Why Your Lender May Keep Your Good Credit to Himself

When you’ve made your monthly home mortgage payment on time for years, you naturally assume that you’ve built up a good credit history.

That credit report or history, in turn, can be crucial in helping you borrow money elsewhere, get a job or even get insurance.

Yet large numbers of American homeowners are the unsuspecting victims of a little-known but growing trend among certain lenders:

Their payment histories are being kept secret, never reported to any credit bureau. Their credit files contain nothing about their home loans, even if they’ve been gold-plated customers of their mortgage companies for years.

Why are lenders doing this? And why don’t any of them disclose the practice to their borrowers? The answers may shock you.

According to federal financial regulators, many mortgage companies--especially those who lend to borrowers with slightly imperfect credit--are intentionally withholding monthly mortgage payment information from credit bureaus.

The purpose is to prevent competing mortgage lenders from identifying their best-paying borrowers and offering them lower interest rates.

The net effect of this practice, according to U.S. Comptroller of the Currency John D. Hawke Jr., is that borrowers who could be paying lower rates for their mortgages are being kept on the books by their current lenders, milked like cash cows.

Equally disturbing, Hawke said, is that consumers who believe they are steadily improving their credit reports by paying their mortgages on time are actually getting nothing for their efforts. As far as credit bureaus know, their mortgages don’t even exist.

In a recent interview, Hawke declined to identify home lenders that fail to report customers’ payments. He said, however, that non-reporting exists not only in the mortgage arena but is spreading fast to the credit card field, in which some of the largest bank credit card issuers have stopped reporting key information on their customers.

One lender active in the “subprime” (less-than-perfect credit) mortgage market confirms that the practice is widespread.

“I see it every day,” says Allen Hardester, a senior executive with Maryland-based Havenwood Financial Corp. With consumers’ financial profiles readily available via electronic credit file data, says Hardester, lenders don’t want potential competitors to know about their best-performing, most profitable customers.

“If you’re getting 11% from somebody who’s paid on time forever,” he says, “you don’t want to lose them to [a competitor] who’ll charge them 7% or 8%,” the rate they deserve.

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The trend of withholding customer payment data is so troubling to financial regulators like Hawke that the federal government is likely to soon publicly urge banks and other lenders to stop it or risk legislation by Congress.

The problem is that, under the American credit data gathering system, withholding credit information violates no federal law.

The system is essentially voluntary for everyone involved: Three huge private credit “repositories” receive billions of bits of data on consumers daily, sent in voluntarily by creditors of every imaginable type--banks, department stores, credit card companies, finance companies, etc.

Those repositories--Equifax, TransUnion and Experian (formerly TRW)--are well known to many consumers as the sources of their credit reports.

What few consumers realize, however, is that their credit files are almost totally dependent on the willingness of their creditors to voluntarily pass on data to the repositories, with no compensation.

The traditional theory behind the whole system has been that because all potential creditors benefit from access to accurate and complete credit histories, it is in everyone’s self-interest to supply full data on borrowers to the repositories.

But that traditional theory may be unraveling. In the credit card field, some of the largest card issuers no longer report the upper limit of each cardholder’s credit line or the customer’s highest balance on the card.

Though most card issuers are reluctant to discuss the subject, one major lender, Household International, confirmed that it has begun withholding data selectively.

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Charles Albright, chief credit officer for Household, said in an interview that “when we found out that several of the major [card companies] stopped reporting” key items from their customers’ credit records, “we did the same” as a defensive measure.

Hawke says that the emerging problem of credit data withholding is so ominous that it “might well require legislation” to correct it.

Although he would prefer that lenders voluntarily change, he said that in his “personal opinion,” it is “not a big stretch to say that it is an unfair and deceptive practice”--open to federal legal attack--for mortgage lenders to fail to report customers’ good payment histories to credit bureaus and not disclose that practice upfront.

How do you find out if anyone’s withholding key credit data on you? Order a copy of your credit report from each of the repositories. Then, if you find holes, you may want to find a more consumer-sensitive lender.

Distributed by the Washington Post Writers Group.