The Federal Trade Commission has just given home buyers and other consumers a peek at one of the most eagerly-awaited new programs in years: Free credit reports for anyone who requests them, once a year.

The FTC's proposed blueprint for the program requires the three national credit bureaus -- Equifax, Experian, and Trans Union -- to create a new, single-source organization that will fulfill the millions of expected requests by e-mail, phone and regular mail. Roughly 200 million Americans have credit data about them on file at each of the three big bureaus.

Under the FTC's plan, consumers will be able to contact the new credit report service center, make a single request, and receive their three bureau credit reports within 15 days.

That should be extremely helpful to home buyers and mortgage applicants who haven't checked their credit files in years, or are unaware that they even exist. By requesting their free reports well in advance of applying for a home loan, consumers will be able to spot any errors or omissions in the data that could push them into a higher-cost mortgage than they deserve.

Mortgage rates typically are quoted to homebuyers based on their credit file data, expressed in the form of numerical credit scores. For example, FICO scores are widely used to price home mortgages and are derived by running an individual's credit file information through risk-prediction software. Home buyers with relatively high FICO scores -- 720 and above -- typically are quoted the very lowest interest rates available in the market.

Buyers with FICO scores below 600, by contrast, virtually always are quoted rates that are higher than prevailing market levels, based on the perceived higher risk of nonpayment to the lender indicated by their credit histories. They may pay thousands of dollars of extra interest over the life of their mortgage as a result.

The new credit fulfillment center will offer not only free credit reports, but FICO scores and other credit-related products such as credit-monitoring services that alert borrowers to sudden changes in their scores. Only the annual credit reports will be free of charge, however.

The new center -- scheduled to be created by the three bureaus over the next six to eight months -- will open up the once-mysterious subject of credit and allow millions of Americans to understand how credit files affect their ability to buy a home.

Another national program authorized by Congress last year and scheduled for start-up this year will also be a major advance for home buyers: Risk-based pricing notifications. Under that program, any time borrowers are quoted higher than the best-available rate because of negative information in their credit files, lenders will have to notify them. The borrowers will then be able to obtain a free copy of the credit files containing the negative information in order to check on its accuracy.

If the information is erroneous or outdated, the borrower will be able to request corrections, and then apply for a loan using the amended credit file and presumably receive a better quote.

When are these credit system improvements scheduled to take effect? No date yet on the risk-based pricing program, but the free credit reports will begin flowing at the end of the year. Under the FTC's proposed regional rollout, residents of the Western states will be able to request their free credit reports starting December 1. (The FTC defines the Western region as Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.)

Residents of the Midwestern region will become eligible for free reports March 1, 2005 (Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.) The Southern region will get its first chance to order free reports June 1, 2005 (Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Oklahoma, South Carolina, Tennessee, and Texas.) The Eastern states and the District of Columbia will all become eligible September 1, 2005.

The phased-in start, according to the FTC, is necessary to avoid swamping the three bureaus with tens of millions of requests in too short a time period.

Published: March 29, 2004

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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, consumer 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.