When information in home buyers' credit files causes them to be charged $500 to $900 a month for mortgage insurance that should normally cost $150 or less, is it anybody's responsibility to alert them to the problem?
Is it the lender's job? The mortgage insurer's? Or nobody's?
A potentially far-reaching group of federal lawsuits is seeking definitive answers to these questions. Whatever the result, the cases throw fresh light on an issue many home buyers know little about when they apply for a mortgage: Your national electronic credit files can cost you a bundle, not only in interest charges but also in mortgage insurance premiums, without you having the slightest hint.
In class-action and individual suits against the seven insurers who make up the private mortgage insurance (PMI) industry, home buyers claim that under the federal Fair Credit Reporting Act, those firms are required to provide "adverse action" notices to loan applicants whenever credit file data causes borrowers to pay premiums at higher than standard rates. All the home buyers were hit with unusually high PMI premiums -- up to $905 a month -- but never received the notices, the suits allege.
No PMI company makes such disclosures now. They look at a borrower's credit reports and scores supplied by their lender client, and they price their premiums based on the perceived risk. Mortgage lenders generally say nothing about credit file problems unless the applicant asks or is rejected for a loan.
Home buyers' lawyers say the federal statutory language is clear on the issue: The fair credit law requires insurance companies that base "an increase in any charge" on information in a consumer's credit files to alert the borrower with an adverse action notice.
The theory is that notice affords the consumer the opportunity to put the transaction on hold, check out the credit data for possible errors, and then either proceed with or withdraw the application.
The home buyers' arguments have persuaded at least two federal district courts -- one in Florida, and another in Illinois last month -- to reject PMI companies' efforts to dismiss the suits outright.
"We think we have the law on our side," said Terry A. Smiljanich, a partner in the Tampa law firm of James, Hoyer, Newcomer & Smiljanich. "We are not talking about increases of $30 or $40 a month on people's premiums. We are talking about $700 and $800 and $900 a month in premiums on a $200,000 mortgage."
Smiljanich, whose firm specializes in insurance industry litigation, estimates that more than 1 million homeowners nationwide have been unwitting victims of the mortgage insurance industry's failure to warn them about credit file issues.
Anthony D. Shore, assistant general counsel for PMI Mortgage Insurance Co. of Walnut Creek, Calif., said Smiljanich and the home buyers have it all wrong. "Mortgage insurance is part of the credit decision and the premiums are part of the finance charge. That's why adverse action notices are given by lenders," not the insurers, when applicants are rejected, he said.
In a filing in one of the Florida cases, lawyers for another industry giant, Milwaukee-based Mortgage Guaranty Insurance Corp., argued that "unlike other types of insurance, mortgage insurance [ordered by lenders] exists solely as a credit enhancement in a transaction." The judge in that case, however, rejected MGIC's argument, ruling that "a plain reading" of the fair credit law supports the home buyers' claims.
If found to be guilty of "willful failures" to comply with the federal credit statute, the PMI industry could be subject to fines of up to $1,000 per violation -- a potentially staggering sum for an industry that insures more than 1 million new borrowers a year and has an estimated 4 million to 5 million policies outstanding. Neither side in the dispute would venture a prediction as to when the cases might be decided or settled.
Meanwhile, regulators at the Federal Trade Commission and other agencies are drafting a new "risk-based pricing" rule that would require all mortgage lenders to alert applicants whenever their credit file data trigger quotes on rates or fees that are less favorable than the best available at the time.
What does this mean for you? Don't wait for a lender or insurance company to alert you to negative information -- erroneous or correct -- in your credit files. Order copies of your credit reports long before you apply for a home loan. That way you won't be surprised with $500 or $600 in unexpected monthly loan fees. You will know you have to clean up your files months before talking to mortgage lenders.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.