The country's largest source of home mortgage money, Fannie Mae, quietly is working on a policy change that national credit industry leaders call dangerous and potentially harmful to borrowers and taxpayers alike.
Though the congressionally chartered company has not made a formal announcement, it plans to allow certain mortgage lenders to sharply cut back on the amount of credit information they order on home loan applicants.
Rather than requiring examination of applicants' detailed credit histories on file at all three of the national credit bureaus -- Equifax, Experian and Trans Union -- Fannie Mae will buy mortgages underwritten with information from one of the big bureaus.
The planned departure from current practices will be tested with a limited number of lenders later this year, according to a senior Fannie Mae official. If the results are positive, the program will be expanded to a larger number of lenders, primarily those who use the Internet and telemarketing to attract applicants.
Though Fannie Mae's move may not sound radical, credit industry experts say it is -- and they oppose it vehemently. The reason why virtually all major mortgage lending organizations examine applicants' credit files from all three national credit bureaus, they argue, is that the information on each individual varies from bureau to bureau, sometimes significantly so.
Studies on credit scores have shown that variances of 50, 80 and even 100 points or more are not uncommon on some individuals, based on differences in information contained in their files at the three national bureaus. Variances that large can disqualify applicants for a home loan or push them into a "subprime" credit category costing thousands of dollars more in interest and fees over the life of the mortgage.
For example, say you check your FICO (Fair, Isaac & Co.) score at Experian and find that it's 720. That's excellent. Then you check your score based on your file at Equifax and find that it's 40 points lower, a 680. That still signifies good credit and won't hurt you with most lenders.
But then you pull your score from your Trans Union file and discover you've got a 619. Now you're on shaky ground. You probably won't qualify for the very best rate quotes from certain lenders. You may even be hit with a higher interest rate, since by some definitions, FICO scores under 620 are subprime.
But how could there be a 101-point variation in your scores?
Each of the bureaus receives credit information, public records, debt-collections reports and other bits and pieces of credit data from somewhat different networks of sources in each geographical region. In certain states and cities, Equifax has the "deepest" -- most detailed -- information on you from the widest spectrum of creditors, public agencies, law firms and the like. In other areas, Trans Union has the deepest files, and in still others Equifax does.
Only by accessing files at all three national bureaus, and then merging them, can a creditor be certain of getting everything on file about you -- the good and the bad. Pamela Johnson, Fannie Mae senior vice president, doesn't dispute this, but says that the companies' "risk assessment tools are now so sophisticated that we are confident in our ability to [evaluate] risk" using one credit bureau file.
Fannie Mae is moving in this direction for several reasons, said Johnson. First, it will cut credit-check costs for mortgage applicants and for lenders. It will allow online mortgage companies to simplify the underwriting process: If a borrower's single credit file looks good, the loan will be cleared for immediate sale to Fannie.
Finally, says Johnson, the traditional three-bureau, merged credit file has its own inherent imperfections. For instance, if one of the bureaus' files contains erroneous information not present in the other two, the final, merged report will contain the erroneous data -- possibly to the applicant's detriment.
Credit industry critics, who concede that they stand to lose substantial revenue under Fannie Mae's plan, warn that pulling only one credit file could open Pandora's box.
"If only one file is [examined] ... will that file be missing important [negative] information?" asks Terry W. Clemans, executive director of the National Credit Reporting Association, an industry group.
"Will a loan decision be based on credit data that does not even belong to the applicant? How can the minimal savings this plan might provide consumers justify the potential overcharging of thousands of dollars in interest" due to erroneous, negative information?
Fannie Mae's Johnson says the corporation has heard these arguments and is not persuaded.
Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington D.C. 20071.