Home buyers and mortgage refinancers should be among the major beneficiaries of new legislation reforming the nation's consumer credit rules and practices, approved by the House and Senate just before the Thanksgiving recess.
Mortgage applicants in all 50 states will now be able to request and obtain one free copy of their credit reports per year from each of the three national credit repositories -- Equifax, Experian and TransUnion. Currently, residents of only a handful of states have that right.
Like an annual medical checkup, ordering your credit files once a year will allow you to spot any errors or omissions that could raise the mortgage rate and fees that lenders quote you on your next application. Research by the Consumer Federation of America and the National Credit Reporting Association found that millions of Americans are at risk of being charged higher fees by lenders solely because of unseen misinformation buried away in their credit reports. Other consumers' credit files are incomplete -- missing key data including positive records of on-time payments -- because their lenders intentionally withheld the information from the credit bureaus. These consumers face higher rates and fees as a direct result.
The new legislation, the Fair and Accurate Credit Transactions Act of 2003, also guarantees you access to the credit scores used to evaluate and price your mortgage application. Though California residents have had the legal right to obtain their scores for more than a year, the vast majority of American home buyers have not.
Another consumer advance in the bill: mandatory notification whenever your loan application is negatively affected by a "risk-based pricing" system that uses your electronic credit files to come up with your rate quote. Most mortgage applicants have no idea when they are quoted a slightly higher rate -- for example, one-quarter of a percentage point to one-half a point above what they deserve -- because of erroneous or incomplete information in their credit files. The risk-based-pricing software systems used by most mortgage companies have no way of knowing that the data in your credit files are bad. They assume your records are correct, and rate you as a credit risk accordingly. Higher-risk borrowers pay more.
A recent example of this occurred in Colorado after a 31-year-old architect was quoted a $200-a-month higher payment on his home loan solely because of an unseen credit-file glitch. The problem: His student loan provider, SLM Corp. or Sallie Mae, had withheld his impressive on-time payment history from two of the three national credit repositories for more than a year. The risk-based-pricing system that scored and priced his mortgage quote saw him as a much higher risk than he really was.
The legislation also addresses a wide variety of other consumer credit issues, especially identity theft. When thieves steal your identity by obtaining access to your Social Security number and banking records, your credit files often end up pockmarked with erroneous reports of unpaid credit card bills, car loans and retail charge accounts. As a result, your credit scores may plummet enough to make a nightmare out of refinancing or applying for a new mortgage.
Clearing up your files after identity theft can take months of frustrating calls to credit bureaus and merchants. To help, the new legislation will facilitate the early placement of "fraud alerts" at the national credit repositories by consumers who believe their identity has been stolen. Those alerts, in turn, will instruct banks and other creditors not to open new accounts or extend additional credit to anyone without contacting the consumer directly.
Credit bureaus also will be required to block the reporting of information on individual credit reports tainted by the illegal behavior of identity thieves. The national credit bureaus will now be required to share among themselves consumers' complaints about identity theft. A call or letter by a consumer alerting one bureau to the existence of an identity theft will now be passed along to the other bureaus, allowing them all to put appropriate notations on the consumer's files.
The bottom line of all this for you as a mortgage applicant? For starters, you should know more about what's in your credit files, and you'll be able to do an annual checkup, free of charge. You should be better protected against being blindsided by junk in your files that can affect your mortgage applications. You should be better protected against the credit-file damage associated with identity theft. And you should have a better chance of getting the home mortgage rate and terms you truly deserve.
Kenneth Harney's e-mail address is email@example.com.