Unreported Credit Improvement

If you’re among the millions of Americans whose credit histories aren’t quite perfect, answer these two questions:

* Have you been trying to improve your credit standing by scrupulously paying your mortgage and credit card bills on time every month?

* Would you be upset to learn that your solid, on-time payment performance isn’t being documented anywhere and therefore won’t help you get a lower interest rate the next time you apply for a home mortgage or an equity loan?

Get ready to be upset.

Federal officials and private-sector credit agencies say the practice of non-reporting of mortgage and credit card payment performances is abusive and widespread.

Federal financial regulators recently issued an advisory to the nation’s banks urging them to take defensive steps to guard against the potentially harmful effects of the practice.

Here’s what’s involved:

You might assume that all your major credit transactions--how much you borrowed on your mortgage, how high a limit you’ve got on your credit card--show up on your credit files. But that’s not the case, especially if you’re a homeowner with some minor dents in your past payment performances.

Some Lenders Hide You From Competitors

That’s because some mortgage lenders and credit card companies hide you from potential competitors. They no longer report your payment histories to the three national credit reporting bureaus--Equifax, Experian and Trans Union.

They do that, according to federal officials familiar with the practice, to keep other lenders from knowing how solid and profitable your account is. Aggressive lenders routinely surf through credit files electronically to identify and harvest potential prospects for home refinancings, home equity credit lines and card offers.

Among the most attractive prospects: people who are paying higher-than-market interest rates on their mortgages because of prior credit problems but who nonetheless make their payments on time every month.

Many of them expect that their on-time payments will help reestablish their credit records and enable them to qualify for lower rates in the future.

But that’s not necessarily true, says David Gibbons, deputy comptroller of the currency. Non-reporting of payment performances by some mortgage lenders means their customers “aren’t getting a fair shake,” he said.

They’ve started as borrowers with subpar credit, Gibbons said, but because their excellent recent performances aren’t being reported to the credit bureaus, their files show no improvements.

Gibbons believes the practice of selective non-reporting could have fair-lending implications as well:

If statistical studies are correct that minority groups are more likely to carry subpar credit scores than other groups, he says, then minorities--especially African Americans and Latinos--could be hurt by non-reporting more than other consumers.

Financial regulators decline to identify individual companies that engage in non-reporting, but they say some are among the largest lenders in the United States.

For its part, the American Financial Services Assn., an organization representing nearly 400 consumer lenders, announced recently that its members have agreed not to withhold borrower information from credit bureaus.

Among the companies covered by the pledge are giants such as Norwest Financial, GE Capital and Household International. Last year, Household--a major home equity lender--confirmed that it engaged in selective non-reporting as a defensive measure against competitors.

The mid-January advisory letter to banks, issued by the five major financial regulatory agencies, focused on the flip side of the non-reporting problem: the implications for the “safety and soundness” of financial institutions that lend to consumers whose credit files are incomplete.

Banks evaluating loan requests from borrowers who have frequently been late--but haven’t been documented as such because their lender never reports to credit bureaus--”could inadvertently expose themselves to increased . . . risk.”

The advisory urged banks to devise ways to protect themselves against lending blindly to applicants whose credit records are “incomplete.”

How to Guard Against Non-Reporting

But, aside from the banks’ problems, what about consumers being victimized by the non-reporting trend? What can you do to guard against it?

Two thoughts:

* Periodically get copies of your credit report from the three bureaus and look for missing data. Has your mortgage lender regularly reported your payments? Does your credit card company report all the key information it should, such as your top credit limit?

If you discover information missing in one or more of your reports, demand to know why from your lender.

* Did your lender promise or imply that by taking out your current loan and repaying it on time you could improve your overall credit score in the future?

And do you now find that the same lender isn’t even sharing information about your on-time performance with the credit bureaus that maintain your files and compute your credit score?

Sounds like that could be a false and deceptive trade practice, which your state attorney general, or even the Federal Trade Commission, might like to learn about.

Distributed by the Washington Post Writers Group.