Insurers must warn of credit problems

Nation's Housing

March 25, 2006|By KENNETH HARNEY

Do you want to know when errors or omissions in your credit files raise your monthly mortgage payments by hundreds of dollars?

Of course you do. But under current mortgage industry practices, you may not get even a hint about costly trouble buried away in those files when you apply for a low-down-payment loan that requires mortgage insurance.

That's because mortgage insurers generally have not issued what are known as "adverse-action" notices when they double or triple monthly premium charges because of negative information - correct or incorrect, complete or incomplete - in consumers' national credit bureau files.

Now the Federal Trade Commission is weighing in to change that. In a legal brief submitted March 17 the FTC asked a U.S. appellate court in Philadelphia to rule that whenever a mortgage insurer raises a borrower's premiums because of negative credit file information, the insurance company must let the borrower know.

The FTC, which oversees federal credit laws, intervened in a case involving homeowners who were slapped with $903.58 monthly mortgage insurance premiums - about triple what they had anticipated. The reason: the mortgage insurer, Radian Guaranty Inc., of Philadelphia, had found negative information in the homebuyers' credit files. As a result, the applicants appeared to be terrible credit risks, when in fact their files contained outdated and incorrect data.

Like most companies that check consumers' credit, Radian did not know the negative data in the homebuyers' files was inaccurate. The company simply priced its premiums to cover the perceived extra default risks.

In such a situation, said the FTC, Radian should have issued an adverse-action notice to the plaintiffs. Adverse-action notices are designed to alert consumers that their credit files contain derogatory information, and that they should check immediately to determine whether anything is amiss. The notices also require that the credit bureaus provide free credit reports to consumers who request them, and to reinvestigate and correct disputed or incorrect information.

Mortgage lenders typically issue adverse-action notices whenever they reject a loan application on the basis of credit file data. Mortgage insurers, however, traditionally have argued that they are different and have no such responsibilities when they increase applicants' monthly premium charges. In recent months, Mortgage Guaranty Insurance Corp. of Milwaukee and some other insurers have begun issuing adverse-action notices in certain circumstances, but firms such as Radian have stoutly refused.

Radian argued in the current case that its customer is the mortgage lender, not the homebuyer, and the beneficiary of its insurance. Its coverage protects the lender from the risks of default, even if the monthly premiums are paid by the borrower. It has no direct contact with the borrower, other than receiving premium payments forwarded by the lender. Therefore it should be spared the burden of coming between its customer and the borrower, and potentially unraveling or delaying the closing of the mortgage transaction.

Radian convinced a federal District Court on that point, sending the issue to the federal appellate level. That, in turn, prompted the FTC to intervene on the consumers' behalf and to let the court know how the federal government's own credit experts interpret the law.

The brief makes that very clear: Mortgage insurers are covered by the fair credit law's adverse-action rules.

If they don't alert the consumer that they're at risk of being charged double or triple what they otherwise would pay in monthly premiums, who is going to? Certainly not the lender.

"Absent the notices," wrote FTC attorney Lawrence DeMille-Wagman, "the consumer may never know to invoke" his or her federal legal rights, "and may never even learn that [a premium increase] has occurred."

The takeaway here for you: If your low-down-payment loan requires mortgage insurance, tell your loan officer that you want to be notified if credit-file information raises the cost of your monthly premiums.

Better yet, avoid potential problems altogether: Weeks or months before you apply for a mortgage, order copies of your three national credit bureau reports - they are free of charge once every 12 months.

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