Realty Times July 9, 2003

Fair Credit Law Lapse Could Cripple Mortgage System
by Broderick Perkins

Too many credit reports continue to contain errors, maintaining vast data banks of consumer credit information raises security and privacy concerns and consumers are just beginning to grasp credit scores.

For all it's shortcomings, however, the nation's credit reporting system is built on the foundation of the Fair Credit Reporting Act of 1970 (FCRA) -- a model financial system responsible for saving mortgage consumers $54 billion a year, for enabling scores of consumers -- often minorities -- to buy homes when they previously couldn't and for giving consumers a low-risk return on their home investment that has generated greater, more stable wealth than virtually any other investment.

Unfortunately, the strength of the FCRA is threatened with possible dilution by state and local governments. A 1996 FCRA amendment preempted state and local governments from enacting measures in several areas deemed crucial to the national credit reporting system, but that amendment is due to expire January 1, 2004.

The National Association of Realtors, consumer groups, major private financial institutions and the federal government's financial and commerce agencies back a Bush Administration proposal to extend the law and enact additional consumer-friendly amendments.

In an economy that now rests on the shoulders of the housing market, allowing the amendment to sunset could mean financial ruin not only for scores of home owners and buyers, but for the economy as well, according to a recent report by the Information Policy Institute, "The Fair Credit Reporting Act: Access, Efficiency & Opportunity -- The Economic Importance of Fair Credit Reauthorization."

"There are significant tradeoffs associated with allowing our national credit system to revert to a state system," said Dr. Michael Turner, president of the Information Policy Institute and lead author of the report.

"Many consumers would pay more for mortgages, credit cards and other financial services, or would lose access to credit through reduced limits or outright denials of credit," he said.

According to the study, the national credit system has been a windfall, particularly for home buyers. The credit system has created

  • More approvals. Thanks to the credit reporting system, the subjective manual underwriting process, which was vulnerable to bias, gave way to the more objective automated underwriting system that treats mortgage loan applicants more equally. Automated underwriting, along with credit scoring, has helped identify more loans that perform better and more qualified borrowers, especially from minority and other historically under-served markets. Using either credit scoring or automated underwriting can result in approval rates improving by 29 percent for minority borrowers.

  • Faster approvals. Before automated underwriting, approving a loan application took as long as three weeks. Last year, more than 75 percent of all loan applications received approval in two to three minutes. The inherent speed of automated underwriting allows consumers and underwriters to react quickly to mortgage market changes. In 2002, prompted by record low interest rates, home owners extracted some $700 billion of accumulated equity from their home banks, according to the Federal Reserve Board.

  • Cheaper loans. Time is money. Faster underwriting has significantly reduced the cost of closing a loan, saving consumers $18.75 billion last year.

    More than 88 percent of consumers' credit scores would be affected if a patchwork quilt of state laws were allowed to replace the current national consumer credit system. The study also finds that in the absence of the federal FCRA provisions, under various scenarios the cost of credit could rise $40 to $270 per year for the average American family.

    "One of two things will happen: Either the cost of credit will go up, or access to credit will be reduced," according to Turner.

    "The results are straightforward: If credit information is restricted, as state level proposals would do, lenders will have less information to judge credit worthiness, and will have to compensate for taking on additional lending risk -- a premium that will be borne by consumers."


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