A congressionally mandated consumer protection of huge potential value to home mortgage applicants has been stalled indefinitely because two federal agencies have not published required regulations, 33 months after the legislation was signed into law.
The new consumer protection, created by the Fair and Accurate Credit Transactions Act of 2003, covers all loan applications in which a lender employs a "risk-based pricing" system that taps into an applicant's credit files.
In the mortgage industry, risk-based pricing is almost universal: Millions of home-loan applicants get their rate quotes and terms this way every year. The lender checks your credit files, computer software produces a risk score, and the rates and fees you are quoted flow directly from that process.
If your credit file data - correctly or incorrectly - suggest that you might pay late or go into default, you get charged a higher rate than applicants with "better" credit.
But what if there are errors or omissions in your files - common occurrences, according to comprehensive studies of credit file data by the National Credit Reporting Association and the Consumer Federation of America? What if your credit scores are artificially depressed?
Under the 2003 legislation, Congress ordered lenders to issue risk-based pricing notices whenever credit file data cause them to quote rates or fees that are "materially less favorable" than the most favorable terms available to large numbers of other applicants.
The notices were to be provided at the time of application or at the time of the rate quote. Either scenario would allow applicants to request a free copy of their credit report and check to see what negative information in their files was causing the problem.
The requirement for notices took effect Dec. 1, 2004. But Congress also directed the Federal Reserve Board and the Federal Trade Commission to issue regulations describing the content, scope and format of the notices.
So far, however, the two agencies have issued nothing, and both say they have no specific schedule to do so.
Ben Hardaway, a spokesman for the Federal Reserve, said: "There is no time line. It's still in the development stage." Joel Winston, a Federal Trade Commission associate director, said through a spokeswoman, "We are actively working on it, including a series of meetings with affected parties to help us understand how different kinds of creditors use risk-based pricing and the feasibility of different ways of providing notices to consumers."
But consumer advocates contend that Congress' clear intent - helping consumers obtain the best possible rates and terms in a risk-based pricing environment - is being thwarted by regulatory foot-dragging.
Evan Hendricks, editor of Privacy Times and author of the book Credit Scores and Credit Reports, blames banking and mortgage industry lobbying for the delay.
"Lenders don't want to tell their customers that they're being charged more than they otherwise would," said Hendricks. Nor do they like the idea of potentially putting a loan application on hold while customers take time out to check the accuracy of their credit reports.
Hendricks says the Federal Reserve is the main obstacle because "the Fed looks at the financial industry as its constituency, and does the bidding of that constituency, not consumers."
As long as lenders object to any form of notice that could alert applicants to specific issues in their credit files that raise their interest rates and fees, said Hendricks, Congress' risk-based pricing directive may be on perpetual hold.
The industry itself, according to a legal memorandum prepared for the Mortgage Bankers Association of America, wants only a generic notice, distributed upfront to all applicants "explaining that credit reports may affect" pricing and other terms.
But consumer advocates such as Hendricks feel that generic, boilerplate notices subvert Congress' purpose: to warn individual borrowers that something specific is amiss in their personal credit files, and to offer them a free credit report to help them check it out.
In the absence of action by federal regulators, what can you do as a mortgage shopper?
First, order your three national credit reports long before applying for a loan. Make sure any errors in the files are corrected and any missing positive payment information is included.
Bear in mind that some of your credit card companies - Capital One is a prime example - do not report your credit limits to the bureaus and thereby can depress your credit scores.
Second, at the time of application ask your loan officer to show you whatever credit information is being used to compute your rates and fees. Ask if you are receiving the same pricing as someone with the highest credit scores.
If not, ask why.
And while you're at it, ask yourself how it could be possible that the protections Congress created for millions of consumers are still nowhere in sight, nearly three years after passage.