Statement Of Alexander Ross

Retired, Department of Justice

The answers may be different, depending on whether scores are to be used in the accept/ deny context or for placing borrowers in different price tiers. In either case, it is essential that the broker be fully informed as to the lender's underwriting criteria. Further, whenever the scores themselves are affected by the information gathered by the broker, the broker must do as good a job as the lender in documenting the borrower's qualifications.

When credit scores are used to accept or deny, the broker's obligation is the same as it would be with manual underwriting. If the broker (a) fails to obtain documentation or (b) screens out applicants without adherence to the same processes the lender does with its direct applicants, both the broker and the lender are headed for trouble.

When credit scores affect pricing, the broker must depend on the full and accurate use of the lender's pricing criteria to avoid surprises and legal problems. For example, if the broker thinks he is presenting a "B" quality loan and has priced it with the borrower accordingly, the deal may not work if the lender prices it at "B-." On the other hand, if a broker knows the borrower has "A" credit but places the loan with a subprime lender at an unnecessarily high price to increase the broker's profit (when that lender would accept higher broker fees), the broker risks involving himself and the lender in deceptive practices, violations of the Real Estate Settlement Procedures Act (RESPA) and, if members of protected groups are adversely affected, possible violations of the fair-lending laws.

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Avoiding Credit Card Disaster

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