The Consumers Union, through its publication Consumer Reports, has called for an end to “secret” credit scoring and advises that consumers should demand the scores be revealed and explained. However, some local mortgage lenders disagree with the magazine’s assessment of where the explanations should originate.

According to the report in the January edition of the magazine, in the last 10 years the number of subprime borrowers has grown 30 percent, and 10 percent to 15 percent of borrowers who received subprime loans would actually qualify for a prime loan.

“Our article deals with two significant and largely unreported developments in banking we’ve identified … The two trends are, first of all, a sharp increase in the number of consumers branded as subprime by lenders. In those cases, there are only minor blemishes on their credit report. The second is use of secret credit scoring formulas in establishing credit worthiness and building on that to set the interest rates,” said Jeff Blyskal, finance writer for Consumer Reports.

“Consumers today are at a real disadvantage when it comes to borrowing money, be they the best, most conscientious bill payers or especially those with a few blemishes on their credit record. Key information that all borrowers need to shop for the best interest rates is withheld from them. At the same time their bill-paying habits are being monitored as never before – with lenders eager to turn lapses into higher interest rates,” said Kim Kleman, special assignments editor with “Consumer Reports.”

Credit scores, the three-digit, statistical average that predicts how likely a consumer is to repay a loan, are generated by credit bureaus and not lenders, but the report calls on lenders to educate consumers on the credit scoring system.

“My personal opinion is that if there were going to be disclosure, it should come from the creators of the models and not the banker,” said Daniel J. Forte, president of the Massachusetts Bankers Association. Forte pointed out there are a number of principles and formulas that are used to generate the scores to which lenders don’t have access. Recently, Fair, Isaac and Co. began offering a credit score explanation service for a fee to lenders, but the program is not available to consumers.

A number of industry experts who read the Consumer Reports article said while credit scores should be explained to consumers, they knew of no Massachusetts-based lending institution that used credit scores alone as a determining factor when deciding whether a borrower should receive a subprime loan.

Forte said many small banks do not use the credit scoring system at all because they do not generate enough of a loan volume to make purchasing the scores a cost-effective option.

“I think any lender would be remiss to take a yes/no answer off a credit score and say ‘that’s it,'” said Forte.

Dean Caso, chairman of the Massachusetts Mortgage Bankers Association, agreed that while lenders do make use of the credit scoring system, a number of other factors contribute to the lender’s determination of whether someone would be categorized as a prime or subprime borrower.

But the problem is not resolved as easily as including additional information to credit scores when rating borrowers, said Blyskal.

Even if the credit score is not the sole basis of the determination, it has become increasingly important and carries great weight. That is a problem, Blyskal said, because 70 percent of credit reports, which contribute to the overall score, contain at least one error.

But Caso said it is not the responsibility of the lenders to fix consumers’ credit problems.

“Lenders are not in the business of credit repair nor do we want to be in the business of credit repair. Lenders would be more than happy to refer the borrower to a company or agency that specializes in that area. Lenders are not credit counselors,” Caso said.

The interest rates separating a prime borrower and low-rated subprime borrower can make a difference of thousands of dollars in repayment during the life of the loan, said Frank Torres, legislative counsel for the Consumers Union.

“The people who are doing the scores … have little incentive to fix it. It’s money in their pocket. Industry, I would submit, doesn’t need legislation to fix this. They could do it on their own and yet they’re not. That’s why we are calling on Congress to reintroduce their legislation in the next session and hopefully we’ll see some changes,” he said.

‘Our Responsibility’
Currently, there is a law in California that will go into effect in July which gives consumers who apply for a home loan their scores. In addition, any person who wants to view his or her score must be allowed to do so and is supplied with four reasons why the score is not higher.

On the national level, Sen. Charles E. Schumer, D- N.Y., has testified in favor of releasing what he calls “secret” credit scoring.

In Massachusetts, no such laws exist, but Sen. Andrea F. Nuciforo Jr., D-Pittsfield, has said he’s aware of the problem.

“There are people who are in the mortgage brokering business that have talked to me about the credit report snafus. What troubles me most is that, under current law in Massachusetts, the credit reporting industry can score consumers and not disclose to consumers how it is they arrived at those particular scores,” said Nuciforo, who is chairman of the Joint Committee on Banks and Banking.

While Nuciforo has not yet drafted a bill requiring the explanation of the scores for consumers, he is considering it, he said.

While the report calls on both those who generate the scores and lenders who use the scores to educate the consumer, many say lenders are also at a disadvantage.

Carol Bulman, president of Norwell-based Conway Financial Services, the mortgage division of real estate firm Jack Conway & Co., said only recently did credit scoring agencies begin allowing lenders to share information with the customer.

“I think it is our responsibility to let the customer know that FICO scores are used as one of the factors in determining their creditworthiness. I agree with Consumer Reports in that how can a customer ask a question if they don’t know it exists,” said Bulman, who is Chairman of the Massachusetts Mortgage Association. But she did point out it is difficult for lenders to interpret the scores for customers because they do not generate the scores.

But legislation on the matter is not something Bulman said she wants to see happen. “As an industry, I’d like to see us have a chance to self-regulate before the consideration of legislation,” she said.

At the beginning of 1990, about 20 percent of borrowers were classified as subprime, according to the report. At the end of the decade, that number has risen to about 30 percent. According to Blyskal, that jump in number is due to increased numbers of divorces, bankruptcies and medical bills combined with more meticulous records kept by the credit bureaus on consumers. But the report goes a step further, pointing the finger at lenders.

“The banks, ironically, relaxed the standards of responsible lending in the 1990s but they didn’t relax the standards of on-time repayment. That helped the banks catch consumers in a losing game of ‘gotcha’, basically. Essentially, they’ve lured consumers to borrow more money, and when they can’t handle the repayments they’ve said, ‘we’ve gotcha’; now we’re going to raise your interest rates,'” Blyskal said.

While Bulman and other local lenders say there has been a rise in the number of subprime borrowers, they don’t agree with Consumer Reports as to the cause. “[T]here weren’t the products available to [consumers] 10 years ago. Subprime programs allow us to extend credit to people that have had blemishes on their credit,” she said.

“If a customer has a combination of poor credit and not having a steady job history, at one point there was really no option for them. Subprime loans basically allowed us to offer an adjusted interest rate that would compensate the lender for a higher risk,” she said. Most subprime borrowers are looking to get into their first home, keep their credit clean for 12 months and refinance, she said.

There is a reason for the increased interest rate, including increased risk and the fact that subprime loans are more expensive to service. But, said Bulman, the adjustment in rate shouldn’t be huge.

Nuciforo also said there has been a rise in the number of subprime borrowers and has a less-sinister-sounding explanation than suggested by the report.

“More people want credit today. Many of the people that want credit have no demonstrated ability to service that debt. Subprime lending is not a dirty word,” he said.