Lenders soon to disclose how credit scores affect mortgage rate quotes

Starting Jan. 1, loan applicants will see a mandatory alert when negative information in their credit bureau files triggers higher rates or adverse terms.

Home mortgage shoppers should see an addition to the application paper blitz starting Jan. 1 — a mandatory alert on how their credit scores might affect the rate quote and terms they receive from their lender.

The new disclosure represents the end product of a congressional effort dating to 2003 to make the crucial role played by credit scores in loan pricing more intelligible to consumers, and to alert applicants when negative information in their credit bureau files triggers higher rates or adverse terms.

Lenders will be required to provide the alert before applicants finally commit to accept mortgage offers, thereby allowing some consumers to reconsider their decisions, order copies of credit reports and look for inaccuracies or outdated information.

Although federal regulators have given banks several ways to make the mandatory disclosure, the one most mortgage applicants are likely to see covers the following:

• 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.

Ted Dreyer, a senior attorney with Wolters Kluwer Financial Services, an advisor to lenders based in Minneapolis, said that inevitably “some people’s eyes will glaze over” when they see the new forms. But properly used, Dreyer said, the disclosure “will be a valuable source of information” for people with negative data — whether accurate or erroneous — buried in their national credit bureau files.