Home buyers and refinancers face higher fees for credit reports this year – a price boost that has mortgage, credit industry and consumer group leaders fuming.
Some believe that the higher fees will have an inordinately heavy impact on moderate-income and minority first-time mortgage applicants who have nontraditional credit patterns, marginal credit scores or “thin” credit files. They also predict that as a result of the increased costs, mortgage loan officers may not shop as aggressively for such clients – leaving them with higher interest rates and worse mortgage choices than they'd otherwise receive.
At the core of the controversy is a policy change by national credit bureaus Equifax and Experian that neither company announced publicly: Beginning this month, they expect to be paid every time a lender or a mortgage investor obtains an applicant's credit file as part of the funding process.
To understand the significance of the change, consider how mortgage brokers – who originate an estimated two of every three new home loans – go about their business. Brokers do not loan their own money; they connect borrowers with lenders. To do so, they must shop applications to competing “wholesale” lenders who generally have different interest rates, loan terms and specializations.
The shopping process involves sharing borrowers' key financial information, property details, credit reports and scores with potential lenders. For home buyers with straightforward credit backgrounds, high scores and substantial assets, a broker might need to send an applicant's file to just one or two lenders.
However, for applicants with more complicated credit histories and marginal scores, brokers often need to shop loan files more widely – to four, five, six or more different lenders. Under the policy changes ordered by Equifax and Experian, each time a broker shops an application package to a potential lender, “reissue” fees would have to be paid to the credit bureaus. Under current practices, no additional fees are due.
Spokesmen for the two bureaus confirmed the policy change, but would not discuss the higher fees to be charged. They said the change was designed to allow the bureaus to better comply with the federal Fair Credit Reporting Act, which requires them to track each exposure of a consumer's credit data. TransUnion, the third national credit bureau, has not said whether it intends to change its policy, and did not respond to a request for comment.
“The whole goal,” said David Rubinger of Equifax, “is strict compliance with (the law) and the security of credit information.” Donald Girard of Experian added that “we believe we should be fairly compensated” each time the company's data is accessed. Moreover, recent technological advances have allowed far faster and easier sharing of credit report data among brokers and potential lenders – a development that, if not properly monitored, both bureaus believe could endanger the security of consumers' private data.
Harry Dinham, president of the National Association of Mortgage Brokers, a McLean, Va.-based trade group with about 30,000 members, estimated that for some loan applicants with marginal or incomplete credit profiles, brokers' add-on credit fees resulting from the new policy could raise total costs anywhere from $100 to $200 to the borrower. For other consumers, it would likely be less.
John Taylor, chief executive officer of the National Community Reinvestment Coalition, which represents a network of local groups that work with minority and moderate-income consumers, denounced the fee increases as a “revenue grab” that “will be paid disproportionately by people of color.”
An extra charge of $100 or $200 “may not sound like a lot,” said Taylor, “but it moves the line on who is going to be able to afford to buy a house.”
A potentially much more costly impact to minorities, recent immigrants and subprime applicants, said Terry Clemans, executive director of the National Credit Reporting Association, is that some brokers, to avoid the new, higher charges, “will simply not send files to as many” wholesale lenders for competing offers. That, in turn, could mean that borrowers with complicated credit profiles requiring more extensive shopping “could end up with worse terms than they'd otherwise might have received” – higher rates, higher fees, less generous underwriting terms, said Clemans.
Brokers association President Dinham said “we intend to fight this – we think it is unfair that consumers are being forced to pay more but are getting no additional benefit.” One independent credit reporting agency, Columbus, Ohio-based CBC Cos., has filed suit against Equifax over the issue, charging antitrust violations. Equifax has asked the U.S. District Court in Columbus to dismiss the suit.
Bottom line: Unlike other segments of the economy, there's no price competition for credit in the mortgage arena. When the bureaus say they want more, you pay more.
Kenneth R. Harney is a nationally syndicated real estate columnist with the Washington Post Writers Group. His e-mail address is firstname.lastname@example.org. © Washington Post Writers Group