Does Lower FICO Score = Lender Loan Discrimination?

Could it be that lenders are discriminating against you if your FICO score is at the lower end of the required range for granting a loan? It could very well be. A series of federal lawsuits is about to be filed, claiming that lenders are purposefully denying loans to many applicants based on lower credit scores, even though those scores fall well above the 580 minimum score set by the FHA (for applicants who qualify and have a 3.5% down payment). Many lenders require applicant borrowers to have credit score minimums falling between 620 and 680 despite FHA requirements that they can be lower.

Unfortunately for the lenders these federal complaints fall under the Federal Fair Housing Act, which will focus the spotlight on these lenders and could get them into hot water. The complaints allege that the requirement to have higher credit scores discriminates disproportionately against certain minority groups, including African Americans and Latino borrowers.

The FHA’s role is to insure lenders against loan losses such as foreclosures or delinquencies. If lenders are discriminating based on FICO scores, even though they fall within the established limits set by the FHA, then it means the FHA becomes, in a way, a partner in crime with the lender in discrimination. The FHA insures loans that fall within the guidelines, but obviously cannot do so if the lenders are not following the guideline requirements.

The end result of lenders setting their own limits is that borrowers and those wishing to refinance will be denied the opportunity to do so. It also has an impact on homeowners who are seeking loan modifications–if they do not meet the lender-imposed higher FICO requirements they will be denied modifications, which leads to more foreclosures. Not only is this discriminatory, but it further stagnates the housing market and prevents recovery, which has a big effect on the economy.

Lenders claim that imposing stricter credit limit requirements upon borrowers insures that there will be fewer delinquencies in the future. Lenders also receive revenue for servicing FHA-insured mortgages, which could disappear if many loans go delinquent.

What do you think: should lenders be able to set their own credit requirements, based on what they believe to be the applicant’s capacity to maintain the loan? Or should they be made to abide by the FHA loan requirements using minimum credit scores?