**GAO-10-876R**                      Published: Jul 30, 2010. Publicly Released: Jul 30, 2010.                  

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## Highlights

When potential borrowers apply for a mortgage loan, lenders typically use borrowers' credit scores--which are based on their credit payment histories, debt, length of credit history, new credit accounts or requests, and types of credit used--to help determine their creditworthiness. However, some borrowers have limited or no credit histories, and lenders are unable to determine their creditworthiness using this traditional method. For these nontraditional borrowers, lenders may assess creditworthiness through alternative means, including the compilation of performance on rental payments; utility, phone, and cable television bills; and insurance or tuition payments. While some lenders have developed statistical scoring methods to determine borrowers' creditworthiness based on these data, others rely on the judgment of their staff to make determinations on a case-by-case basis, according to Department of Housing and Urban Development (HUD) officials. HUD permits lenders that originate mortgages insured by HUD's Federal Housing Administration (FHA) to establish a borrower's credit history through alternative means and has provided guidance to FHA lenders for evaluating these nontraditional credit histories. According to HUD officials, 7,319 nontraditional borrowers were approved for FHA-insured mortgages in fiscal year 2009. Section 2124 of the Housing and Economic Recovery Act of 2008 (HERA) requires HUD to develop a pilot program establishing an automated process for providing FHA lenders with alternative credit rating information for borrowers who have insufficient credit histories to determine their creditworthiness using traditional methods. Section 2124 of HERA also directs GAO to report by July 30, 2010, on (1) the number of additional borrowers served using the automated process and (2) the impact of the process on the safety and soundness of FHA's insurance funds.

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## Topics

Housing

Auditing standardsCreditEligibility determinationsEvaluation methodsFinancial managementHousing programsLending institutionsMortgage loansMortgage programsCredit reportsFinancial condition