WASHINGTON — The country's largest source of home mortgage money, Fannie Mae, quietly is working on a policy change that national credit industry leaders call dangerous and potentially harmful to borrowers and taxpayers alike.
Though the giant, congressionally chartered company has not made a formal announcement, it plans to allow certain mortgage lenders to dramatically cut back on the amount of credit information they order on home loan applicants. Rather than requiring examination of applicants' detailed credit histories on file at all three of the national credit bureaus--Equifax, Experian and Trans Union--Fannie will buy mortgages underwritten with information from just one of the big bureaus.
The planned departure from current practices will be tested with a limited number of lenders beginning later this year, according to a senior Fannie Mae official. If the results are positive, the program will be expanded to a far larger number of lenders, primarily those who use the Internet and telemarketing to attract applicants.
Though Fannie's move may not sound radical, credit industry experts say it is--and they oppose it vehemently. The reason virtually all major mortgage lending organizations examine applicants' credit files from all three national credit bureaus, they argue, is that the information on each individual varies from bureau to bureau, sometimes significantly so.
Studies on credit scores have shown that variances of 50, 80 and even 100 points or more are not uncommon on some individuals, based on differences in information contained in their files at the three national bureaus. Variances that large can disqualify applicants for a home loan or push them into a "sub-prime" credit category costing thousands of dollars more in interest and fees over the life of the mortgage.
For example, say you check your FICO (Fair, Isaac & Co.) score at Experian and find that it's 720. That's excellent. Then you check your score based on your file at Equifax and find that it's 40 points lower, a 680. That still signifies good credit and won't hurt you with most lenders. But then you pull your score from your Trans Union file and discover you've got a 619. Now you're on shaky ground. You probably won't qualify for the best rate quotes from certain lenders. You may even be hit with a higher rate, since by some definitions, FICO scores under 620 are sub-prime.
But how could there be a 101-point variation in your scores from the three big bureaus? Easily, according to credit industry experts. Each of the bureaus receives credit information, public records, debt-collections reports and other bits and pieces of credit data from somewhat different networks of sources in each geographical region. .
Only by accessing files at all three national bureaus, and then merging them, can a creditor be certain of getting everything on file about you--the good and the bad. Pamela Johnson, Fannie Mae senior vice president, doesn't dispute this but says that the company is confident that its risk-assessment tools can evaluate risk using just one credit bureau file.
Johnson says the move will cut credit-check costs for mortgage applicants and lenders and will allow online mortgage companies to simplify the underwriting process. If a borrower's single credit file looks good, the loan will be cleared for sale to Fannie.
Finally, says Johnson, the traditional three-bureau, merged credit file has imperfections. For instance, if one of the bureaus' files contains erroneous information not present in the other two, the final, merged report will contain the erroneous data--possibly to the applicant's detriment.
Credit industry critics, who concede they stand to lose revenue under Fannie's plan, warn against pulling only one credit file.
"If only one file is [examined] ... will that file be missing important [negative] information?" asks Terry W. Clemans, executive director of the National Credit Reporting Assn., an industry group.
Johnson says Fannie Mae wants to save lenders and borrowers money on credit charges, and is prepared to test the limits on default and fraud risk to do so.
Distributed by the Washington Post Writers Group.