For mortgage applicants and home purchasers, it’s been a six-year wait, but the Federal Trade Commission and the Federal Reserve finally have come out with important consumer credit protection rules first required by Congress in 2003.
In late December, the two agencies published regulations designed to safeguard loan applicants from needless overcharges on interest rates caused by erroneous or outdated negative information in their national credit bureau files.
The rules require lenders to alert consumers whenever derogatory credit data cause them to be charged higher rates, higher down payments or less than optimal terms on a “risk-based pricing” system. Risk-based pricing tied to credit scores is standard practice for home mortgages, credit cards, auto loans and most other financial products offered to the public.
The problem, though, is that credit bureau files sometimes contain erroneous entries. Consumers have the right to demand correction of these errors, but frequently have no idea they even exist.
Adverse Terms
For years, the only way loan applicants learned of a problem was a rejection letter from a lender, turning down their mortgage request.
But with the rapid spread of risk-based pricing systems, fewer applicants were formally declined for loans; lenders simply raised rates to handle the perceived higher risk. Concerned that many loan applicants were being hit with excessive rates for no good reason, Congress in 2003 passed the Fair and Accurate Credit Transactions Act. Among a long list of other reforms, that law introduced the concept of free annual credit reports for everyone and directed the FTC and the Fed to come up with a new “risk-based pricing notice” for mortgage and other loan applicants whenever their credit scores triggered high interest rates or other adverse terms.
President George W. Bush signed the legislation Dec. 4, 2003. No one can even venture a guess as to how many overpriced subprime mortgages during the housing boom might have been averted had risk-based pricing notices been available to consumers in 2004, 2005 and 2006. But the FTC and the Fed never came up with draft proposals to implement Congress’ mandate until May, 2008. Nineteen months later – on Dec. 22, 2009 – the agencies came out with their final regulations for lenders, and even those won’t be mandatory for another year.
Though the mandatory start date is not until next Jan. 1, some lenders are expected to begin phasing in the new notice system this year.
The rules offer several alternatives, but home mortgage lenders are likely to provide consumers with notices including their credit scores, a bar graph representation allowing them to see where their scores rank against other consumers, the name and contact information for the credit bureau that provided the information, key factors that might have lowered the score, plus guidance on how to correct mistakes in credit files.
During the coming months, home loan shoppers should ask competing lenders how they handle pricing when scores come in low. Ask whether the lender will inform you if something in your files is dragging down your scores and raising your fees and rates. You should also request a free credit report in advance of any application by visiting www.annualcreditreport.com.
