WASHINGTON — The Federal Housing Administration has enhanced its single-family Neighborhood Watch System in an effort to ensure that lenders are not unfairly penalized for making loans to creditworthy borrowers with low credit scores.
The new "supplemental performance metric" is designed to compare lenders' performance on loans with credit scores below 640.
"This is one more tool to help FHA, lenders and the public know exactly who we're serving," said Ed Golding, principal deputy assistant secretary for housing. "By better understanding FHA's acceptable risk tolerance levels for a variety of credit scores, lenders will have the confidence to lend more broadly and FHA will have more data on how successful those lenders are."
Under the Neighborhood Watch System, FHA lenders with high early default rates can be targeted for audits and administrative actions.
Over the years, lenders have complained that Neighborhood Watch discourages lending to borrowers with low credit scores. The average credit score on FHA-insured loans in the second quarter was 681.
FHA currently calculates a ratio that compares a lender's rate of early defaults to other approved lenders in geographic areas, which FHA uses to identify lenders with high default rates. The supplemental performance metric complements that ratio by measuring default rates and claims in three separate credit areas.
The new metric is "intended to encourage lenders to originate more creditworthy loans with below 640 credit scores and should only help a lender facing a potential Credit Watch action," said Brian Chappelle, a mortgage consultant.
