When Congress returns from its summer vacation, look for a new push on a consumer issue directly affecting millions of home mortgage applicants: mandatory nationwide disclosure of the scores and credit data the lender used in approving, disapproving or setting the interest rate on the loan.
Though the legislation is aimed at helping all mortgage applicants, its heaviest effect would be on borrowers who are “mispriced” by loan officers. These are people whose credit scores qualify for lower rates and fees than their lenders actually charge them. Mortgage industry experts estimate that 350,000 to 400,000 applicants every year are overcharged when lenders incorrectly label them higher risk or “sub-prime” because of their credit scores.
Industry data indicate that even some borrowers classified as D or C grade by their lenders--and charged anywhere from 4 to 8 percentage points higher on interest rates than the prevailing market--actually have credit scores that merit the most favorable rates available. But because those applicants typically have no knowledge of their scores, or are not equipped to interpret them, they needlessly pay higher rates and fees.
A bipartisan bill sponsored by Sen. Charles E. Schumer (D-N.Y.) and Sen. Wayne Allard (R-Colo.) would require all lenders and brokers to provide mortgage applicants whatever credit scores they used in loan underwriting and pricing. It would also require them to furnish explanatory information on the “key factors” that “adversely affected” the consumer’s score.
Currently only California gives loan applicants a legal right to obtain their scores from lenders. The Schumer-Allard bill, the Consumer Credit Score Disclosure Act of 2001 (S.1242), would federalize score disclosure for all home real estate-related financings, including home equity loans.
During the past decade, credit scores have become critical, though poorly understood, elements in the American home-buying and financing process. The most widely used scores--dubbed FICOs for their developer, Fair, Isaac & Co.--often determine whether you are granted a mortgage and what interest rate you pay.
Although Fair, Isaac urges loan officers to look at other factors in an application, many mortgage brokers use FICO score cutoffs to price loans. Scores below set minimums--say 620 on a scale that goes to 800--are steered to higher-rate loan programs, or rejected.
If a 30-year fixed-rate mortgage at 7% requires a minimum score of 680 and you’ve got a 630, a broker may not take the time to puzzle out why you’ve fallen short. It’s much easier to simply quote you 7.5% and tell you--if you ask--that you’ve got some dents somewhere in your credit file.
With your credit score and explanatory information in hand as a matter of federal right, you’ll be able to stop the process and say: Hey! Why is my score 630? I’ve had perfect credit all my life. And why is my No. 1 negative credit score factor “delinquent accounts?” I don’t have any delinquencies. Let me see my full credit report before we proceed further on this mortgage.
A separate bill pending in the House would also require routine disclosure of credit scores and credit bureaus to provide one free credit report annually to any consumer who requested it. Sponsored by Rep. Harold Ford Jr. (D-Tenn.), the Fair Credit Reporting Act Amendments of 2001 (H.R. 1176) would also attempt to improve the sometimes cumbersome process of correcting erroneous information in electronic credit files.
It would require the Federal Trade Commission and the Federal Reserve Board to conduct intensive studies on how well credit bureaus and creditors perform in correcting inaccurate information in consumer credit files and in investigating and resolving disputes between consumers and creditors over credit-file data.
While Congress deliberates on federalizing score disclosure, how can you make sure you’re not being mispriced because of allegedly low credit scores?
First, before applying for a home loan, order copies of your current credit reports from the three big credit repositories--Equifax, Trans Union and Experian. Look for any erroneous information in each report, such as debts and delinquencies that aren’t yours. If you find problems, write to the creditors involved and request immediate corrections.
Second, you can order your FICO credit scores online, plus a full credit report and explanatory information, for $12.95 at https://www.myfico.com or https://www.equifax.com. Note, however, that this FICO score is based only on information in your Equifax credit file.
Finally, be upfront with your loan officer or broker. If he or she tells you your score is lower than needed for the best rate, ask why. Ask to see the “reason codes” that come with all FICO scores. They will guide you to the weak points of your credit file. If they’re correctable, you’ve got a good shot to boost your score and lower your rate--even without federal legislation.
Distributed by the Washington Post Writers Group.