Housing and Economic Recovery Act of 2008: Pilot Program for Automated Process for Borrowers Without Sufficient Credit History; Solicitation of Comments on Program Design

AGENCY:

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

ACTION:

Notice.

SUMMARY:

The Housing and Economic Recovery Act of 2008 requires that HUD carry out a pilot program to establish, and make available to mortgagees, an automated process for providing alternative credit rating information, which might include rent, utilities, and insurance payment histories, etc., for mortgagors and prospective mortgagors who have insufficient credit histories for determining their credit worthiness. With this notice, HUD commences the process for development of the mandated pilot program and solicits public comment and suggestions for a practicable design of the pilot program that is consistent with statutory goals, program requirements, and fair lending standards, and includes comment on how the pilot program might align with existing Federal Housing Administration policy regarding nontraditional credit verification. Comments addressing the information, data, and experience necessary to support an evaluation of the operation, performance, and fair lending compliance of a pilot are welcome as well. All comments will be considered in the development of the pilot program.

DATES:

Comment Due Date: September 28, 2009.

ADDRESSES:

Interested persons are invited to submit comments regarding this notice to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-0500. Communications must refer to the above docket number and title. There are two methods for submitting public comments. All submissions must refer to the above docket number and title.

1. Submission of Comments by Mail. Comments may be submitted by mail to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-0500.

2. Electronic Submission of Comments. Interested persons may submit comments electronically through the Federal eRulemaking Portal at http://www.regulations.gov. HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically.

Note:

To receive consideration as public comments, comments must be submitted through one of the two methods specified above. Again, all submissions must refer to the docket number and title of the rule.

No Facsimile Comments. Facsimile (FAX) comments are not acceptable.

Public Inspection of Public Comments. All properly submitted comments and communications submitted to HUD will be available for public inspection and copying between 8 a.m. and 5 p.m. weekdays at the above address. Due to security measures at the HUD Headquarters building, an advance appointment to review the public comments must be scheduled by calling the Regulations Division at 202-708-3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number through TTY by calling the Federal Information Relay Service at 800-877-8339. Copies of all comments submitted are available for inspection and downloading at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:

Margaret Burns, Director, Office of Single Family Program Development, Office of Housing, Department of Housing and Urban Development, 451 7th Street, SW., Room 9278, Washington, DC 20410-8000; telephone number 202-708-2121 (this is not a toll-free number). Persons with hearing or speech impairments may access this number through TTY by calling the toll-free Federal Information Relay Service at 800-877-8339.

SUPPLMENTARY INFORMATION:

I. Background

The Housing and Economic Recovery Act of 2008 (Pub. L. 110-289, 122 Stat. 2654, approved July 30, 2008) (HERA) made significant and comprehensive reforms to the National Housing Act (12 U.S.C. 1701 et seq.), which governs Federal Housing Administration (FHA) programs. Section 2124 of HERA adds a new section 258 to the National Housing Act (12 U.S.C. 1701 et seq.) that requires the Secretary of HUD to “carry out a pilot program to establish, and make available to mortgagees, an automated process for providing alternative credit rating information for mortgagors and prospective mortgagors who have insufficient credit histories for determining their credit worthiness.” “Such alternative credit rating information may include rent, utilities, and insurance payment histories, and such other information as the Secretary considers appropriate.” In addition, section 258 allows the Secretary to restrict the program to first-time homebuyers and limits annual loan volume under the pilot program to 5 percent of FHA's prior-year aggregate loan volume for the duration of the pilot program, which ends July 30, 2013. The Government Accountability Office is charged with providing Congress with a report on the number of additional mortgagors served using the automated process and the impact on the safety and soundness of the insurance funds supporting the pilot program mortgages, by July 30, 2010.

FHA has long permitted mortgagees to establish a borrower's credit history through nontraditional means, including the compilation of performance on rental payments, utility bills, telephone and cellular phone services, cable television service, payments to local stores, etc. Mortgagee Letter 2008-11 (issued on April 29, 2008) provides further guidance on the issue, and states that “FHA has no objection to the use of various service providers now operating that are able to develop a bill payment history, as well as a score by obtaining rental payment history, utility trade-lines, and other common recurring non-reporting bill payments. While * * * [FHA does] not endorse any particular service provider, FHA approved lenders may use such services to develop a credit history for borrowers with no or little traditional credit.” A copy of Mortgagee Letter 2008-11 may be downloaded at http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm.

The pilot program authorized by section 258 of the National Housing Act builds upon this past FHA practice by requiring that HUD establish an automated process for providing alternative, or nontraditional, credit information.

II. This Notice—Solicitation of Public Comment on Automated Process

Through publication of this notice, HUD starts the process for developing the mandated pilot program and solicits public comment and suggestions for a practicable design of the pilot program that is consistent with statutory goals, program requirements, and fair lending standards and includes comment on how various pilot programs might align with existing FHA policy regarding nontraditional credit verification. Comments addressing the information, data, and experience necessary to support an evaluation of the operation, performance, and fair lending compliance of a pilot program are welcome as well.

In particular, HUD is interested in obtaining feedback on the following questions:

1. What automated processes for providing alternative credit rating information for mortgagors and prospective mortgagors who have insufficient credit histories for determining their credit worthiness are currently available and operational?

2. For operational automated processes identified in question 1, what factors or information is utilized to develop the alternative credit histories and in what form is the information passed on to end-user mortgagees—i.e., individual items to be assembled into a credit profile by end user, items aggregated into a summary profile or score with distributional reference points, individual and summary information in combination, etc.?

3. Which operational automated processes identified in questions 1 and 2 currently can be uniformly applied everywhere in the United States and, if not, what impediments must be overcome before uniform and universal application is possible?

4. What new and universally available automated processes for providing alternative credit rating information might be developed and maintained with reasonable accommodation and investment by industry and government? Conversely, are there aspects of manual processes with little potential for automation?

5. For current and potential new automated processes, what criteria and validation methods should be employed to evaluate the relative strength and reliability of alternative processes for establishing accurate and predictive credit profiles? What relevant evaluative information already exists?

6. Which current or potential new automated processes would be likely to prove most beneficial for mortgagees, mortgagors, and FHA and why? For example, such benefits could include acceleration of origination and improving the quality of underwriting.

7. How would automated processes affect the potential for fraud or misrepresentation during underwriting?

8. If no single automated process was universally feasible, how might HUD ensure equal treatment of equals processed by differing HUD-provided systems?

9. Is there any reason the Secretary should not limit the pilot program to first-time homebuyers?

10. What is the total size and characteristics of borrowers who potentially would use automated histories? What are the implications of these characteristics for design and implementation of automated processes?

11. How should the pilot program be structured with respect to geographic coverage, to ensure representative results? What criteria should be employed in selecting pilot locations and participants? What control groups could be used to support a rigorous evaluation?

12. What additional concerns should be considered in structuring the pilot program and evaluation design to ensure a successful pilot evaluation?

13. What safeguards to ensure compliance with applicable fair lending and nondiscrimination requirements would be most effective?

14. What are any statutory or regulatory obstacles to automated processes?

As noted in the ADDRESSES section of this notice, all public comments submitted to HUD will be made available for public inspection. Accordingly, commenters are cautioned against submitting proprietary or confidential information not intended for public disclosure. All information solicited in this notice is solely for the purpose of assisting HUD in designing the pilot program, and does not imply that HUD will be contracting with any provider of automated credit evaluation services for purposes of the pilot program. Comments must be submitted by the deadline date established in the DATES section of this notice, and in accordance with the instructions contained in the ADDRESSES section of this notice.

HUD will consider all public comments in the development of the pilot program. HUD will announce the establishment of the pilot program in a follow-up Federal Register notice that is based on the consideration of these comments.