Can you say for certain that you got the best possible deal on your mortgage when you bought your home or when you refinanced your loan?
Most Americans cannot answer that basic question. But now the Federal Trade Commission and the Federal Reserve Board are working on a key consumer reform that should help.
The Fair and Accurate Credit Transactions Act of 2003, signed into law by President Bush in December, requires lenders to inform their customers whenever their "risk-based pricing" systems detect negative credit file information that triggers a higher rate quote or fees from the lender. Congress assigned the FTC and the Fed joint responsibility for writing rules to implement the requirement.
The agencies' work is all behind closed doors, but here's why the forthcoming rules could have huge positive effects on home buyers.
In today's mortgage market, the rates and fees you are quoted almost always come out of an electronic black box rather than a loan officer's head. Risk-based pricing systems pull your credit files from the three national credit bureaus, grade you according to your perceived risk of default, down payment and appraisal, and spit out a rate quote.
The key element governing that quote is your credit. If there is erroneous negative information or omissions of positive payment information in your files, you are likely to be "priced up" by the system -- that is, quoted rates and terms that are not as favorable as the lender's best available that day.
The rate bump might cost you thousands of dollars over the term of the mortgage, but if you accept the offer, no one will ever tell you what happened. The loan officer is not required to say, "You know, we're charging you a quarter of a point extra because of some weird stuff in your Equifax files. Maybe you ought to check it out before we proceed further."
Under the rule being drafted by the FTC and the Fed, a lender using a risk-based pricing system will have to notify you if your credit file triggers an offer that is "materially less favorable" than the rates or terms available to a "substantial proportion" of other applicants in its customer base.
Congress's idea here was to send up an alert whenever credit data -- correct or not -- was about to cost you money for a mortgage, credit card or other loan. Before you accept this risk-based loan quote, in other words, you should get hold of your credit files and make sure they're accurate.
If you were late on car payments or you've run your credit cards to the max, then sure, your credit score will be depressed and you're going to pay more for your mortgage. But if the facts got scrambled for some reason -- say, your name and Social Security number were mistaken for those of some deadbeat -- then you need to correct that information before paying a needlessly elevated price for your loan.
The Fed and the FTC are trying to figure out such issues as the timing of the risk-based pricing notifications and the meaning of the trigger term "materially less favorable."
At best, the notices will be made in writing or orally when the mortgage quote is rendered by the lender or broker. Lenders, however, are concerned that this could disrupt the normal flow of the transaction and scare customers away from accepting the deal as offered.
Lenders also favor more generalized notifications rather than highly specific, alarm-bell alerts that warn applicants that something is fishy in their credit files.
Whatever the Fed and the FTC decide, here's the lesson for anyone applying for a mortgage: Institute your own risk-based pricing notification program now. At application, ask the loan officer or broker whether you will be evaluated by a risk-based grading system. Then ask the loan officer whether the quote of rates, terms or the program you received was negatively affected by credit file data or credit scores.
Ask point blank: Would I get a better deal if my scores were higher? Any ethical broker or loan officer should level with you. If there is any indication you have been priced up, ask to see the credit information that triggered the rate bump. Or get the name and contact numbers for the company that provided the credit file data.
Then bird-dog the problem. If there is junk or omissions in your credit files -- and every national study suggests there's a good chance that there will be -- put the mortgage application on hold until you get the bad stuff out.
Kenneth R. Harney's e-mail address is firstname.lastname@example.org.