December 23 2010 (Shirley Allen)
Starting January 1st, 2011, lenders will be required to disclose to mortgage applicants how their credit score might affect their mortgage rate and the terms of their loan before the applicants finally commit to accept mortgage offers. The hope is that the disclosure will motivate consumers who have negative information in their credit file, which can trigger higher interest rates and adverse terms, to reconsider their decision, order copies of their credit reports and look for inaccuracies or outdated information.
The new disclosure represents the end product of a congressional effort dating back to 2003 to make the crucial role played by credit scores in loan pricing more intelligible to consumers.
Although federal regulators have given banks a lot of leeway in how to make the mandatory disclosure, the following information is what most mortgage applicants are most likely to see:
– The specific credit score — including the source and the date it was pulled — that was used by the lender to arrive at a decision on the rate quote.
– How the applicant’s score ranks against other consumers’ scores.
– The key negative credit-file factors that affected the applicant’s score, such as the number of late payments, inquiries by the consumer seeking new credit accounts and excessive use of the credit accounts already available to the consumer.
– A reminder that all applicants have the legal right to dispute any inaccuracies they find in their credit files.
– Contact information for obtaining free annual credit reports — one each from Equifax, Experian and TransUnion, the three national bureaus — by toll-free phone, online or by mail.
– A brief description of credit-scoring methodology.
Supporters of the new rule say that this is a step in the right direction because it gives consumers the opportunity to stop the loan process before they’re in the escrow office ready to sign for their new home…and feeling pressured to sign even though they don’t fully understand the why or how of the terms of their loan.
Evan Hendricks, author of the book “Credit Scores and Credit Reports” and editor of Privacy Times, a newsletter that focuses on consumer credit issues, said, “It’s a step — a baby step — in the right direction. Anything that reminds people about their credit score and how their lender is using it will be better than nothing.”
Not everyone is happy about the new forms. Consumer advocates who successfully pressed for the disclosure in 2003 say the final form taking effect Jan. 1 doesn’t come close to what was originally intended: a personalized red flag from the lender to the applicant that negative credit-file data had caused the rate quote to be significantly higher than it otherwise would have been.
Some critics even claim the final disclosure form “seems to be a very watered-down version of the intent of Congress back in 2003.”
But no matter which side of the fence you stand on, compared to what we have today, any type of disclosure that will allow consumers to stop and make a more intelligent decision when purchasing a home is a positive. And unlike many consumers who disregarded or were unaware of the terms that they were signing for in the loans that has led to the current housing crisis, disregarding this disclosure takes away the excuse of claiming they didn’t know.