A major reason Fannie Mae and Freddie Mac lenders are willing to make immediate loan decisions is credit scoring. Credit scoring uses statistical samples to predict how likely it is that a borrower will pay back a loan. To develop a model, the lender selects a large random sample of its borrowers, analyzing characteristics that relate to creditworthiness. Each of the characteristics is assigned a weight, based on how strong a predictor it is. Credit scores treat each person objectively because the same standards apply to everyone. Credit scores are blind to demographic or cultural differences among people.
The most commonly used credit score today is known as a �FICO� score, named after the company that developed it, Fair Isaac Corp. FICO scores range from 400 to 900. The lower the score, the greater the risk of default.
According to FICO, the breakdown of a person�s score is as follows:
35 percent of the score is determined by payment histories on credit accounts, with recent history weighted a bit more heavily than the distant past;
30 percent is based on the amount of debt outstanding with all creditors;
15 percent is produced on the basis of how long the borrower has been a credit user (a longer history is better if there have always been timely payments);
10 percent is comprised of very recent history and whether the borrower has been actively seeking (and getting) loans or credit lines in the past months;
10 percent is calculated from the mix of credit held, including installment loans (like car loans), leases, mortgages, credit cards, etc.
THE EQUAL CREDIT OPPORTUNITY ACT
The Equal Credit Opportunity Act (ECOA) and the Fair Housing Act protect consumers against discrimination when they buy homes and apply for mortgages to purchase, refinance, or make home improvements. The Federal Trade Commission (FTC) and other federal agencies have enforcement responsibilities.
Consumer Rights Under ECOA
The ECOA prohibits discrimination in any aspect of a credit transaction based on
- race or color
- national origin
- marital status
- age (provided the applicant has the capacity to contract)
- the applicant's receipt of income derived from any public assistance program
- the applicant's exercise, in good faith, of any right under the Consumer Credit Protection Act, the umbrella statute that includes ECOA
The law is very strict on the way lenders evaluate their customers' qualifications. Lenders must do the following:
- Consider reliable public assistance income in the same way as other income.
- Consider reliable income from part-time employment, Social Security, pensions, and annuities.
- Consider reliable alimony, child support, or separate maintenance payments. A lender may require proof that this income be consistent.
- Accept someone other than a spouse, if a cosigner is needed. If both spouses own the property, both may be required to sign mortgage documents, even if only one spouse must sign the note.
- Consider income regardless of sex or marital status. For example, a creditor cannot count a man's salary at 100 percent and a woman's at 75 percent. A creditor may not assume that a woman of childbearing age will stop working to raise children.
Consumers should take action if they think they have been illegally discriminated against. Consumers might do the following:
- Complain to the lender. Sometimes lenders can be persuaded to reconsider.
- Check with the state attorney general's office to see if the creditor violated state laws.
- Contact a local private fair housing group and report violations to the appropriate government agency. If the mortgage application is denied, the lender must give the name and address of the agency to contact.
- Consider suing the lender in federal district court. If the court finds that a lender's conduct was willful, consumers can recover their actual damages and be awarded punitive damages. They also may recover reasonable legal fees and court costs. In addition, they might consider joining with others in a class action suit.
Many federal agencies share enforcement responsibility for the ECOA and the Fair Housing Act. Determining which agency to contact depends, in part, on the type of financial institution to which the applicant applied.