WASHINGTON - For years, mortgage lenders have relied on skilled underwriters, complex rules, and fat folders of application documents to decide whether they would make a home loan.
Now, a push to automate the credit decision is leading lenders to use a technique called credit scoring.
Lenders say scoring - the equivalent of a brief quiz rather than a lengthy exam - will make credit assessment quicker, cheaper, and more reliable. And they hope it will slash the laborious documentation that burdens borrowers and lenders alike.
Scoring, however, is also somewhat controversial. Critics question whether low-income families, whose applications often need more detailed interpretation, would be well served by the simplified underwriting. But proponents say these are merely matters of fine-tuning that can be overcome readily.
Long used in the credit card industry, credit scores try to provide a simple measure of the likelihood that prospective borrowers will pay back the debt.
In the mortgage business, scores quantify a borrower's history, said Mark Faris, executive vice president at Norwest Mortgage. The scoring process takes into account the borrower's credit record and job stability, the loan-to-value ratio of the mortgage, and other factors, assigns weights to them, and boils them down to a single number, Mr. Faris said.
This makes credit scores more objective than lending guidelines provided by Fannie Mae and Freddie Mac, which are based partly on experience and reflect "cultural bias," he said.
The industry's most prominent proponent of mortgage scoring is Freddie Mac, formally the Federal Home Loan Mortgage Corp. The agency uses credit scoring in its recently introduced automated underwriting system, and Fannie Mae, the Federal National Mortgage Association, is following suit.
Michael Stamper, executive vice president of risk management at Freddie Mac, said the agency likes credit scoring because it is quick and consistent.
"There are thousands of people that underwrite loans for Freddie Mac. I can't sit here and tell you that every one of them does it the same way," Mr. Stamper said. "There are going to be lots of loans where one underwriter would say yes and another would say no on the very same loan."
Concerned about an increase in loans to borrowers with poor credit histories, Freddie Mac has begun to integrate credit scoring into its existing underwriting process. The agency has asked lenders to start using scores from credit bureaus to sort out the riskiest borrowers.
Meanwhile, mortgage insurer GE Capital Mortgage Corp., has developed a scoring model that it will use next year to approve mortgage insurance.
Large lenders, such as Countrywide Credit Industries, Pasadena, Calif., are also planning to use credit scoring models. Ralph Mozilo, executive vice president and chief underwriting officer, said Countrywide would begin using a mortgage scoring model, developed by Equifax, later this year. Bank of America and Norwest Mortgage Inc. already have systems in place.
Lenders say they hope that credit scoring will help them differentiate among borrowers, so that the best-qualified don't have to provide all the documentation that everyone else does.
One commonly cited example: Borrowers with good credit scores won't have to submit tax returns to back up their income statements.
"It is clearly the view of the industry ... that if we could determine with some sort of certainty that a borrower would repay a loan, then we should stop harassing them for information at the point that we can determine it," said Mr. Faris of Norwest. But since Norwest must sell its loans to Fannie Mae and Freddie Mac, which only buy loans with full documentation, it can't implement this policy yet, he said.
Freddie Mac has taken its first steps toward streamlining the credit decision on high-quality loans. The agency will no longer require lenders to calculate income-to-debt ratios, or to verify the level of nonmortgage debt on such loans.
At Bank of America, 25% of applications already get "streamlined processing" with less documentation and verification, according to Jim Petersohn, credit scoring officer for the retail risk management unit at the bank. The loans are held in the bank's portfolio.
For all its promise, credit scoring has one large cloud looming over it. Low-income advocates, such as Robert Gnaizda, general counsel of the Greenlining Institute in San Francisco, charge the use of scores discriminates against low-income borrowers, who tend to have spottier credit histories.
Mr. Mozilo of Countrywide agrees that because of marginal incomes, low- income borrowers do have lower scores when the scores are based on credit histories alone. But when other elements, such as income and loan-to-value ratios, are added to the score, the technique does not discriminate against low-income borrowers, he said. He based his statement on an analysis of Countrywide's portfolio of low-income loans, he said.
Freddie Mac's scores are "just as predictive of low-income and minority borrowers as they are of everybody else," said Mr. Stamper.
"Moreover, when all is said and done, you do have to underwrite loans," he said. "Which means sometimes you've got to say no. It's always going to be a bone of contention over what were your reasons for saying no."