This is the accessible text file for GAO report number GAO-10-876R 
entitled 'Mandate on Department of Housing and Urban Development's 
Alternative Credit Pilot Program' which was released on July 30, 2010. 

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United States Government Accountability Office: 
Washington, DC 20548: 

July 30, 2010: 

The Honorable Christopher J. Dodd:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The Honorable Barney Frank:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives: 

Subject: Mandate on Department of Housing and Urban Development's 
Alternative Credit Pilot Program: 

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.[Footnote 
1] 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. 

To respond to the mandate, we obtained documentation and interviewed 
officials from HUD about the pilot program. At this time, HUD has not 
established an automated process for providing alternative credit 
information. Therefore, no FHA borrowers have been served using such a 
process and there has been no impact on FHA's insurance funds. 
However, we discuss the status of the pilot program below. 

We conducted this performance audit from June 2010 to July 2010 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

In July 2009, HUD published a notice in the Federal Register to 
solicit comments on the design of the pilot program. In September 
2009, HUD awarded a contract to a consulting firm to study the 
feasibility of developing an automated process and to propose a design 
for the pilot program.[Footnote 2] The contractor reported to HUD in 
June 2010 on its findings and concluded that there are sufficient 
sources of alternative credit data--and scoring methods using such 
data--to move forward with the pilot program. Specifically, the 
contractor noted that several vendors aggregate data that are often 
used for making credit decisions through alternative means and that 
cover a large portion of the nontraditional borrower population. In 
addition, other vendors have developed methodologies and tools to 
analyze these data to produce nontraditional credit scores, which 
could be used to support the pilot program if they can be 
independently validated as being effective for managing credit risk. 

Based on these findings, in July 2010 the contractor recommended that 
HUD implement the pilot program in two phases. In the first phase, 
called the proof-of-concept phase, the contractor proposed to examine 
the performance of existing FHA-insured mortgages that were approved 
using alternative credit information. Specifically, the contractor 
would analyze statistical relationships between mortgage performance 
and alternative credit data to determine whether there are indicators, 
criteria, and parameters that could be used in an automated decision 
tool, according to HUD officials. The contractor recommended allowing 
300 days for the completion of the proof-of-concept phase. If the 
proof-of-concept phase is successful, they will move to a production 
phase, during which the contractor would create an automated decision 
tool based on their findings and HUD would recruit lenders to 
participate. This second phase would continue for several years in 
order to evaluate the performance of the mortgages approved using the 
decision tool. HUD officials said they have reviewed the contractor's 
reports and agree with the findings and recommendations. They plan to 
exercise the option year on their contract with the consulting firm in 
order to begin the proof-of-concept phase in fiscal year 2011, 
provided that funding is available. 

HUD officials provided comments on a draft of this report. They agreed 
with our facts and observations. They also provided technical 
comments, which we incorporated as appropriate. 

We are sending copies of this report to the Secretary of HUD and other 
interested parties. This report will also be available at no charge on 
GAO's Web site at [hyperlink,]. 

If you have any questions or need additional information, please 
contact me at (202) 512-8678 or Key contributors to 
this report were Steve Westley, Assistant Director; Don Brown; John 
McGrail; and Jennifer Schwartz. 

Signed by: 

Mathew J. Scirč:
Director, Financial Markets and Community Investment: 

[End of section] 


[1] Pub. L. No. 110-289. 

[2] The contract, which was for 1 year with an option for an 
additional year, specified a number of tasks for the contractor to 
perform, such as determining in the first year how a pilot could most 
effectively be established and evaluated. The major task during the 
option year, if exercised, would be to develop an automated reporting 

[End of section]