The head of the nation's largest mortgage originator warns that using credit scoring to approve mortgages could lead to severe bias against minority and low-income groups.

In an interview with the American Banker, Angelo Mozilo, chairman and chief executive of Pasadena, Calif.-based Countrywide Funding Corp., said there would be "horrendous discrimination," if scoring is the primary tool to approve or reject a home loan.

The problem with using credit scores to underwrite home loans, Mr. Mozilo said, is that the scores cannot account for the way apparently risky borrowers may improve their credit behavior after buying a house.

"I can show you thousands and thousands of cases where, using any kind of credit scoring ... there is no way the people qualify," Mr. Mozilo said.

But "when these people clearly demonstrated verbally that they were going to do everything possible to make sure that they maintained this home - whether it's getting a second job or eating beans instead of steak - that kind of personal desire overshadows any mathematics, and there's no way a machine could detect that," he said.

Both Fannie Mae and Freddie Mac are using credit scoring, a statistical method of measuring credit risk, in their new automated underwriting systems.

And in a recent letter to lenders, Michael Stamper, executive vice president of Freddie Mac, asked lenders to begin using scores from two national credit bureaus to grade the riskiness of loans they manually underwrite.

Credit scores boil down a borrower's history of repaying credit card, auto, department store, and other credit to a single number that proponents say is an extremely accurate reflection of how the borrower will repay future credit.

Advocates for low-income households have raised concerns about the mortgage industry's increasing use of credit scoring, and government agencies such as the Department of Justice are also scrutinizing it for possible racial bias.

But Mr. Mozilo is one of the first prominent mortgage executive to raise concerns over scoring.

He said he was also worried that if Fannie Mae and Freddie Mac require lenders to repurchase loans with poor credit scores, underwriters will get the message that, regardless of compensating factors, a poor credit score means the loan should not be made.

But a Fannie Mae spokesman, David Jeffers, said his company was still conducting research and had reached no conclusions about the role of credit scoring.

"We would never believe that lenders should automatically reject a loan on the basis of credit scoring alone," Mr. Jeffers said.

"Lenders must use judgment if they are going to expand opportunities in the marketplace," he added.

At Countrywide Funding - the lending unit of Countrywide Credit Industries - credit scores are now being used to verify decisions made through the company's own underwriting system, Mr. Mozilo said. But if a loan that has been approved has a poor credit score, and the underwriter remains confident about the borrower, the original decision stands, he said.

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