Credit-score secrecy suddenly on the way out

Nation's Housing

May 28, 2000|By KENNETH HARNEY

HOME mortgage borrowers who've been frustrated by not being able to obtain - or understand - their credit scores are in for some good news: Two of the three national credit bureaus, plus the country's largest source of home loan money, plan to disclose credit-scoring information helpful to consumers beginning as early as this summer.

Credit scores have become highly controversial because they are kept secret from most loan applicants, but often are critical determinants of the interest rates and fees that homebuyers are charged. Lenders are prohibited from revealing scores to consumers, except those who are rejected for a loan.

Opposition to credit-score secrecy is increasing. Consumer groups are calling for more openness, and legislation has been proposed to require disclosures. In Congress, the Fair Credit Full Disclosure Act (H.R. 2856), sponsored by Rep. Christopher B. Cannon, a Utah Republican, is awaiting action. In the California Legislature, a bill is pending that would force lenders to provide mortgage applicants their credit scores.

But government intervention may prove unnecessary. Two of the three major suppliers of consumer credit data - Trans Union Corp. and Experian - plan to pre-empt legislative moves by offering new services designed to explain loan applicants' credit-risk ratings and offer advice on how to improve them. Perhaps even more important, the nation's largest supplier of home mortgage money, Fannie Mae, plans to cease using traditional credit scores on all home loans it purchases through its electronic underwriting system, as early as July. According to a Fannie Mae official, the giant company plans instead to evaluate the raw data in mortgage applicants' credit files using its own, proprietary rating models, and to provide borrowers with an independent assessment of their credit standings and needs.

The Federal Housing Administration (FHA) is also working on a replacement for traditional credit scores that, like Fannie Mae, would show borrowers where and how they need to improve their credit histories - if necessary - to qualify for mortgage money.

The net effect of all these moves will be to sidestep the current controversies over the most widely used form of credit scores, so-called "FICO" scores, named after their developer: Fair, Isaac & Co.

FICO scores are generated from complex statistical models that assign applicants numerical risk ratings based on their credit file data. Scores run from the 400s to above 900. People with scores above 700 are considered excellent credit risks; those with scores below the low 600s are considered more likely to default, and may be charged higher fees and interest rates.

Fair, Isaac prohibits commercial users of its scores from revealing them to individual consumers, except in connection with application rejections. Fair, Isaac's policy is based on the belief - shared by many lenders - that FICO scores in and of themselves are inherently confusing. They don't tell borrowers how to raise a low score. And they don't provide much detail about why the applicant's score is what it is.

Trans Union's forthcoming answer to this problem, outlined in an interview May 19 with Executive Vice President Walter Rothschild, is particularly intriguing.

Later this year, Trans Union will offer any consumer who requests a credit report a free, statistical evaluation of his or her credit-risk profile. According to Rothschild, the analysis will be based on Trans Union's statistical modeling software and will show a consumer "where he or she ranks" as a credit candidate compared with the millions of credit files maintained electronically on individuals nationwide by Trans Union.

The new Trans Union consumer score will allow prospective homebuyers or other borrowers to periodically "check in" for a statistical assessment of their credit, much as a lender would view them.

The score itself will be free, but the accompanying credit report will cost about $8 in most areas, according to Rothschild. Trans Union will continue to supply FICO scores to lenders who request them on applicants.

But lenders using Fannie Mae's popular electronic underwriting system known as Desktop Underwriter soon may not be requesting FICO scores as frequently as they currently do. That's because Fannie Mae, which buys billions of dollars of home mortgages a year through its electronic system, will stop using FICO scores altogether to evaluate applicants and will substitute its own credit assessments.

Beginning in July, the new Fannie Mae credit-rating approach will also supply lenders and consumers with specific information about what credit factors raised or lowered the applicant's risk profile.

Fannie Mae's Raschelle S. Burton says that, while the company believes that FICO scores "are very useful and predictive," they are "opaque" to the loan applicant. Fannie Mae wants to substitute a more consumer-friendly approach that educates and informs borrowers while achieving the same risk-rating goals as FICO scores.

The outlook? A lot more sunshine for homebuyers and those refinancing on the mysterious black box known as credit scoring.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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