Community advocacy agency calls out “investor overlays”on FHA loans as discriminatory

by Karen Lawson
November 30th, 2010

We’ve addressed the issue of mortgage lenders adding their own requirements for approving FHA mortgage loans, a practice known as “investor overlay.” This typically means that a mortgage lender adds its own requirements over and above HUD/FHA requirements.

For example, a mortgage lender may require a higher FICO credit score than the FHA minimum of 580 for a mortgage loan with a minimum down payment of 3.5 percent. We don’t think this is conducive to improving the housing markets or promoting home ownership, and evidently others agree.

The National Community Reinvestment Coalition (NCRC) has sent letters to mortgage lenders it believes have used investor overlays to “up the ante” on qualifying for FHA loans. We’ve previously challenged investor overlays as further reducing available sources of affordable home loans for those who can’t qualify for mortgage loans underwriting to conventional lending criteria.

In this economy, a 20 percent down payment isn’t easy to produce for many folks. Instituting requirements in excess of FHA guidelines is bad enough, but The NCRC is now raising the ugly spectre of housing discrimination in its assertion that investor overlays are being used by mortgage lenders serving communities predominantly populated by minorities. In the past, before fair lending laws were enacted, mortgage lenders could “red-line” certain neighborhoods by charging exorbitant fees for home loans in red lined communities, or worse, flat-out decline to lend in red-lined neighborhoods. It was no coincidence that these practices typically equated to discrimination against minority borrowers and neighborhoods.

Prohibiting investor overlays would reduce discrimination claims

FHA, as an agency of the federal government, takes a strong position in defense of fair lending practices as required by the federal Fair Housing Act. In these times of economic challenges and difficulty, it would seem that FHA would want to do everything in its power to promote accessible home loans for working class people who would love to come home to their own home rather than paying their landlords’ mortgages.

The more accessible home loans are made available, the more people will buy homes. This produces demand for mortgage loans, and reinvigorate depressed housing markets. What’s not to understand?

Let’s give Americans their best shot at owning their own homes and end arbitrary and potentially exclusive investor overlays on FHA loans. And by the way, ending investor overlays now can help with limiting potential problems arising from potential claims of discriminatory lending. If FHA makes the rules for its home loan programs, then FHA lenders should follow FHA guidelines for making home loans. Allowing otherwise doesn’t make sense and is asking for trouble.

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2 Responses to “Community advocacy agency calls out “investor overlays”on FHA loans as discriminatory”

  1. s2kreno Says:

    FHA encourages investor overlays by its practice of using compare ratios to determine which lenders keep their approvals and which don’t. If you are a lender with a higher default experience then others in your area, you can lose your approval. So to defend against that possibility, Lender A increases its requirements to lower its default experience. Lender B, seeing that, raises its requirements even higher, to make sure that its default experience is better than that of Lender A, and so on. But it’s the underlying policy that causes it. No one has the political will to tighten up FHA guidelines to a meaningful level, but lenders who have to deal in reality will do it anyway.

  2. Karen Lawson Says:

    Thanks for this valuable insight. Unfortunately, it appears that moderate income buyers are once again the victims of lenders’ understandable efforts to ensure that their underwriting practices are not found lacking by FHA should defaults occur.
    From the standpoint of FHA’s mission to assist moderate income borrowers achieve home ownership, this situation seems to be all about the lenders competing and protecting their interests at the expense of affordable home ownership.

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