Californians interested in buying a home, refinancing or getting a second mortgage should pay close attention to a debate in our state Capitol.
The Assembly Banking Committee will soon decide whether consumers have the right to know their “credit scores.” If approved by the Legislature and signed by Gov. Gray Davis, California will have the most comprehensive consumer credit-disclosure law in the country.
Sponsored by a diverse coalition led by the California Association of Realtors and the Consumers Union, SB-1607 will give consumers access to their credit score and the top four factors used to develop it. To understand this legislation and its impact you must understand the history of credit scores.
Many industries have used credit scores to determine a borrower’s risk. Mortgage lenders started using credit scores to automate lending decisions on the Internet and this technological explosion resulted in almost all mortgage-lending decisions being based solely on the applicant’s credit score.
Unfortunately, applicants were left in the dark. To add insult to injury, consumers unknowingly hurt their score by consolidating debt, applying for online loans, having too many open lines of credit or even by paying off old debts.
This system of secrecy gives lenders and credit bureaus a monopoly, holding all the cards while consumers are left in “jail” with no chance of improving their score or ever owning their own Park Place or Boardwalk. Realtors and consumer organizations have asked the lending industry to make credit scores public for years, but met resistance through claims of “proprietary information” or “contractual conflicts.”
State Sen. Liz Figueroa took matters into her own hands when she introduced SB-1607. This legislation triggered a series of actions.
First, E-Loan, an online lender, broke rank and provided credit scores over the Internet. Thousands of consumers flocked to the site. But Fair, Isaac (a software company that develops formulas to generate FICO scores) stopped E-Loan by filing a breach of contract suit. Next, Fannie Mae decided to stop using “FICO scores” and create their own “transparent” system. Soon after, the credit bureaus, Trans Union and Experian, separately decided to develop their own ranking system.
Finally, with pressure mounting, Fair, Isaac ended their silence and posted a list of factors used to create credit scores and the weight each factor carries in determining the FICO score.
Great news, but consumers still don’t have access to their credit score. Alternative systems, lists of factors and Web sites won’t give consumers their score. Industry players are posturing or pointing the finger. No one is taking the responsibility to provide consumers their credit score. That is why it is crucial that the Legislature and Gov. Davis approve SB-1607.
It will give consumers the right to have their score whether they are applying for a loan or not. The measure will hold the industry accountable and prevent confusion and frustration for consumers. Fair, Isaac contends that consumers do not need to know their score unless they are applying for a loan. Not true. If consumers have access to their score they will be able to better manage their credit and correct problems before they need to apply for a loan.
The lending industry has made significant progress toward shedding light on the credit scoring system, but the game is only half over. Consumers need the passage of SB-1607 to ensure consistent and fair access to this all-important three-digit number.
Access to credit scores should not be a privilege; it should be a right.
Gaylord is the 2000 president of the California Association of Realtors.