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The Associated Press December 8, 2010, 6:08PM ET

HUD investigates lenders' fair-housing practices

Federal officials have launched an investigation to determine whether 22 mortgage lenders have been discriminating against qualified African-American and Latino borrowers by denying them loans.

The U.S. Department of Housing and Urban Development said Wednesday that the inquiry is in response to complaints filed by the National Community Reinvestment Coalition accusing 22 banks nationwide of violating fair housing laws.

The coalition says the lenders denied Federal Housing Administration-insured loans to borrowers with credit scores that met the federal standard. The lenders set higher credit score thresholds, thus excluding many minority borrowers.

HUD assistant secretary John Trasvina says the coalition's allegations raise serious concerns.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

LOS ANGELES (AP) -- A national housing and consumer rights group alleged in a series of complaints to the U.S. Department of Housing and Urban Development that Bank of the West, MetLife Bank N.A, Paramount Residential Mortgage Group Inc. and other lenders are unjustly denying government-backed loans to borrowers with low credit scores.

The National Community Reinvestment Coalition complaints filed Tuesday allege that the 22 banks nationwide violated fair housing laws by failing to issue Federal Housing Administration-insured loans to borrowers with credit scores above a threshold set by the government.

The FHA requires borrowers to have a credit score of at least 580 to be eligible for the insurance it provides against default, but many FHA lenders require higher scores.

The Washington-based NCRC claims that those requirements disproportionately harm black and Hispanic communities, since minority borrowers' credit scores fall between the federal threshold of 580 and the higher benchmarks set by the banks.

The policies have "the effect of discriminating against African-Americans, Latinos, and residents of African-American and Latino neighborhoods across the nation," the group wrote in the complaints, which it announced Wednesday.

The group also said the banks don't have a legitimate business reason to withhold mortgages from borrowers who meet FHA credit score guidelines, since the government's insurance eliminates their risk.

"The decision by some banks to not follow the FHA's policy is cutting qualified borrowers off from accessing credit, and in doing so, causing harm to their ability to prosper, build wealth and for our economy to grow," NCRC president and chief executive John Taylor said in a statement.

The complaints seek an injunction forcing banks to change their lending policies, in addition to unspecified monetary damages.

Messages left with HUD, San Francisco-based Bank of the West and Corona-headquartered Paramount were not returned. David Hammarstrom, a spokesman for Bridgewater, N.J.-based MetLife, said his company could not comment because it had not yet seen the complaint.

Guy Cecala, publisher of the trade magazine Inside Mortgage Finance, said banks are reluctant to lend to some borrowers because of fears that the government won't deliver on its insurance if it believes their standards are too relaxed.

"If a lender doesn't want the FHA knocking on its door about problems, they need to make sure they have less delinquencies and less defaults and the easiest way to do this is just to hike the credit score," he said.

To prepare for its complaints, NCRC had borrowers claiming credit scores between 580 and 615 call lenders to apply for mortgages.

Other banks turned down borrowers with scores above 580 but were not named in complaints because they agreed to consider revising their policies or because the NCRC is still looking into their practices, spokesman Jesse Van Tol said.

He said later complaints could be filed against those banks, which he would not identify.

The FHA program insures loans for borrowers who make a 3.5 percent down payment toward their homes, allowing people with lower savings to become homeowners.

Borrowers pay extra fees to take advantage of the program, which has become the primary source of mortgages for first-time home buyers.

The market has grown increasingly dependent on FHA-backed loans in recent years, as banks remain fearful of lender defaults in the wake of the subprime lending crisis.

Twenty percent of all mortgages written so far this year have had FHA backing, according to Inside Mortgage Finance. By comparison, FHA loans' market share ranged from 2 percent to 12 percent between 1990 and 2007.

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