Maryland rule loosens credit restrictions for homebuyers

The rule will obligate lenders to consider an applicant’s history of rent, utility payments, school attendance and work attendance during the mortgage application process

Maryland’s state legislature has pushed through a rule that could widen the pool of eligible applicants vying to become homeowners by requiring lenders to use alternative methods of evaluating a borrower’s credit.

HB 1213, which will go into effect on Oct.1, will obligate lenders to consider an applicant’s history of rent, utility payments, school attendance and work attendance during the mortgage application process.

The legislation said that entities subject to the bill’s requirements must consider these alternatives if the applicant requests them to do so and the alternative indications of creditworthiness are verifiable.

The Maryland Department of Labor Licensing and Regulation is expected to issue guidance for lenders soon.

This rule follows on the heels of Fannie Mae’s announcement in August that they will include an applicant’s positive rent history in its underwriting process starting Sept. 18.

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This will be done by allowing single-family lenders to automatically identify recurring rent payments in the applicant’s bank statement data, Fannie said in a statement.

Bottom line: by including alternative methods of assessing an applicant’s credit there is a possibility that more first-time homebuyers with minimal credit history will be able to purchase a home and start to build equity.

According to a report published by the Urban Institute, as of October 2020, Hispanic consumers and Black consumers had elevated subprime credit scores of 31.5% and 45.1%, respectively. Meanwhile, only 18.3% of white borrowers had subprime credit scores.

The report noted that alternative data could allow many of these consumers to improve their credit prospects and open “generational wealth-building opportunities available via homeownership and other credit opportunities.”

“Although alternative data will not create equality, it could reduce financial inequities and improve the accuracy of underwriting,” the think tank said.

However, despite a push for a more holistic evaluation of a borrower’s creditworthiness, there is still some unease in the industry.

Reacting to MD’s legislation, the Mortgage Bankers Association said that it had been “in contact with the DLLR and the GSEs to express the industry’s concern regarding accounting for information that might have a limited effect on an applicant’s ability to repay, or might not be an acceptable underwriting for the GSEs, FHA, Department of Veterans Affairs or Rural Housing Service loan.”

The MBA also said that if an applicant provides school and work attendance in their application, it will obligate a lender to use a manual underwriting process, since school and work attendance are not considered in an automated loan evaluation.

The trade group said that “it is not clear that the agencies would accept some of these factors as part of any manual underwriting decision.”

“The law creates new litigation risk by failing to provide specifics about how lenders should interpret and weigh such factors in an assessment of an applicant’s creditworthiness,” the MBA added.

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