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Nation's Housing
Free credit-report program could still be a year away

Kenneth R. Harney
Syndicated columnist

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The short answer is this: They are a long way from reality. Maybe as much as a year. The new credit-reform legislation signed by President Bush earlier this month gives the federal government and the three national credit bureaus up to 12 months to devise operational plans, rules and phase-in periods for a vast array of provisions, including these two.

The Federal Trade Commission has six months to figure out how to create a free credit-report program that is workable both for consumers and the bureaus themselves. With 200 million-plus consumers in the three bureaus' files — all of whom theoretically could call in for free credit reports the first day they're available — that's a complicated task.

The same is true for the pricing alerts. How and when do you tell a mortgage applicant that his or her credit scores triggered an interest-rate quote higher than the best available? That's a critically important consumer issue in this era of mass electronic underwriting, where loan officers' desktop computers can access your credit file data instantaneously.

When home buyers ask a lender for its "best" mortgage deal, who tells them that their particular "best" rate and fees aren't really the very best? Say you're a first-time purchaser and you haven't examined your credit reports recently. You are not aware that there is erroneous or incomplete information in your credit files, damaging your scores.

Who tells you about that? Currently, nobody does. You pay more without the slightest hint that your credit files caused you to be "priced up." Under the new credit-reform legislation, however, creditors — including all mortgage lenders — will be required to give you a "risk-based pricing" notice whenever the deal you qualify for is "materially less favorable" than what you'd get with higher credit scores.

But when do you receive that disclosure? While you're sitting at the loan officer's desk and you still have a chance to correct any erroneous negative information in the files and qualify for a better deal on the mortgage? Or sometime much later, after you're stuck with loan terms that you accepted in ignorance of the false information in your files?

"Timing of delivery (of risk-based pricing alerts) is just one of the issues we are looking at," said Joel Winston, the FTC's associate director of financial services. "We will need to balance the rights of the consumer with those of the lender" in determining when and in what form to make the risk-based pricing disclosure.

"We don't want to scare people" out of a loan application that may be precisely the deal they wanted, said FTC financial practices staff attorney Clarke Brinckerhoff. In other words, the FTC doesn't want to needlessly blow up home-loan applications and other credit transactions that are perfectly acceptable to the borrowers.

On the other hand, said Winston, the FTC recognizes that Congress' purpose in mandating the new disclosure is to alert consumers to possible problems in their credit files. Once applicants receive the risk-based pricing notice, they also will be entitled to free copies of their credit reports. With those in hand, the borrowers can then determine whether the negative information is accurate or not.

Over the coming year, free credit reports will continue to be available under existing law to anyone rejected outright for a loan. That happens frequently in some areas of consumer finance, but much less so in the mortgage arena. That's because risk-based pricing systems simply push applicants with "subprime" credit into progressively higher-rate, higher-fee loans.

So what should home buyers and others do over the coming year while they wait for the new credit reforms to kick in? For starters, order your credit report long before applying for any loan. Yes, you'll pay $9 or so per report, but that's not much when a $150,000 or $200,000 mortgage is at stake.

Second strategy: Always ask loan officers three key questions:

• Are the loan terms you're quoting me the result of risk-based pricing?

• Did my credit scores cause me to be "priced up" — higher than the best available?

• And finally, could you show me the credit report information used by the pricing system?

Bottom line: You don't have to wait for a year for credit reforms. You can achieve a lot of them on your own, right now.

Kenneth Harney: kharney@winstarmail.com

Copyright © 2003 The Seattle Times Company