A class action suit against the country's second-largest source of home loan money, Freddie Mac, is focusing new attention on a consumer protection statute that is probably unfamiliar to many home buyers and mortgage borrowers.

The federal Fair Credit Reporting Act governs lenders, landlords and others who obtain and use credit reports and scores to make decisions on consumers' applications. If a lender uses credit file information to reject an applicant or charge a higher interest rate, the lender is required to provide what the law terms an "adverse action" notice.

That notice explains what adverse action was taken and identifies the credit-reporting agencies that contributed information leading to the rejection or higher costs. The applicant can then challenge or seek to correct the credit file data if it is erroneous.

The class action suit against Freddie Mac charges that hundreds of thousands of home loan applicants nationwide have been rejected or assessed higher fees through the corporation's electronic underwriting system without receiving the required notices and protections afforded to them under the Fair Credit Reporting Act.

The suit, filed in U.S. District Court in Philadelphia, accuses the corporation of multiple violations of the law and asks for substantial monetary damages on behalf of all mortgage applicants rejected or charged higher rates through Freddie Mac's underwriting system during the past two years.

Freddie Mac officials had no immediate comment.

The lead plaintiff in the case is Donald Weidman of Philadelphia, who applied for a home mortgage last year through several lenders who used Freddie Mac's electronic underwriting system to process his applications. The system, known as Loan Prospector, allows lenders around the country to submit applications online and to receive a funding and pricing decision almost instantaneously from Freddie Mac.

Freddie Mac, a congressionally chartered private corporation based in McLean, is not a direct lender itself. Instead, it buys billions of dollars' worth of mortgages annually from originating lenders nationwide. It either retains the loans in its investment portfolio or packages them into bonds for sale to other investors.

Though the details of Loan Prospector are proprietary secrets, Freddie Mac has confirmed that the system runs credit file data through statistical models to evaluate borrower risk. Rival mortgage investor Fannie Mae has a similar electronic system and was sued in a class action last month alleging fair lending, equal credit opportunity and fair credit violations. Fannie Mae denied the allegations but has not yet responded to the suit in federal court, according to a spokesman.

Weidman's suit charges that each of his mortgage applications submitted to local lenders was processed through Freddie Mac's system, using data obtained from the national credit repositories of Experian, Equifax and TransUnion. Based on Freddie Mac's negative electronic evaluation, the suit says, Weidman was denied the interest rate and terms he sought from each lender.

The suit charges that although Freddie Mac is subject to the Fair Credit Reporting Act, it never provided him an explanation of its adverse evaluation and never identified the sources of its credit information, nor did it afford him an opportunity to review the credit file data that caused him harm as a loan applicant.

At the core of the case, say banking industry lawyers and consumer advocates, is an unresolved issue that has been festering for half a decade: On the one hand, mass-market electronic underwriting systems such as Freddie Mac's and Fannie Mae's have dramatically cut the time needed for a loan applicant to get a decision -- from days or weeks to seconds.

On the other hand, these lightning-quick credit evaluations frequently leave applicants in the dark. They may be accepted for funding, but because their credit scores do not meet minimum benchmarks set by the underwriting software's statistical models, they are charged higher rates or fees. Those higher charges, however, qualify as "adverse actions" under the federal fair credit law, say consumer advocates. Yet consumers rarely get to review the credit data that triggered the adverse action.

Worse, says Edmund Mierzwinski, consumer program director at the Washington-based Public Interest Research Group, the underlying data in the credit files are often inaccurate or incomplete. One-third of all credit files in a study by Mierzwinski's group contained errors "sufficient to lower the applicant's credit score" enough to affect a lending decision.

Richard LeFebvre, chief executive of AAA American Credit Bureau of Flagstaff, Ariz., says electronic underwriting has "eliminated the safety net" that the fair credit law once routinely guaranteed. When an underwriting decision flashes across a computer screen, "almost nobody takes the time anymore" to review the applicant's files, looking for errors, as often occurred in the pre-electronic, slower-paced underwriting era, says LeFebvre.

Kenneth R. Harney's e-mail address is kharney@winstarmail.com.