FHA Axes Mortgage Credit Reject Screen

In a move geared toward improving and streamlining credit access to qualified borrowers, the FHA is getting rid of the Mortgage Credit Reject screen.

Up until now, the FHA required lenders to flag information about denied applications due to a provision in its Single Family Housing Policy Handbook. That information was flagged for a six-month period, to be reviewed by one of the agency’s Homeownership Centers when applicants tried for an FHA-insured loan from other lenders.

Borrowers may have been denied a loan again because of this initial rejection, even if they qualified otherwise. FHA officials have concluded that the process “does not improve risk management and is often why other lenders will reject an applicant even when that applicant might otherwise qualify for a loan” and are waiving the handbook provision.

Industry experts have pushed to remove the MCR screen in the past.

Christopher Whalen of Whalen Global Advisors called it a “scarlet letter that stigmatizes borrowers who may have simply called the wrong lender, a bank, for example, as opposed to a nonbank lender.”

“Lenders can already see that a borrower previously was denied credit using commercial credit reporting systems, thus the reject reports don’t serve an obvious purpose. More, the harm to consumers done by the FHA loan reject reports seems obvious,” he wrote for National Mortgage News.

FHA loans are go-to’s for low-income borrowers, offering low downpayment loans to borrowers in good credit standing.

The waiver goes into effect this week and will become a permanent policy in a future version of the Single Family Housing Policy Handbook.

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