Washington--The Federal Trade Commission is on the verge of giving borrowers -- including all home mortgage applicants -- a major new tool for understanding how lenders evaluate them as potential credit risks.
In mid-August, the FTC plans to begin shaping final ground rules requiring for the first time that credit reporting agencies disclose and explain all your "credit scores" -- the little-understood but highly influential rankings that frequently determine whether you get a loan or not.
Credit scores are gaining special importance in the home mortgage field because lenders are shifting rapidly to electronic underwriting. Mortgage loan officers taking your application can now access not only your credit history files in a matter of seconds, but can also obtain credit scores evaluating your likelihood of default, bankruptcy, foreclosure or other risk categories.
Scoring programs take varying forms, but they generally are based on interrelationships among select bits of data contained in your credit files at the big three financial information repositories -- TRW, Equifax and TransUnion. The data scrutinized isn't always what you might guess. Not only might a score reflect how many times you paid late on a credit card, for example, but how many open lines of credit you have at a given time. Or how big a down payment you made on your last home purchase.
Using sophisticated statistical models, credit score programs assign numerical weights to certain pieces of information in your file. The resulting total is your score for that program -- a number that typically ranges somewhere between zero and 1,000.
How high or low you score isn't necessarily the key to a loan decision. One lender may consider a score of 550 to be a perfectly acceptable risk. To a lender down the street, on the other hand, it may portend future repayment troubles.
Complicating scores even further is the fact that they are dynamic. They change as the data in your credit files change. Your credit score in January -- based on 1993 reports from your creditors -- may be substantially different from your score this June.
That's why the FTC wants credit reporting agencies to reveal not only raw scores to any consumer who requests them, but to provide intelligible explanations of what the scores mean and how they may be used.
In a recent proposal to the credit reporting industry, the FTC said it wants agencies to provide consumers with "each type of risk score" they have provided to lenders in the last six months, or during the last two years for employment- related credit checks. The scores should be current -- calculated at the time of the consumer's request to the agency for disclosure -- and should be accompanied by a brief statement that explains "how the score may be applied by the user, and how the consumer ranks against other consumers under the scoring model."
Typically you'd get your scores and rankings along with a copy of your current credit report.
"The idea is for people to get as full and as relevant a disclosure as possible" about what creditors are obtaining on them from commercial credit reporting agencies, said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, which has urged the FTC to mandate credit score disclosures.
Under current FTC policies, mortgage applicants who get rejected because of subpar credit scores "often have no idea about it," said Mierzwinski, "and they have no access to the scores themselves or how they're interpreted" by the lender who said no.
By examining one or more credit scores, home loan applicants "will see where they fell short [in the lender's eyes]," according to Mierzwinski, "and can then either correct that -- if there's some factual error -- or can work on the problem and correct it."
If, for example, a borrower learns he's getting poor scores because his monthly credit card balances are seen as ominously high, he may be able to pay some of them off and improve his rating.
Without scores and explanations, he might never comprehend that despite a solid monthly income, his debt level is setting off alarm bells inside an electronic underwriting program.
Although the main trade group representing the credit industry -- Washington-based Associated Credit Bureaus -- has not formally responded to the FTC's proposals, a spokesman indicates the industry will likely go along with the broad thrust of expanded disclosures to consumers.
The upshot for you? Sometime in the coming months it's highly likely you'll probably get your first opportunity to see yourself as your mortgage lender does: not only through your credit report but your competitive risk score -- ranked against thousands of unseen fellow borrowers.
Kenneth R. Harney is a syndicated columnist. Send letters car of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.