Things to do while waiting for credit reforms to kick in

Nation's Housing

December 21, 2003|By KENNETH HARNEY

WHERE ARE the free annual credit reports for everybody that Congress and the president recently promised? And where are the new "risk-based pricing" alerts that tell you you're being charged a higher interest rate on your mortgage because your credit report has problems?

The short answer is this: They are a long way from reality. Maybe as much as a year. The credit reform legislation signed by President Bush this month gives the federal government and the three national credit bureaus up to 12 months to devise operational plans, rules and phase-in periods for a vast array of provisions, including these two.

The Federal Trade Commission has six months to figure out how to create a free credit-report program that is workable both for consumers and the bureaus. With more than 200 million consumers in the three bureaus' files - all of whom theoretically could call in for free credit reports the first day they're available - that's a complicated task.

The same is true for the pricing alerts. How and when do you tell a mortgage applicant that his or her credit scores triggered an interest-rate quote higher than the best available? That's a critically important consumer issue in this era of mass electronic underwriting, where loan officers' desktop computers can access your credit file data instantly.

When homebuyers ask a lender for its "best" mortgage deal, who tells them that their particular "best" rate and fees aren't really the very best? Say you're a first-time purchaser and you haven't examined your credit reports recently. You are not aware that there is erroneous or incomplete information sitting in your credit files, artificially depressing your scores.

Who tells you about that? Now, nobody does. You pay more without the slightest hint that your credit files caused you to be "priced up."

Under the new credit reform legislation, however, creditors - including all mortgage lenders - will be required to give you a "risk-based pricing" notice whenever the deal for which you qualify is "materially less favorable" than what you'd get with higher credit scores.

But when do you receive that disclosure? While you're sitting at the loan officer's desk and you still have a chance to correct any erroneous negative information in the files and qualify for a better deal on the mortgage? Or sometime much later, after you're stuck with loan terms that you accepted in ignorance of the false information in your files?

"Timing of delivery [of risk-based pricing alerts] is just one of the issues we are looking at," said Joel Winston, the FTC's associate director of financial services. "We will need to balance the rights of the consumer with those of the lender" in determining when and in what form to make the risk-based pricing disclosure.

"We don't want to scare people" out of a loan application that may be precisely the deal they wanted, said FTC financial practices staff attorney Clarke Brinckerhoff. In other words, the FTC doesn't want to needlessly blow up home-loan applications and other credit transactions that are perfectly acceptable to the borrowers.

On the other hand, Winston said, the FTC recognizes that Congress' purpose in requiring the new disclosure is to alert consumers to possible problems in their credit files.

Once applicants receive the risk-based pricing notice, they will also be entitled to free copies of their credit reports. With those in hand, the borrowers can then determine whether the negative information is accurate or not.

Over the coming year, free credit reports will continue to be available under existing law to anyone rejected outright for a loan. That happens frequently in some areas of consumer finance, but much less so in the mortgage arena. That's because risk-based pricing systems simply push applicants with "subprime" credit into progressively higher-rate, higher-fee loans.

So what should homebuyers and others do while they wait for the credit reforms to kick in? For starters, order your credit report long before applying for any loan.

Second strategy: Always ask loan officers three key questions. Are the loan terms you're quoting me the result of risk-based pricing? Did my credit scores cause me to be "priced up" - higher than the best available? And, finally, could you show me the credit report information used by the pricing system?

Bottom line: You don't have to wait a year for credit reforms. You can achieve a lot of them on your own, right now.

Ken Harney's e-mail address is

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