Realty Times - Major Credit Reform Bill Passes House By Wide Margin

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Major Credit Reform Bill Passes House By Wide Margin

by Kenneth R. Harney

The most far-reaching reforms to the American credit system -- touching virtually ever home buyer, every mortgage applicant -- passed the House of Representatives last week by a 392-30 vote.

Action now shifts to the Senate, where Banking committee chairman Sen. Richard Shelby (R-ALA.) is sponsoring a similar bill, but with additional consumer protections.

Among the key reforms in the House-passed measure are detailed new protections against identity theft such as improved fraud alerts on credit reports that would bar lenders from extending additional credit without specific authorization by the consumer.

Provisions in the House bill with special significance for home buyers and mortgage applicants include:

Mandatory provision of free credit reports not only by the three national repositories -- Equifax, Experian and Trans Union -- but by other regional and specialized credit data collectors such as medical information bureaus. Consumers in all 50 states and the District of Columbia would be able to obtain their full credit reports once every 12 months at no charge, upon request. Currently residents of only six states have that legal right.

Mandatory provision, upon request of a loan applicant, of the credit scores used in the underwriting process on a mortgage, line of credit or credit card. The scores, including FICO scores or proprietary mortgage scores used by many lenders, would not be free, but would have to carry no higher than a “reasonable” cost. Consumer groups such as the Consumer Federation of America criticized the House for not requiring free credit scores, arguing that low-income home buyers would be disadvantaged by having to pay fees to see their scores.

Mandatory notification of consumers by lenders anytime they plan to submit “derogatory” information about a consumer’s account to any of the national credit repositories. This requirement -- considered unduly burdensome by some financial institutions -- is designed to alert consumers to the existence of erroneous information in their credit files that could depress the credit scores they need to qualify for a home loan, other credit, employment or insurance.

For example, if your mortgage servicer incorrectly concluded that you missed or were late on monthly payments, you would have to be informed that the servicer planned to send this misinformation to the national credit bureaus. You would then be able to contact the servicer and attempt to straighten out the errors directly, and to alert the credit bureaus that the information is under dispute. Disputed credit file information normally is not included in calculations of credit scores.

Currently, by contrast, no consumer gets the slightest advance hint about negative information submitted by creditors with whom they have accounts. Typically they only learn of erroneous information -- and the attendant depressed credit scores -- when they seek credit elsewhere.

The House-passed bill, the Fair Credit Transactions Act of 2003 (HR 2622), differs from the Senate bill in a couple of important ways that affect mortgage applicants. The Senate bill would force creditors to notify loan applicants anytime their credit scores result in higher interest rates or fees on a loan.

Creditors would be required to issue “adverse action” notices anytime they “priced up” a mortgage applicant using credit data. This is especially important for home buyers whose lenders use “automated underwriting” systems with risk-based pricing features. Fannie Mae and Freddie Mac -- the giants of the home loan field -- both use proprietary risk-based pricing systems but do not inform applicants when credit information pushes them into a higher-rate category.

Published: September 15, 2003

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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.

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