What could be one of the most helpful, pro-consumer reforms in years for home mortgage applicants has been bottled up at the Federal Trade Commission and the Federal Reserve for well over a year.
Worse yet, say consumer advocates and credit industry experts, the final version of the reform may be considerably watered down from what Congress intended. Here's the background:
Nearly two years ago, President Bush signed the Fair and Accurate Credit Transactions Act of 2003. Among other provisions, the legislation required all lenders to notify loan applicants whenever their credit files contain negative information that triggers "materially less favorable" rate quotes or fees compared with a "substantial proportion" of their other applicants.
The requirement was a congressional response to the widespread use of electronic "risk-based pricing" systems that lenders use to make "tiered" rate quotes to applicants for mortgages and other credit. Applicants with good scores and clean credit files get the best rates; people with spotty credit histories get progressively worse quotes, based on their scores.
Risk-based pricing technology allows lenders to almost never say no. Instead of rejecting applications, they simply ramp up the rates and fees as credit scores decline. Even if applicants have low scores, they still get a quote -- though in a 6 percent market, it may be 7.5 percent or 8 percent. Or a lot higher.
The key problem with risk-based pricing is that it is invisible to most consumers, especially first-time home buyers or loan applicants with "thin" credit files. Nobody, least of all the lender, tells them: "Excuse me, but you really should check the information in your credit files. I just quoted you a higher-than-typical interest rate and higher fees, based on your credit data."
Risk-based pricing is not necessarily "correct" pricing. The systems are blind to botched information sitting in consumers' files, a situation several national studies have documented as commonplace. They are also blind to the bad behavior of lenders and other reporters of credit data themselves. For example, if you've made on-time payments but your credit card company never has reported them, your FICO scores from Fair Isaac Corp. are likely to be lower than they should be.
But risk-based pricing systems offer no clues about problems like these that can cost you thousands of dollars in higher payments during the term of your mortgage. Which is why Congress directed the Fed and the FTC in December 2003 to come up with a risk-based pricing notification for consumers that would, in the words of then-FTC Commissioner Timothy J. Muris, "better reflect the modern credit market."
So where is this consumer-friendly notification 23 months after congressional action? The FTC confirms that it is working jointly on the project with the Fed. But its project director, staff attorney Katherine Armstrong, told credit industry executives at a Nov. 2 conference that there is no target date for issuing the final product.
What's going on here? Consumer advocates worry that the banking and mortgage industries are putting pressure on the FTC and the Fed to water down and delay implementation of the notification. Edmund Mierzwinski, consumer program director for the District-based U.S. Public Interest Research Group, said he fears the final form of the risk-based pricing alert may "lean too heavily" in banks' favor and be of little practical value to most applicants.
To fulfill congressional intent, Mierzwinski said, the risk-based pricing notice cannot simply be boilerplate language handed out to all applicants. Rather, he said, it must be specific to individual consumers' applications -- an alarm bell -- that they have been "priced up" into a higher cost category because of negative information in their credit files.
Some credit industry leaders agree. "There needs to be a clear notice that tells applicants exactly what is going on," said Terry Clemans, executive director of the National Credit Reporting Association. "It has to alert them that there is a problem."
Some of critics' fears are being fed by drafts of recommended risk-based pricing alerts circulated among lenders' attorneys. One published in the Mortgage Law Compliance Insider newsletter offers a "model notice." It simply says, "The credit terms you (are being/will be) offered (are/will be) based, in whole or in part, on information in your credit report." The model notice then identifies the source of the credit information and provides contact information.
Picture yourself at the mortgage officer's desk. You've just gotten a rate quote for the loan you need to buy the house of your dreams. The rate looks high, but hey, you've got the loan. With this bland, nonspecific handout, are you likely to say, "Whoa! Better go check for errors or omissions in my credit files"?
Ken Harney's e-mail address is firstname.lastname@example.org.