When you're quoted a higher interest rate than you deserve because of erroneous information in your credit file, wouldn't you like someone to red-flag the problem for you?
That's an especially pertinent question in today's mortgage market as lenders ratchet up their credit score minimums and use electronic "risk-based pricing" to set rates and other loan terms. If you really deserve a 720 FICO score, but you have been pulled into the low 600s because of incorrect or missing information in your national credit bureau files, you really ought to know about it.
To help with this, two federal agencies have proposed risk-based pricing alert procedures that would cover all lending situations -- home mortgages, credit cards, auto loans, among others. As part of credit reform legislation enacted at the end of 2003, Congress directed the Federal Reserve and the Federal Trade Commission to devise a system that would require lenders to notify consumers whenever credit-file data contribute to a less favorable credit offer than they might otherwise receive.
It took four years, but the two agencies published their risk-based pricing alert proposal in mid-May. After a three-month comment period open to the general public and affected industry groups this summer, the FTC and the Fed could adopt the plan this year.
Here's how it might work for home mortgage applicants: The bank pulls your credit files and prepares a rate quote. If your score comes in too low to qualify for the lender's best deals, the loan officer would be required to use one of several alternative methods to notify you.
Using one method, the bank could provide you the credit score that governed your rate quote, along with a graphic representation of how your score compares with other mortgage applicants, plus the key factors in your files that depressed your score. The notice also would include information on how to contact the credit bureau that provided the score and how to obtain your full credit report.
Because you wouldn't yet be contractually committed on the mortgage, you'd be free -- if you so chose -- to call a timeout and check what's in your credit files. If derogatory information was erroneous -- or if some of your creditors had failed to report your on-time accounts to the national bureaus -- you'd be able to correct the files before proceeding further.
