When you apply for a mortgage to purchase a home, how do you know if you're being quoted higher rates or fees than you deserve?

Equally important: Did you know that Congress passed legislation requiring that lenders notify you whenever they price you higher -- even slightly higher -- than other applicants?

That congressional mandate, part of the Fair and Accurate Credit Transactions Act of 2003, is now the law of the land. But virtually no lenders comply with it because two federal agencies have not yet issued regulations telling them how to do it.

The 2003 law directed all lenders to issue "risk-based pricing" notices to applicants whenever negative information in their credit files leads to rates or fees that are "materially less favorable" than the terms available to other applicants.

This is particularly important for mortgage applicants because even small differences in FICO (Fair Isaac) scores can lead to unfavorable quotes. For example, as of last Friday, a mortgage applicant with a FICO score of 639 would be charged 7.68 percent for a $216,000 home loan, while an applicant with a score just 21 points higher would be quoted 6.7 percent for the same size loan. That information comes from a research company that surveys hundreds of lenders nationwide and reports the findings on score differentials and rate quotes to Fair Isaac for posting at myfico.com.

FICO credit scores are the central component of most lenders' risk-based pricing software. The lender checks your national credit files, pulls FICO scores, and quotes rates and fees accordingly. High FICO scores -- generally 720 or above -- get the lowest rate quotes.

But what happens if your scores are artificially depressed because of errors or omissions in your national credit bureau files? Under the 2003 law, you are supposed to be informed about the negative file data and have the right to obtain a free credit report to correct any errors or omissions.

But 33 months after Congress's mandate was signed into law, the two federal agencies tasked with writing rules telling lenders how and when to issue the credit alert notices, still have not produced even a preliminary proposal. Spokesmen for both agencies also say there is no specific time target for them to do so, either.

What's going on here? According to consumer advocate Evan Hendricks, editor of Privacy Times and author of the book "Credit Scores and Credit Reports," it's all about lobbying by lending trade groups.

"Lenders don't want to tell their customers that they've been charged more than they otherwise would," said Hendricks. And they definitely don't relish the possibility of losing mortgage transactions because applicants opt to get their credit reports and correct any bad information depressing their FICO scores.

The Federal Reserve in particular, according to Hendricks, is gumming up the works because "the Fed looks at (lenders) as its constituency, and does the bidding of that constituency, not consumers."

What's the outlook for risk-based pricing notices and what can home buyers do in the meantime? The outlook is uncertain at best. Lenders are pressing for the most minimal sort of notices -- generic, boiler-plate disclosures handed out to all applicants, rather than to those individuals who face higher rates because of credit file problems.

In the meantime, however, anybody thinking of buying a home should get copies of their credit reports well in advance of a loan application, clean up any errors, and fill in any missing positive information. Then, at the application stage, buyers should ask their lender or loan officer point blank: Are my credit files or scores raising the interest rate or fees you are quoting? If so, by how much?

Then simply ask the loan officer to show you a copy of the credit report he or she received on you. If you spot junk, and you don't want to pay higher rates or fees, put the application on hold and get your files up to snuff.

Published: September 4, 2006

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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.