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CUNA Regulatory Comment Call

July 21, 2010

FHA Risk Reduction Proposal

EXECUTIVE SUMMARY

• The Department of Housing and Urban Development has requested comments on proposed changes to certain policies that are intended to reduce the risk of loans insured by the Federal Housing Administration (FHA). The proposal would change: 1) the credit score requirements, although the FHA is also considering a temporary exemption for borrowers who refinance current loans; 2) the level of seller concessions; and 3) the standards for loans that are underwritten manually.
• The purpose of the proposal is to strengthen the reserves of the fund that covers FHA losses. The FHA indicates that few borrowers who do not meet these proposed standards have received FHA loans in the past.
• Here is more information about these proposed changes:
  • Credit Scores – Borrowers with credit scores of less than 500 would no longer qualify for FHA loans. Those with scores between 500 and 579 would be required to make a minimum 10% down payment. Currently, there is no overall minimum credit score requirement, although those with scores under 500 must make the minimum 10% down payment.
  • Maximum Seller Concessions – The amount of the buyer’s closing costs that may be paid by the seller would be reduced from 6% to 3% of the purchase price of the home.
  • Underwriting Standards for Manually Underwritten Loans – FHA loans may be manually underwritten in certain situations, such as when the borrower has a very limited or nontraditional credit history, a credit score may not have been issued by the credit bureau, or when the credit score is based on limited information. In these situations, the proposal would require consideration of the borrower’s credit history; a maximum housing ratio of 31%; a debt-to-income ratio (DTI) of 43%; and a cash reserve maintained by the borrower that is equal to at least one monthly payment that includes principal, interest, taxes, and insurance. Borrowers with credit scores above 620 may have housing ratios and DTIs of up to 37% and 47%, respectively, if they satisfy certain compensating factors.
• Comments are due by August 16, 2010. Please submit comments to CUNA by August 9, 2010.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you have questions or would like a copy of the proposal. You may also access a copy here.

• What will be the impact of the new credit score requirements? Will this pose problems for credit unions that may not use scores in their underwriting process? The scores outlined in the proposal refer to FICO scores. What should the numerical requirements be for other credit scoring systems that you may use? The FHA is also considering a temporary exemption for borrowers who refinance current loans. Do you agree with this approach?
  
  

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• Do you have any comments with regard to the decrease in the maximum permitted seller concessions or the underwriting standards for manually underwritten loans?
  
  

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• Other comments?
  
  

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