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A Penny Saved and a Loan Denial

Fannie says AU improving lender profitability, but lawsuit claims AU discriminates

October 4, 2002


Key findings recently released from Fannie Mae's third annual Mortgage Focus study confirmed the best ways lenders can keep the cash and up the output -- by using automated underwriting (AU). However, this comes on the cusp of a discrimination lawsuit based on the company's credit scoring system, which lenders must use if they want to sell their mortgages to Fannie.

The lawsuit was filed Sept. 13 in the U.S. District Court for the District of Columbia and charges Fannie with violating the Fair Housing Act, the Equal Credit Opportunity Act, and the Fair Credit Reporting Act, Dow Jones Newswires recently reported.

The lawsuit says its goal is to correct what it says are racial disparities in Fannie's underwriting guidelines, the news service reported. The plaintiff, Safiyyah Rahmaan, who is African-American, was denied a $95,000 mortgage loan with a 6.75% interest rate from the Cornerstone Bank in Wilson, N.C., based upon a credit score produced by Fannie's Desktop Underwriter software. She eventually obtained a home loan at 10.5% from American Fidelity Finance Company, the news service reported.

Fannie spokeswoman Janice Daue was quoted by the news service as saying the company's AU software is not discriminatory and accurately predicts a borrower's likelihood to make timely payments.

On Sept. 27, Fannie Mae announced the results of its yearly Mortgage Focus study, which found that using AU increases savings and productivity for lenders.

The yearly study provides current mortgage origination data for the traditional retail, Internet/call center, wholesale, and correspondent channels, the announcement said. It examines qualitative and quantitative information to help lenders identify business practices that would improve their productivity, reduce costs, and enhance overall profitability. 

The mortgage behemoth did not release announcements in 2000 or 2001 for the findings in those years' studies, said Rochelle Burton, director of technology and e-business communication at Fannie. According to this year's announcement, the 2002 findings echoed those from the previous two years.

The company reported that again it found that AU reduces origination costs by more than $1,000, and it more specifically showed that retail lenders reported origination cost savings of approximately $1,300 per loan when they implement AU. 

The study also compared the profit margins of retail lenders who didn't use AU at the point-of-sale during 1998's refinance boom, but did use it during 2001's refinance boom. They reported increased productivity and profit, some as high a 250 percent.

The same lenders attribute technology with improved customer service and smoothed-out processes, the announcement said. But the study also found that in addition to technology, top-performing lenders incorporated such practices as clear strategies and comprehensive employee retention programs.

"In addition to the dramatic savings traditional retail lenders realized from implementing AU at the point-of-sale, the study found that lenders with AU-enabled Internet/call center channels achieved the lowest origination costs overall," said Terri Davis, managing director of Fannie Mae e-business. "Further, wholesale/correspondent lenders achieved noteworthy full-time employee productivity gains as a result of employing business-to-business Web sites powered by AU."

The total cost to originate per closed loan decreased in all channels, and direct productivity increased, the announcement said.

Bill Corbet, senior vice president of risk management at Citizens Mortgage Corporation, said in the announcement that his company's origination volume doubled, the cost to originate decreased more than $500 per closed loan, and productivity increased more than 50 percent.

"These results have a direct correlation to investments we have made in our use of technology," he said. "Technology has played a vital role in our ability to cut costs and achieve our business goals."

Automated underwriting also has helped  keep origination expenses below $800 per closed loan in the retail channel of Sky Financial Group, Incorporated, said Diane Critchet, the company's vice president of secondary marketing.

On the borrowing side, however, AU has its critics. Dow Jones reported the lawsuit as stating that, "Credit scoring systems routinely penalize minority applicants with higher interest rates or outright denials of mortgages."

"The big secondary market companies have moved toward automated underwriting to save a few pennies," the news service reported Ed Mierzwinski, a consumer advocate for the U.S. Public Interest Research Group, as saying. "But for people on the margin, a 10- or 20-point error on your credit report could move you from a prime to a subprime loan."

Consumer groups have long criticized credit scoring practices as inherently flawed and based upon inaccurate information, and critics say those practices, in general, seem to discriminate against minorities, Dow Jones reported.

Participating in the study this year were 96 lenders from various channels, of various size, institution type, and location, the study report said. The information collected included the lenders' business strategies and mission, as well as details about their profits, cost to originate, staffing, and loan production. The reported financial data was restricted to loan origination and secondary marketing operations; servicing departments were excluded.

The announcement said that the study is not scientific, but meant to provide information and insight.

Milberg, Weiss, Bershad, Hynes & Lerach, the nation's largest class action law firm, is one of four lawyers representing Rahmaan according to the news service, and did not immediately respond to information requests by MortgageDaily.com.

Christy Robinson is the editor of MortgageDaily.com. She received a bachelor's degree in news-editorial journalism from The University of Texas at Arlington. Her work has previously been published in The Dallas Morning News.

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