Could Fannie Mae's controversial decision to allow some lenders to check just one credit bureau file on mortgage applicants -- instead of the current, mandatory three -- affect your ability to qualify for a home loan?

Absolutely. But the policy change could cut two ways -- helping you qualify in some cases, hurting you in others. It all depends on which credit bureau file the lender chooses to see.

Here's what Fannie Mae is planning, and what it means to home buyers and borrowers.

Beginning later this year, the nation's largest source of home loan money will eliminate its traditional requirement that lenders check applicants' credit histories on file at each of the three national credit bureaus -- Equifax, Experian and TransUnion.The single-bureau option will be tested with a limited number of lenders, according to a senior Fannie Mae official, before making it available as an option to all lenders. The purpose of the change, according to Pamela Johnson, is to cut application costs for lenders and loan applicants.

Freddie Mac, Fannie's rival mortgage investor, continues to examine borrower data in all all three bureaus, and says it has no plans to move to a single-bureau approach.

The double-edged potential of Fannie's new option arises from the fact that the information contained in the files of the three big credit bureaus about all of us can vary dramatically, bureau by bureau. That's because the bureaus depend on local creditors, bill collectors and others to supply information about consumers voluntarily. In exchange for the information, the creditors get access to the bureau's files.

The three national bureaus -- based in Atlanta (Equifax), Chicago (Trans Union) and California (Experian) -- each have built up relationships over the years with local creditors. But for historical reasons, their networks vary in strength region by region. Trans Union, for instance, is generally acknowledged to have the most information -- the "deepest files" -- in the midwestern region. Equifax is strongest in its southeastern regional neighborhood and along the east coast.

What's the significance of this for consumers? Say you live in Illinois and you want to apply for mortgage credit. Trans Union's database is likely to have the most detailed history on you --including not only your national credit card accounts but those unpaid bills you've got with local merchants. Those past-due accounts may not show up on your Equifax or Experian files.

As a result, you're likely to get your least flattering credit evaluation -- and your lowest credit score -- from your Trans Union file. The other two bureaus are likely to rate you better.

Studies by independent credit reporting agencies have documented routine, high-to-low credit score differences of 75 to 100 points or more on the same loan applicants, based on data differences at the three national credit bureaus. You might, for example, have a Fair, Isaac & Company. (FICO) credit score of 730 on your Experian file, a 710 on your Equifax file, and a 630 on your Trans Union. Under Fannie Mae's and Freddie Mac's traditional practice of examining all three bureau files -- and using the middle score to underwite the mortgage -- you'd have a 710 score in this example. You'd be rated an excellent credit risk.

But if the lender only looked at your lowest-scoring file (Trans Union in the Illinois case), you'd be seen as a considerably higher credit risk, and you probably wouldn't qualify for the best rate quotes available.

That's the negative scenario. Now flip it over. Say the lender or broker taking your application knows which bureau is likely to have the most negative ("derogatory") information on you, but wants to push the loan through anyway. So the lender or broker chooses to pull your credit file only from Experian, under Fannie's new option. Now you look great: you're a 730 FICO borrower, deserving of red-carpet treatment, even though Trans Union knows you're a sinner.

The potential ramifications of all this are huge: You could be charged a higher rate -- or even denied the loan -- if your lender pulls the single credit file containing the most negative information about you. On the other hand, you might walk away with a mortgage at a rate lower than you'd have received had the lender checked all three bureaus.

Could loan officers and even consumers "game" the system here -- choose the single bureau that is most advantageous? One would think so. But Fannie Mae insists it will keep close tabs on this during the initial phase of the policy, and will try to eliminate it altogether as time goes on.

Stay tuned.

Published: June 11, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.