New Technology Easily Allows Consumers to See Credit
Rating
Millions of Americans pay more in interest for home
loans than they should because they are unaware of their credit
score, according to US Senators Charles E. Schumer and Wayne Allard.
The Senators announced that they are introducing the Consumer
Credit Score Disclosure Act of 2001 today, a bill that would require
mortgage lenders and credit reporting agencies to provide consumers
with full disclosure of their credit score and any information regarding
their credit behavior that may negatively impact their score.
Schumer and Allard said that this legislation will help middle
class consumers improve their credit, increase homeownership, protect
consumers from usurious interest rates and save millions of borrowers
over one hundred dollars a month in mortgage payments.
"For most families, obtaining a home loan is the biggest
financial move they will ever make. Yet the credit score, which
is the principle factor in determining an individual's credit worthiness
and the loan terms they receive, is shrouded in mystery,"Schumer
said. "This legislation will lift the veil of secrecy over
credit scores and create greater opportunity for securing a home
mortgage at considerably less expense."
"It is wrong for mortgage credit scores to be kept secret
from consumers," Allard said. "Consumers have a right
to know their score and how they can improve their credit score."
Nearly 80% of all mortgage lending decisions now use credit scores
as the primary determinant of an individual's credit risk, according
to E-LOAN, an Internet mortgage company that would like to see the
mortgage application process become more open. Specifically, lenders
use the credit score to determine whether to extend a loan to an
applicant and to make pricing decisions regarding the rates and
terms of the loan.
According to the Federal Home Loan Mortgage Corporation (Freddie
Mac), as many as one-third of all borrowers who obtain loans from
expensive subprime lenders have credit scores that would
make them eligible for a "prime" rate, or lower cost
loan, from a conventional bank. Under this calculation, nearly
one third of the 1,137,019 Americans across the country who took
out high priced subprime loans in 1999 could have obtained a loan
at considerably less expense.
A typical reputable subprime lender may charge three percentage
points more than a conventional bank lender. On a modest mortgage
of $90,000, for example, shaving three percentage points from a
loan would save homeowners $160 per month, or over $1,900 a year
on lower mortgage costs had they known that their credit score was
strong enough to secure better loan terms. Freddie Mac estimates
that consumers nationwide overspend on their mortgage by $100 million
each year because they are paying rates which are higher than their
credit score warrants.
"It's wrong that the lender has all of the knowledge and
the consumer is left in the dark. Now that the technology is available,
consumers should be allowed to see instantaneously what their credit
rating is and how it is determined. Consumers need to access to
the same information lenders and credit reporting agencies use so
that they can make wiser decisions that will improve their credit
score," said Schumer.
Schumer and Allard pointed out that already one Internet company,
E-LOAN, is offering a free, web- based service that allows real
estate agents, bankers, and consumers to instantly determine their
credit rating. In addition to an instant credit score, consumers
receive a credit score analysis that helps them identify and understand
actions they can take to improve their score. And recently, the
leading credit scoring firm of Fair Isaacs and Company listed for
the first time the five factors they use to determine a person's
credit score:
- timely payments (35% of score),
- amount and type of outstanding debt (30% of score),
- length of credit history (15% of score),
- number of credit cards and number of recently opened credit
accounts (10% of score),
- mix of credit accounts, such as department store credit cards,
regular credit cards, margin accounts, etc. (10% of score).
The bill Schumer and Allard are introducing today will require
all lenders to supply consumers with their credit score along with
an invoice that describes how their score was calculated. It would
end the practice by credit reporting agencies of writing contractual
clauses that bar lenders from disclosing to consumers their credit
scores. The National Association of Realtors and Consumers Union
both support the legislation.
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