A congressionally-mandated tool that could help large numbers of home buyers qualify for lower mortgage rates has been kept on ice for nearly two years by federal regulators.

How can that be? Here's how.

In December of 2003, President Bush signed the Fair and Accurate Credit Transactions Act into law. The Senate and House had both passed it with strong bipartisan majorities. In addition to creating the popular "free annual credit report" program, the legislation also required all lenders to notify loan applicants whenever "risk-based pricing" underwriting software raised their rate quotes. The law directed the Federal Trade Commission to work with the Federal Reserve Board to develop a notification form that would allow lenders to alert applicants to potential problems in their national credit bureau files.

Risk-based pricing programs are now used by virtually all lenders, mortgage brokers, banks, Fannie Mae and Freddie Mac to evaluate an applicant's risk of default. The programs typically access national credit bureau files electronically, and price applicants according to their credit data and scores. People with high scores get the lowest rate quotes; those with negative credit data and low scores are charged more, often a lot more.

The 2003 legislation said the risk-based pricing alerts should be provided to loan applicants whenever their credit file information causes the lender to quote rates or fees that are "materially less favorable" than most other applicants receive.

For example, say you're a first time home buyer and you apply for a mortgage. Under Congress's notification program, you would be informed by the loan officer or broker if negative information in your files causes the lender to offer you a higher rate or fees than you'd otherwise deserve. That, in turn, should prompt you to check out your credit bureau data for errors or omissions before signing up for the loan. If you corrected the errors, your credit score would increase and your mortgage rate would be less.

Two years after Congress's mandate, where are the risk-based pricing alerts? The FTC, which has the lead responsibility for developing the notification, is mum. It will only say that it is working on the project. Katherine Armstrong, the FTC staff attorney heading the notification team, says there is no specific timetable for completion.

That has some consumer groups upset. Edward Mierzwinski, consumer program director for the U.S. Public Interest Research Group in Washington DC, says he's concerned that banks, mortgage companies and credit card issuers are putting pressure on the FTC and the Fed to delay implementation of the project and dilute its consumer protections.

"They (lenders) don't like it because they think it might knock some loan transactions off the track," said Mierzwinski. Or, worse yet, it might cut the profits lenders now make by charging higher rates to people who deserve lower rates, but have unseen errors and omissions in their credit files that drag down their scores.

Some banking industry lawyers already are circulating their own preferred versions of the risk-based pricing notification. They are mainly boilerplate and get handed out to all borrowers at the start of the application process -- not after an individual applicant gets a higher rate quote.

Terry Clemans, executive director of the National Credit Reporting Association, says boilerplate notifications won't achieve Congress's intent.

"There needs to be a clear notice that tells applicants exactly what is going on. It has to alert them that there is a problem." They need to know that they're at risk of paying much more for their home loan, monthly and over the full term of the mortgage, than they really should.

Published: November 21, 2005

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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.