White House favors greater disclosure on loan decisions

THE BALTIMORE SUN

IN A SURPRISE move that delighted housing advocates, the Bush administration now favors greater disclosure whenever a loan applicant is quoted a higher rate because of credit file information.

In a policy statement, Treasury Secretary John W. Snow said the administration supports "granting the Federal Trade Commission specific authority to require notices to consumers when their credit scores caused them to be offered less favorable rates than for which they applied."

Though it may sound technical and bureaucratic, the policy announcement has potentially far-reaching financial impacts on mortgage applicants nationwide. That's because the majority of them are now quoted interest rates that are directly tied to electronic "risk-based pricing" systems heavily dependent on credit scores.

The quote differentials may be subtle - a quarter of a percentage point in some cases - but the mortgage payment differentials spread over many years are often substantial. More importantly, the one-quarter or one-half of a percent higher rate you are charged may be for the worst of reasons - namely, your credit files contain erroneous, outdated or incomplete information.

The administration's policy statement supports consumer groups' calls for greater disclosures when you are "priced up" behind your back because of credit data.

"To us, the principle should always be: Whatever the lender sees [in the way of credit information] that causes the higher rate, then notify or make the information available to the applicant," says Brad Scriber, housing coordinator for the Consumer Federation of America.

Take this hypothetical case. Say you apply for a mortgage to buy your first home. The loan officer taps your personal identification data into a computer terminal hooked into a risk-based pricing system, and comes back with a rate quote of 5 3/4 percent on a 30-year loan. The quote strikes you as slightly on the high side, but acceptable. You sign up.

But unknown to you, the same electronic system would have quoted you just 5 1/4 percent if there weren't errors in your credit files depressing your credit scores.

What were the errors doing the damage? A creditor mistakenly reported you as having been 30 days late on an installment account twice in the past two years. Your credit scores plunged as a result.

If someone had alerted you that such misinformation was sitting in your three national credit files, you could have quickly requested that the creditor correct the errors. But under current federal rules, no one needs to tell you a thing. You are quoted a needlessly higher rate on your loan, and you're none the wiser. And if you accept that rate quote, you fall under what is known as the "counteroffer exception" - essentially a nondisclosure limbo.

Once you agreed to take the 5 3/4 percent rate in the example above, federal law permits the loan officer to tell you nothing about what happened. You never see your credit files. You never learn about the errors. You simply pay the higher rate - which is just fine for the lender.

Under the Treasury's proposal, the Federal Trade Commission would be able to take a new look at the entire set of rules governing notification of consumers who are priced up by credit file information.

Segments of the credit industry say such notifications are the only way for mortgage applicants to be alerted that there's something fishy in their files.

"Right now it is totally unfair" to the consumer, says Terry Clemans, executive director of the National Credit Reporting Association, the principal trade group representing independent credit-reporting companies.

"Almost nobody gets turned down for a loan" in an electronic risk-based pricing system, said Clemans. "You just get quoted a higher rate" based on your credit file information. And when the information that causes your rate spike is incorrect or incomplete - a situation Clemans believes to be commonplace - then "you really need some sort of notice" that tells the applicant to obtain and check the credit file data. Ironically, he added in an interview, mortgage loan officers frequently have the credit information in hand and could easily share it with the applicant if federal rules required them to.

Joel Winston, an associate director of the FTC's Bureau of Consumer Protection, says re-examining the notification process could lead to broader consumer access to the credit file that governs the interest rates they pay. The federal Fair Credit Reporting Act predates electronic risk-based pricing systems by decades. Under that law, when an applicant is turned down for a loan, the lender must provide a formal "adverse action" notice including the names and contact information of the credit companies that supplied the damaging data.

But in a system where you rarely get turned down - and frequently get priced up - what sort of notice is needed? That's what the Treasury wants the FTC to figure out.

Ken Harney's e-mail address is kharney@winstarmail.com.

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