Capital One Financial Corp. agreed as part of its purchase of ING Direct USA to originate loans insured by the Federal Housing Administration to borrowers with low credit scores. But five months after giving verbal assurances to the Federal Reserve and consumer groups that it would accept FHA applications with minimum FICO scores of 580, Capital One still is not originating such loans.

Tatiana Stead, a Capital One spokeswoman, told American Banker that the McLean, Va., bank is in the process of "developing the infrastructure to make these loans." Capital One is on track to have systems in place at the end of the first quarter, she says.

Every mega-bank deal includes some concessions to win the support of consumer groups and community activists and the Cap One-ING deal was no exception. Months before the deal was approved Capital One pledged to invest $180 billion over 10 years in low and moderate-income communities.

Whether the concessions will result in expanded credit to borrowers is another question entirely.

Jaret Seiberg, a senior policy analyst at Guggenheim Partners' Washington Research Group, says lowering FICO scores to the FHA minimum requirement "could offer new opportunities to borrowers who today cannot find mortgage credit."

But he throws cold water on the idea that it would make much of a difference to credit-hungry borrowers.

"Do I think there will be a lot more lending? If there was zero, there will now be more than zero, but is it going to be their dominant line of business? I doubt it," he says.

Capital One joins the ranks of large mortgage lenders that are caught between federal regulators' desire to expand access to credit, particularly to low-income minority borrowers, and the risk of underwriting bad loans that could result in costly settlements.

Even though FHA loans are insured by the government, the agency can make lenders indemnify it against losses if underwriting errors are discovered. On Wednesday, Citigroup Inc. agreed to pay $158.3 million to settle claims that its mortgage unit improperly originated FHA loans over six years.

Banks have routinely added "credit overlays" — requirements for FHA loans that are tighter than the Department of Housing and Urban Development's own 580 FICO minimum. Demanding a credit score of at least 640, which has been routine during the financial crisis, may have excluded 15% to 20% of potential borrowers, the FHA has said.

David Berenbaum, a chief program officer for the National Community Reinvestment Coalition, says Capital One had assured his group that they were "voluntarily" changing their policy on FHA credit scores.

The consumer group held numerous face-to-face meetings and conference calls with Capital One over a six-month period last year before it filed a complaint with HUD alleging that the bank's refusal to accept mortgage applications with the minimum 580 credit score had an illegal discriminatory impact on minorities.

"It's our belief that hundreds of consumers should have received loans from Capital One and their refusal to originate to the FHA program amounted to discriminatory conduct," Berenbaum says.

HUD is still conducting an investigation into allegations that Capital One engaged in unfair lending practices.

Some lenders like Wells Fargo & Co. have agreed to accept applications from borrowers with bad credit (as low as a 500 FICO score), but have added other restrictions such as a minimum 10% down payment requirement and maximum 31% monthly mortgage debt-to-income ratio. Those conditions reduce the number of consumers who qualify.

FHA borrowers with credit scores of 580 to 599 must have a down payment of at least 5%.

Capital One said it is preparing to offer FHA loans with lower FICO scores that have "appropriate protections to minimize the risk of a borrower's default." It is in the process of developing the servicing and reporting platforms necessary to sell such loans directly to the Government National Mortgage Association, or Ginnie Mae, which securitizes FHA loans, Stead says.

Still, banks are reluctant to originate FHA loans these days because they are unsure if the agency will find a technical reason to reject its insurance coverage. Without a government guarantee, lenders are forced to keep the loans on their own balance sheet or try to unload them at a discount because of the risk of default.

"The insinuation in the order is that failing to originate FHA loans to those who qualify, but have low credit scores, may constitute a fair lending violation," says Seiberg. "If that is the standard, all the banks need to worry about their legal exposure."

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