The idea was to red-flag consumers about credit file complications before they were legally bound to a loan deal that might be overpriced. President George W. Bush signed the legislation Dec. 4, 2003. No one can even venture a guess how many overpriced subprime mortgages during the housing boom might have been averted had risk-based pricing notices been available to consumers in 2004, 2005 and 2006. But the FTC and the Fed never came up with draft proposals to implement Congress' mandate until May of 2008. Nineteen months later -- on Dec. 22, 2009 -- the agencies came out with their final regulations for lenders, and even those won't be mandatory for another year.
When critics -- including myself -- complained of foot-dragging in recent years, the FTC said staffers were busy drafting other rules to implement the many requirements of the 2003 legislation. In the December announcement of the final rules, the FTC and the Fed noted that they conducted "in-depth outreach" to "interested parties," including lenders, credit reporting agencies and consumers.
Putting aside the six-year span between congressional mandate and final regulation, what will risk-based pricing notices mean in practical terms for consumers applying for mortgages? Though the mandatory start date is not until next Jan. 1, some lenders are expected to begin phasing in the new notice system this year.
The rules offer several alternatives, but home mortgage lenders are likely to provide consumers with notices including their credit scores, a bar graph representation allowing them to see where their scores rank against other consumers, the name and contact information for the credit bureau that provided the information, key factors that might have lowered the score, plus guidance on how to correct mistakes in credit files.
During the coming months, home loan shoppers should ask competing lenders how they handle pricing when scores come in low. Ask whether the lender will inform you if something in your files is dragging down your scores and raising your fees and rates. You should also request a free credit report in advance of any application by visiting annualcreditreport.com. This is especially important in 2010 because virtually all major mortgage sources -- including Fannie Mae and Freddie Mac -- have raised their credit score cutoffs for the best rate quotes and fees.