Better Very Late than Never on Credit File Rules

WASHINGTON -- For mortgage applicants and home purchasers, it's been a six-year wait, but the Federal Trade Commission and the Federal Reserve finally have come out with important consumer credit protection rules first required by Congress in 2003.

In late December, the two agencies published regulations designed to safeguard loan applicants from needless overcharges on interest rates caused by erroneous or outdated negative information in their national credit bureau files.

The rules require lenders to alert consumers whenever derogatory credit data cause them to be charged higher rates, higher down payments or less than optimal terms on a "risk-based pricing" system. Risk-based pricing tied to credit scores is standard practice for home mortgages, credit cards, auto loans and most other financial products offered to the public.

Generally, the higher your credit score, the lower the rates and fees you're quoted. The lower your scores, the higher your costs of credit.

The problem, though, is that credit bureau files sometimes contain junk entries -- mistaken or outdated reports of late payments, unpaid bills, charge-offs and judgments that can severely depress credit scores. Consumers have the right to demand correction of these errors, but frequently have no idea that they even exist.

For years, the only way loan applicants learned of a problem was a rejection letter from a lender, turning down their mortgage request. At that point, federal law guaranteed them the right to receive an "adverse action" notice, encouraging them to check their credit files for possible errors.

But with the rapid spread of risk-based pricing systems, fewer applicants were formally declined for loans; lenders simply raised rates to handle the perceived higher risk. The entire subprime mortgage industry -- which lit the fuse for what eventually became the housing bust -- rested on the ability of lenders to charge borrowers with low credit scores far more than they'd charge consumers with prime scores.

Concerned that many loan applicants were being hit with excessive rates for no good reason, Congress in 2003 passed the Fair and Accurate Credit Transactions Act. Among a long list of other reforms, that law introduced the concept of free annual credit reports for everyone and directed the FTC and the Fed to come up with a new "risk-based pricing notice" for mortgage and other loan applicants whenever their credit scores triggered high interest rates or other adverse terms.