FTC: Mortgage Insurance Firms Must Notify Borrowers If Premiums Rise Due to Bad Credit

Naturally, if errors or omissions in your credit report raised your monthly mortgage payments by hundreds of dollars, you’d want to be aware of it. Right?

Of course. But you might not get that chance. Under current mortgage industry practices, you may not get even a hint about costly trouble buried in those files when you apply for a low down payment loan that requires mortgage insurance (MI), writes syndicated housing columnist Kenneth Harney. This is because mortgage insurance firms generally do not issue what are known as “adverse action notices” when they double or triple monthly premium charges because of negative information regarding consumers’ credit.

The Federal Trade Commission (FTC) is weighing in to try and change that. On March 17, the FTC asked a U.S. appellate court in Philadelphia to rule that when a mortgage insurer raises premiums because of negative credit file information, the company must let the borrower know. The FTC oversees credit laws and has intervened in a case involving homeowners who were hit with $903.58 monthly MI premiums — about triple what they anticipated.

The reason? Radian Guaranty, Inc., a Philadelphia-based mortgage insurance firm, found some negative information in the home buyers’ credit files and believed them to be terrible credit risks. In reality, the files contained outdated and incorrect data. Like most companies that check consumers’ credit, Radian did not know that the negative data in the files was inaccurate. The company simply raised premiums to cover the perceived risk.

The FTC believes that Radian should have issued an adverse action notice to the plaintiffs. Such a notice is designed to alert home loan applicants that their credit files contain derogatory information and that they should check immediately to determine what, if anything, is wrong. The notices also require credit bureaus to provide free credit reports to consumers who request them, and to investigate and correct incorrect information.

Mortgage lenders typically issue the adverse action notices whenever they reject a home loan application on the basis of credit data. But insurers, have traditionally argued that they have no such responsibilities when they increase applicants’ monthly premium charges. In recent months, Milwaukee-based Mortgage Guaranty Insurance Corp. and other insurers have started issuing the notices in certain cases, but many firms refuse.

Radian argues that its customer is the mortgage lender, not the home buyer. Its coverage is in place to protect the lender from the risks of default, even as the premiums are paid by the borrower. It has no direct contact with the borrower, other than receiving premium payments forwarded by the lender, and therefore should not come between its customer and the borrower. This could unravel or delay the closing of the mortgage transaction.

• Illogical as it may seem to prospective borrowers, Radian convinced a federal court on that point, sending the issue to the appellate level.
• That, in turn, prompted the FTC to intervene and let the court know how the U.S. government’s own credit experts interpret the law.

The brief filed on March 17 makes it clear that U.S. mortgage insurers are covered by the fair credit law’s adverse action rules. If they don’t alert the consumer that they may be charged 2-3 times the premiums they would pay otherwise, who is going to? Certainly not the lender.

“Absent the notices, the consumer may never know to invoke his or her federal legal rights, and may never even learn that a premium increase has occurred,” wrote FTC attorney Lawrence DeMille-Wagman.

What this means for you going forward:

• If your Florida home loan requires mortgage insurance (which it will if you put down less than 20 percent), tell your loan officer that you want to be notified if credit information raises the cost of your premiums.
• Better yet, avoid potential problems altogether by ordering copies of your reports from the three national credit bureaus months in advance. Once per 12 months, these are free.
• Check every item in each report to make sure it is complete and accurate. That way, you’ll never end up with a $900 mortgage insurance fee every month on top of your PITI payments.
• You’ll also avoid the hassle of going to federal court over your Florida home loan. No one wants that!