Deployment of the FHA TOTAL Mortgage Scorecard

AGENCY:

Office of the Assistant Secretary for Housing—Federal Housing Commissioner, HUD.

ACTION:

Notice.

SUMMARY:

This notice announces HUD's intention to deploy the FHA TOTAL Scorecard for mortgage industry use. TOTAL refers to “Technology Open To All Lenders.” The FHA TOTAL Scorecard, developed by HUD, assesses the credit worthiness of FHA borrowers by evaluating certain mortgage application and borrower credit information that has been statistically proven to accurately predict the likelihood of borrower default. The FHA TOTAL Scorecard is not an automated underwriting system; rather, it is a mathematical equation intended to be used within an automated underwriting system. HUD wishes to deploy the FHA TOTAL Scorecard with industry users who share the Department's vision of increasing homeownership opportunities.

In order to participate in the Scorecard initiative, interested parties should have an automated underwriting system (“AUS”) in place. As this product offering relates solely to the deployment of a scorecard, the AUS will utilize its own checks for FHA eligibility rules and its own functionality for loan specific messages. Based on the Scorecard configurations, the industry user must be equipped with a Sybase Database Server that receives calls in XML or Sybase Open Client. In addition, the user must have a communication link to HUD (https). In order to maximize the effectiveness of the Scorecard, interested participants should consult their internal IT personnel to ensure sufficient capacity to house the FHA TOTAL Scorecard. Participants should be prepared to fully support the server under their current IT Operations center. Additionally, any programming related to required inputs/connectivity to the FHA TOTAL Scorecard are the responsibility of the industry users.

ADDRESSES:

Interested persons are invited to submit comments and responses to the Rules Docket Clerk, Office of the General Counsel, Room 10276, Department of Housing and Urban Development, 451 Seventh Street SW, Washington DC 20410-0500. Communications should refer to the above docket number and title. Facsimile (FAX) responses are not acceptable. A copy of each response will be available for public inspection and copying during regular business hours (7:30 a.m. to 5:30 p.m. Eastern Time at the above address).

FOR FURTHER INFORMATION CONTACT:

Laura Donnelly, Office of the Deputy Assistant Secretary for Single Family Housing, Room 9278, Department of Housing and Urban Development, 451 Seventh Street S.W., Washington, D.C., 20410, telephone (202) 708-0614 (this is not a toll-free number). Hearing or speech-impaired individuals may access these numbers via TTY by calling the Federal Information Relay Service at 1-800-877-8339 (this is a toll-free number).

SUPPLEMENTARY INFORMATION:

Background, Purposes and Objectives

In July 1996, the FHA, an entity within the Department of Housing and Urban Development (“HUD” or the “Department”) issued Mortgagee Letter 96-34. That Mortgagee Letter set forth HUD/FHA's requirements and processes for approving automated mortgage underwriting systems (“AUSs”) to underwrite HUD/FHA insured mortgage loans. Mortgagee Letter 96-34 permitted lenders to utilize various AUSs in underwriting FHA loans, following screening, evaluation and approval of the AUS by FHA. Pursuant to Mortgagee Letter 96-34, two individual privately-developed mortgage scorecards were approved by HUD for use in the processing of HUD/FHA mortgage loans. Both of these systems employ mortgage scorecards developed by the system vendors using FHA borrower data. This notice is to inform the public that FHA intends to rescind approval of these proprietary scorecards and replace with the FHA TOTAL Scorecard. TOTAL refers to “Technology Open To All Lenders.”

A Mortgagee Letter will be issued to supersede Mortgagee Letter 96-34, and outline the basic requirements for an AUS to be used in underwriting FHA loans; this future Mortgagee Letter may be further amended or supplemented by future mortgagee letters, handbooks, policy statements, or lender notices concerning AUSs. Prior approvals for use of privately-developed mortgage scorecards will be formally rescinded by written notice to the entities previously receiving such approvals. HUD anticipates providing three months prior notice of rescission and thereafter HUD will require use of the FHA TOTAL Scorecard in any AUS. Users of the FHA TOTAL Scorecard will receive documentation relief and credit policy waivers provided by FHA. FHA has also developed a Use Agreement which sets forth the requirements and responsibilities for implementation and use of the FHA TOTAL Scorecard by qualified lenders, government sponsored enterprises and their contractors, sponsors, loan correspondents and authorized agents that purchase, sell, underwrite or document HUD/FHA mortgage loans for lenders under HUD/FHA's Direct Endorsement procedures for various HUD/FHA mortgage insurance programs (hereinafter “Lenders”). Please note that while FHA wishes to permit access to the FHA TOTAL Scorecard as widely as possible, only lenders with Direct Endorsement status may “underwrite” FHA insured loans, with or without use of AU systems, on FHA's behalf.

HUD/FHA's objectives for entering into the Use Agreement are to:

(a) Provide for the use and implementation of the FHA TOTAL Scorecard in AUSs used during the process of underwriting FHA loans;

(b) Identify and approve creditworthy borrowers that may have been excluded from homeownership under traditional HUD/FHA underwriting guidelines;

(c) Continue to ensure that no borrower will be denied an FHA-insured mortgage loan solely on the basis of a “refer” risk classification by an AUS.

(d) Expand access to mortgage credit for low-and moderate-income borrowers and other under served populations and locations and to discourage unlawful discrimination against borrowers protected by the Fair Housing Act and the Equal Credit Opportunity Act;

(e) Facilitate access to and reduce the cost and time associated with originating HUD/FHA-insured mortgages;

(f) Enhance HUD/FHA's ability to assess and manage risk and preserve the actuarial soundness of HUD/FHA's mutual mortgage insurance fund;

(g) Facilitate and encourage a standardized, industry-wide capability for communication and exchange of information among members of the mortgage lending community.

This Notice

HUD is in the process of deploying the FHA TOTAL Scorecard and will rescind the approval of scorecards under Mortgage Letter 96-34, ML 98-14 and ML 99-26. Upon completion of FHA's deployment efforts, FHA will require use of the FHA TOTAL Scorecard in any AUS and Users will receive documentation relief and credit policy waivers approved by FHA. HUD's goals are to increase the availability of the FHA TOTAL Scorecard and increase lenders' efficiencies through loan level data transfer on a real-time basis thereby reducing lenders reporting requirements and improving workflow processes through reduced data entry. Other goals include improving underwriting efficiencies by lenders, decreasing losses to FHA's insurance fund, and integrating the use of automated underwriting systems into FHA's existing processes and workflow including mortgage insurance endorsement processing.

To that end, HUD continues to work with Users to deploy the FHA TOTAL Scorecard.