WASHINGTON — Home mortgage shoppers should see an unexpected addition to the application paper blitz starting Jan. 1 — a mandatory alert on how their credit scores might affect the rate quote and terms they receive from their lender.
The new disclosure represents the end product of a congressional effort dating to 2003 to make the crucial role played by credit scores in loan pricing more intelligible to consumers, and to alert applicants when negative information in their credit bureau files triggers higher rates or adverse terms.
Lenders will be required to provide the alert before applicants finally commit to accept mortgage offers, thereby allowing some consumers to double-think their decisions, order copies of credit reports and look for inaccuracies or outdated information.
Though federal regulators have given banks several ways to make the mandatory disclosure, the one most mortgage applicants are likely to see covers the following:
• The specific credit score — including the source and the date it was pulled — that was used by the lender to arrive at a decision on the rate quote.
• How the applicant's score ranks against other consumers' scores.
• The key negative credit-file factors that affected the applicant's score, such as the number of late payments, inquiries by the consumer seeking new credit accounts, and excessive use of the credit accounts already available to the consumer.
• A reminder that all applicants have the legal right to dispute any inaccuracies they find in their credit files.
• Contact information for obtaining free annual credit reports — one each from Equifax, Experian and TransUnion, the three national bureaus — by toll-free phone, online or by mail.
• A brief description of credit-scoring methodology.
Ted Dreyer, a senior attorney with Wolters Kluwer Financial Services, an adviser to lenders based in Minneapolis, said the new forms "will certainly (be) another piece of paper" and that inevitably "some people's eyes will glaze over." But properly used, according to Dreyer, they "will be a valuable source of information" for people with negative data — whether accurate or erroneous — buried away in their national credit bureau files.
Consumers should be especially alert to the connection between credit files and mortgage rate quotes, say proponents of the new disclosure, because the hard economic jolts of the past four years — unemployment, high delinquency rates, home foreclosures and short sales — have depressed millions of individuals' credit scores.
At the same time, most mortgage lenders have steadily ratcheted up their underwriting standards and credit score requirements for good rates — or even the minimum score needed to qualify for any quote at all.
Not everyone is as optimistic as Dreyer about the efficacy of the new forms. Consumer advocates who successfully pressed for the disclosure in 2003 say the final form taking effect Jan. 1 doesn't even come close to what was originally intended: a personalized red flag from the lender to the applicant that negative credit-file data had caused the rate quote to be significantly higher than it otherwise would have been.
The concept was to encourage a borrower who received the warning to consider putting the brakes on the deal until he or she had a chance to check out what exactly in the files was causing the problem. Only applicants who were being quoted disadvantageous, higher rates by the lender's risk-based pricing system using credit scores would receive the notice, rather than 100 percent of all applicants.
Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group, said next year's form amounts to "just another disappointing generic disclosure" whose effectiveness will be limited by the fact it's a handout to everybody. Mierzwinski is especially critical of the two federal agencies responsible for crafting the final product — the Federal Reserve and the Federal Trade Commission — both of whom, he says, "choked the life out of this promising consumer reform" during a protracted seven-year deliberation process.
Terry W. Clemans, executive director of the National Credit Reporting Association, whose members specialize in preparing credit data and scores for mortgage lenders, said the final disclosure form "seems to be a very watered-down version of the intent of Congress back in 2003."
But Evan Hendricks, author of the book Credit Scores and Credit Reports and editor of Privacy Times, a newsletter that focuses on consumer credit issues, said he prefers to look for the positive in the new disclosures. Though "it's a step — a baby step — in the right direction," he said in an interview, "anything that reminds people about their credit score and how their lender is using it will be better than nothing."
Kenneth R. Harney can be reached at email@example.com.