A low-key settlement with a mortgage company announced by the Federal Trade Commission at the close of 2002 has broad significance for home buyers and borrowers in 2003.
For consumers, the message is this: Whether you are casually shopping for loans at a Web site or talking face to face with a loan officer, every time you give permission to anyone to access your personal credit files, you are protected by federal law. That law, overseen by the FTC but ignored by some lenders, is designed to help you spot -- and correct -- factual errors or omissions in your credit files.
For lenders, the message is the flip side: Every time you obtain and evaluate a consumer's credit data, even for a mortgage preapproval, the federal government expects you to provide basic protections to that consumer. Specifically, if the applicant's files contain negative information that makes it impossible for you to offer your best possible loan deal, you've got to immediately provide a federally mandated "adverse action" notice to the consumer. That notice, in turn, will alert the shopper that something could be fishy in his or her credit files.
Credit file accuracy already is a hot-button issue. In mid-December, a study by the Consumer Federation of America and the National Credit Reporting Association Inc. documented widespread inaccuracies and omissions in consumer files nationwide. Two of the largest users of credit data, mortgage investors Fannie Mae and Freddie Mac, were hit with class-action lawsuits recently that alleged violations of the Fair Credit Reporting Act.
Now the FTC has settled with a prominent mortgage originator, Quicken Loans Inc., alleging that the lender's online preapproval system failed to provide shoppers the adverse action information required by that law. Quicken Loans denied the allegations but agreed to the settlement to avoid what its counsel described as the "costs of protracted litigation" with the FTC.
Preapprovals for mortgages are widely available from lenders, online and offline. With preapproved financing in hand, home buyers can demonstrate to home sellers, builders and real estate agents that they have the wherewithal to complete the transaction.
In the case of Quicken Loans, visitors to the company's Web site could obtain a preapproval or were advised that they had "unique" borrowing needs requiring additional discussions offline. Shoppers who received the latter typically had negative information in their credit files, according to the FTC, but were not provided adverse action notices.
Such notices are important because they force the lender to divulge the name, address and telephone number of the source of the negative credit information. With that information, loan shoppers can then quickly begin the process of correcting anything erroneous and provide the lender details of positive credit information omitted from the report.
Borrowers "have a right to know" when they're being denied credit or charged more because of their credit files, says J. Howard Beales III, director of the FTC's Bureau of Consumer Protection. The adverse action notice "is the key to maintaining the accuracy of sensitive personal information and the signal to check your credit for accuracy."
Yet all too often, mortgage industry critics charge, today's lightning-quick electronic underwriting systems leave applicants in the dark when they're being charged higher rates or fees because of credit report negatives. Richard F. Le Febvre, president of AAA American Credit Bureau Inc. of Flagstaff, Ariz., says he has seen hundreds of cases in which borrowers were overcharged for home loans because of erroneous credit file information, without ever receiving adverse action notices.
"It is the biggest scandal in the mortgage industry," he says. Credit files can be rife with erroneous entries and mixed identities, according to Le Febvre, but unless the lender provides an adverse action notice, the borrower often ends up paying a higher rate than necessary.
James A. Francis, a Philadelphia lawyer who specializes in fair credit litigation, says part of the problem is that loan shoppers have meager knowledge of their legal rights. Once you give permission for a lender to order your credit files, says Francis, the fair credit law "regulates every stage of the loan process." The statute is especially useful to home mortgage applicants because it requires immediate disclosures by lenders whenever an application -- or preapproval request -- results in anything but the best available credit deal for the applicant.
That could be as little as one-eighth of a percentage point on your rate. Or it could be as subtle as requiring a larger down payment or more costly mortgage insurance coverage. Or it could be a kid-glove handoff of your online preapproval request to a loan officer.
The bottom-line message from the FTC on all this for 2003: We are policing this beat. Consumers and lenders alike should know it.
Kenneth R. Harney's e-mail address is email@example.com.