three years.

Riley went on to claim that the government may indict others involved in Pierce Commercial Bank as early as the end of this year.

Portmann was a college friend of DiCugno’s, Riley told the court, and brought him into Pierce Commercial Bank even though DiCugno had no experience in finances.

In a letter to the court, DiCugno said the promise of easy money prompted him to give up a fulfilling career.

“I regret ever leaving my teaching and coaching job to run after wealth,” DiCugno said. “I was a good teacher and coach and I was impactful in the lives of the students I taught.

“I should have been content with this career. I am faced with the stark reality that I will never be a public school teacher again.”

While with the bank, DiCugno worked with Ashmore to secure loans “straw buyers” who sold their names to Ashmore for money. DiCugno was charged alongside Ashmore and two others following an investigation into a wide-ranging mortgage fraud scheme that saw 40 properties sold to straw buyers.

Federal prosecutors contended Ashmore and others recruited “straw buyers” — individuals willing to lend their identities to obtain mortgage loans — with promises of payment up to $10,000. The buyers then obtained overly large loans to purchase homes, prosecutors contended, passing the leftover money to those running the scam.

The properties were often “flipped” to another straw buyer, at an even higher price, with the excess amount going to Ashmore.

One Bellevue home bought by a straw buyer at Ashmore’s behest for $655,000 was sold to a co-defendant for $830,000 then resold to a straw buyer for $1.1 million, netting the conspirators $445,000, prosecutors contended. Two other homes noted in the complaint were resold for profits in excess of $100,000.

In the end, the straw buyers would fail to make payments on the loans and properties would go into foreclosure, causing the financial institutions and mortgage lenders to suffer substantial losses. While his attorney disagrees, prosecutors contend DiCugno’s actions during five real estate transactions cost banks about $1.1 million.

Asking that his client be sentenced to home detention and community service, Riley told the court DiCugno’s superiors — Portmann and two other men — “set the tone” for loan officers at the bank. DiCugno, the attorney said, was “naïve.”

DiCugno resigned after the bank was served with a grand jury subpoena related to the investigation into Ashmore’s activities.

Pierce Commercial Bank — which had loaned a significant amount of money to those involved in the Ashmore scheme — ultimately shutdown its home loan business and came under increased scrutiny from state and federal regulators because of the badly damaged loan portfolio. State regulators closed the bank Nov. 5.

“Like many institutions, Pierce Commercial Bank has experienced large losses associated with construction and land development loans,” Brad Williamson, Banks Division director for the Department of Financial Institutions, said at the time. “Unfortunately, the bank also suffered from poor mortgage lending practices that further impacted the bank’s earnings and capital.”

Prosecutors have asked that DiCugno be sentenced to 18 months in federal prison.

Such a sentence, which would fall 15 months short of the standard minimum, is warranted in large part because of DiCugno’s cooperation with authorities investigating Ashmore and Pierce Commercial Bank, Assistant U.S. Attorney Nicholas Brown told the court.

Brown noted, though, that DiCugno, as a bank employee, had a heightened responsibility to not to engage in fraud.

“While there appears to have been numerous others at Pierce bank involved in similar fraud, (DiCugno) was a large part of the overall problem,” Brown said in a statement to the court.

“As the defense notes, he was clearly intelligent enough to have known better. … Instead, to pursue his own greed, he joined the conspiracy perpetrated by Mr. Ashmore and others with hopes to gain financially.”

Having pleaded guilty to a single count of wire fraud, DiCugno is scheduled to be sentenced Thursday morning by U.S. District Court Judge Richard Jones.

Jones is also scheduled to sentence one of DiCugno’s co-defendants, Hiep Nguyen, on similar charges. A third co-defendant, Luke Reimer, was sentenced to 15 months in prison Tuesday.

Convicted of wire fraud following a jury trial in which DiCugno testified for the prosecution, Ashmore, 42, is scheduled to be sentenced Dec. 17.

Levi Pulkkinen can be reached at 206-448-8348 or levipulkkinen@seattlepi.com. Follow Levi on Twitter at twitter.com/levipulk.

 

Conventional Wisdom: 6 Things You Need to Know About Private Monthly MI, by Cecilia Farley MGIC


Recently, the Federal Housing Administration (FHA) made a change to its premium pricing structure: lowering the upfront premium amount from 2.25% to 1% and raising its monthly premium from .50% to .85% for 30-year loans with 5% or more down and from .55% to .90% for 30-year loans with less than 5% down. This change has made some people anxious and others just don’t care. What does this change mean to today’s homebuyers? Is this a good change or not?

Well, that depends. For borrowers with lower credit scores, an FHA loan may continue to be the best option. For borrowers with higher credit scores, private mortgage insurers offer cheaper alternatives.

Even FHA commissioner David Stevens said, in an article that appeared in the National Mortgage News on September 27, 2010, “We have actually made GSE loans with private mortgage insurance a better option for some homebuyers.”

Private mortgage insurance (MI) has become a better option because private mortgage insurance companies have made changes, too. In response to the housing and economic downturn many private companies, including mortgage insurers tightened, however,  as the economy began to recover most have spent the majority of 2010, opening up markets and normalizing guidelines and some have altered their pricing . The result is private MI options that are competitive with FHA, especially for borrowers of credit scores of 720 or higher.

 

Here are 6 things you need to know about the Monthly MI premium plan offered by private MI insurers:

 

  1. No upfront premium: While all MI companies offer premium plans that allow for an upfront premium, the most popular premium structure by far in the industry is the Monthly MI plan where no upfront payment is needed. Borrowers choosing an FHA loan must either pay an additional 1% at closing or finance the amount into their loan.
  2. Lower loan amount: Most FHA borrowers choose to finance that upfront premium into the loan and spread it over the life of the loan, increasing their debt. With a private MI Monthly premium, there is no upfront premium and no need to increase the loan amount.

  3. Greater equity: Because there was no upfront premium to finance into the loan with a private MI Monthly premium, the borrower is put in a better equity position right from the start.

 

  1. Lower or comparable monthly payment: Here is where homebuyers and real estate professionals should rely on a professional loan originator, because several variables will come into play, especially the borrowers’ credit scores.

    For instance, at MGIC, the leading private mortgage insurance company, a borrower with a 720 credit score and 5% downpayment will pay a monthly premium rate of .67%, compared to FHA’s premium rate of .85% for a borrower with the same score and downpayment. But remember that FHA also charges a 1% upfront premium!  So it’s important to “do the math” to see which option is actually better for the borrower. In many cases, going the private MI route results in a lower monthly payment, compared to FHA.

 

  1. Lower total MI cost: Because there is no upfront premium and often a lower monthly premium, the amount paid for mortgage insurance can be dramatically less with private MI compared to FHA. For example, on a $150,000 loan where the borrower put 5% down and had a credit score above 720, the borrower will pay more than $2,500 more in MI costs over 3 years with FHA compared to MGIC’s Monthly MI.
  2. Cancellation: Fannie Mae and Freddie Mac have more flexible rules for cancellation than FHA, meaning a homebuyer using private MI may be able to cancel the monthly MI payment sooner than with FHA, saving even more money over the life of the loan.

It’s obvious that checking out all the options can really pay off for savvy lenders and homebuyers. To find out which is the better option, all the MI companies provide calculators that allow originators to compare FHA and private MI premium plans. (MGIC’s calculator is located at: www.mgic.com/calculator)

Cecilia Farley – MGIC
Account Manager
Cell (503) 869-5732
cecilia_farley@mgic.com

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MGIC (www.mgic.com), the principal subsidiary of MGIC Investment Corporation, is the founder and leader of the private mortgage insurance industry, serving more than 3,300 lenders with locations across the country and Puerto Rico.