How Much Should Lenders Know About You?

Peter G. Miller
OurBroker®

The state of California announced last week that once-private financial information extracted from its citizens would be sold to mortgage lenders and other bidders.

And then it changed its mind.

Florida, Iowa, Texas, Oregon, Minnesota, Indiana, and Colorado either have similar systems in place or are expected to have them shortly. What makes California interesting is that first the state said it would sell citizen data, and then Governor Gray Davis ordered the state's Employment Development Department to halt the process -- a decision expected to cost the state government $15 million over the coming decade.

States collect confidential information through taxation, car registrations, and data used to calculate pensions and unemployment compensation. Such information is provided by citizens on a basis which is hardly voluntary -- either you give it or you go to jail, don't drive, or whatever.

Mortgage lenders require access to such information, we are told, because employers often do not complete those pesky employment verification forms sent out when consumers seek to finance or refinance real estate.

At this point it will be mentioned that no information is released without the consumer's permission. The unstated assumption is that permission is freely granted, but that's hardly the case. If you do not give the information demanded, your loan application will be declined, and you'll either rent or live in a tent.

The description above probably reflects the views of many privacy advocates, and their views are not without merit. But such beliefs do not reflect the baseline financial realities associated with real estate financing.

The truth is that completing a mortgage application necessarily requires the provision of information that most of us do not discuss in public. A mortgage application is both an "invasion of privacy" and a way in which lenders can avoid loans with hidden and excessive risks. In effect, a mortgage application represents a clash of values.

Think about it this way: If lenders hold down risk won't they have fewer losses? Does not less risk translate into generally lower rates for all of us? Isn't that all good?

One can easily feel sympathy with the arguments brought forth by privacy advocates. These views should be raised loudly and often because they help assure that demands for information will go no further than necessary.

But at the same time, we ought to recognize that lenders also have rights and that there is a societal demand for the dollars they provide.

While most people can likely see a need for lender access to financial information, most no doubt would also agree that such information must be handled with great care. For example:

• Information taken from state files and IRS forms should not be distributed to "third parties." Given that lenders today are often affiliated with huge corporations which offer a wide variety of products and services, it should be understood that giving information to a "mortgage lender" does not entitle that company to share such data with corporate affiliates. In other words, let's not be cute and use misleading assurances regarding "third parties" as a dodge to spread private information throughout corporate empires.

• A mortgage application should not be seen as creating a right to continually check consumer credit in the absence of a specific triggering event -- say the failure to make two consecutive mortgage payments.

• The right to consumer data should be limited to a specific event. For example, giving a lender permission to check state employment records as part of a June mortgage application should not entitle a lender to ask the same question three months later without new permission.

• Only information specifically relevant to a loan application should be released. No lender needs four years of income records: records going back two years should be sufficient for most applications, three years in a limited number of instances.

• There should be serious civil penalties for lenders who abuse consumer privacy.

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