WASHINGTON — When you're quoted a higher interest rate than you deserve because of erroneous information in your credit file, wouldn't you like someone to flag it for you?
That's an especially pertinent question in today's mortgage market as lenders ratchet up their credit score minimums and use electronic "risk-based pricing" to set rates and other loan terms. If you really deserve a 720 FICO score, but you have been pulled into the low 600s because of incorrect or missing information in your national credit bureau files, you really ought to know about it.
To help with this, two federal agencies have proposed risk-based pricing alert procedures that would cover all lending situations: home mortgages, credit cards and auto loans, among others. As part of credit reform legislation enacted at the end of 2003, Congress directed the Federal Reserve and the Federal Trade Commission to devise a system that would require lenders to notify consumers whenever credit file data contribute to a less favorable credit offer than they might otherwise receive.
It took four years, but the two agencies published their risk-based pricing alert proposal in mid May. After a three-month comment period open to the public and affected industry groups this summer, the FTC and the Fed could adopt the plan later this year.
Less desirable rates would trigger alert
Here's how it might work for home mortgage applicants: The bank pulls your credit files and prepares a rate quote. If your score comes in too low to qualify for the lender's best deals, the loan officer would be required to use one of several alternative methods to notify you.
Using one method, the bank could provide you the credit score that governed your rate quote, along with a graphic representation of how your score compares with other mortgage applicants, plus the key factors in your files that depressed your score. The notice would also include information on how to contact the credit bureau that provided the score, and how to obtain your full credit report.
Since you wouldn't yet be contractually committed on the mortgage, you'd be free, if you so chose, to call a time-out and check what's in your credit files. If derogatory information was erroneous or if some of your creditors had failed to report your on-time accounts to the national bureaus, you'd be able to correct the files before proceeding further.
Not all applicants would be issued risk-based pricing notices under the proposal, only those whose mortgage terms and rate quotes are "materially less favorable than the most favorable terms available to a substantial portion of consumers (obtaining credit) from or through" that particular lender.
Setting ground rules
The FTC and the Fed offered two methods for lenders to determine which applicants fit that description. Using one approach, lenders would set a credit score cutoff point at which roughly 60 percent of customers have lower scores and roughly 40 percent have higher scores. Only loan applicants with scores below the cutoff would have to receive risk-based pricing alerts.
Under a second alternative, lenders would create a tiered pricing grid, with notices required only for applicants whose scores are in the lowest tiers. For example, if a lender used five pricing gradations, only applicants who fell into the lowest three tiers would receive an alert.
In a key decision that could provoke controversy, the FTC and the Fed removed responsibility for issuing notices for most mortgage brokers as long as they do not function at any time as a lender during a transaction and are solely intermediaries. If finally adopted, that means that when brokers shop loan applications to multiple lenders and receive quotes, they would not need to provide multiple risk-based pricing notices.
In another limitation, the two agencies conceded that some consumers might not receive risk-based pricing notices even though negative information in their files depressed their scores. That's because mortgage brokers might send applications with apparent subprime credit exclusively to lenders who specialize in subprime. In that event, an applicant's high rate quote may be typical for that lender, and not "materially less favorable" than what the bulk of the lender's other clients receive.
Whatever the shape of the final risk-based pricing alert plan, it almost certainly will heighten consumer awareness of the importance of credit data in determining mortgage rates and terms. In the meantime, remember this: Always check at least one of your national credit bureau reports (on file with Equifax, Experian and Trans-
Union) months before applying for a mortgage.
That allows you the time to take remedial action, if necessary, and qualify for the best rate you deserve.
Kenneth R. Harney can be reached at firstname.lastname@example.org.