The upcoming changes to credit reporting could negatively affect the mortgage landscape
By Leora Ruzin
It really is a crazy time to be in the mortgage business.
Lenders across the country, large and small, are feverishly trying to keep up with the never-ending regulatory changes, while also navigating the rollercoaster that is the MBS market. TRID 2.0, HMDA, UCD, the new 1003—it’s enough to make any compliance officer consider changing careers, and sales managers are just trying to get phones to ring and loans through the door. It would be tough to look back and think of another time where it seemed like this industry was tackling so many different obstacles at the same time.
So, let’s just throw another log on the fire, shall we?
In 2015, the three major credit reporting agencies (Experian, Equifax, and TransUnion) entered into a settlement agreement with lawmakers in 30 different states after it was found that many derogatory credit items were not accurate. As a result of this settlement, the agencies will have to remove civil judgements and liens (otherwise known as “Public Record” items) from reports if they do not match three of the four following identifying criteria:
- Social Security Number
Whether or not the public record is valid is no longer relevant to the reporting agencies. If the data does not match at least three of the identifying criteria, it will no longer be reported. Instead of dealing with analyzing all of the data to ensure the liens and judgements meet the identifying criteria, the reporting agencies have opted to refrain from reporting ALL public records. According to FICO, it is estimated that approximately 12 million Americans will see an instant increase in their credit score of up to 20 points as a result of this change, with several million more who may see a smaller increase.
Earlier this year, Vantage Credit (another credit reporting agency that is mostly used by credit card vendors and auto dealers) began to use what is called “Trended Credit Data” in their reporting model. Trended credit data takes information on nontraditional trade lines, such as rental history and monthly payment histories, and incorporates that data into their credit score modeling. The idea is that those who have very little established credit may still be a strong candidate for financing, based on their ability to pay their other obligations and how well they manage their debt balances. Fannie Mae is also looking more deeply into trended credit data through their Desktop Underwriter platform, providing that data is available on the credit report.
On the surface, these changes seem like they would be a good thing; increased score for the borrower, cleaner credit reports, and more opportunity to expand the credit box. So, why are many mortgage lenders nervous?
The answer is simple. While trended credit data serves a valid purpose when considering offering short-term financing options, that data does not depict a true picture of how a borrower may (or may not) be able to handle a larger debt load. In addition, the removal of public record items from the credit report does not mean that those public record items do not, in fact, exist. Removing them does not remove the borrowers’ obligation to settle that debt, and it does not give the lender the information they need to make a sound credit decision. Many liens and judgements can be identified when obtaining a preliminary title report, but lenders do not typically pull a title report until much later in the loan manufacturing process and would typically rely on the credit report to provide them with this information right up front.
On June 13, 2017, Fannie Mae issued a formal response to the upcoming changes in Lender Letter LL-2017-02. In the response, Fannie has advised that lenders should still be able to trust the results of DU risk assessment of the credit report, even with this information missing. In addition, if, during a standard post-closing QC, a lien or judgement is identified, Fannie will cite a finding only, as opposed to a significant defect. They did go on, however, to advise that they will “rely on life of loan reps and warrants as a resolution if there is a clear title and first-lien enforceability issue identified subsequent to the post acquisitions review, even if a finding was initially cited.”
Lenders are still waiting for secondary market investors to issue a formal response to Fannie’s clarifications, although it is widely known that they perform their own due diligence checks at the time of loan delivery. If an investor pulls a report at delivery that shows a judgement or lien that was not previously identified by the lender, that loan may now be subject to potential repurchase, even if that lien or judgement does not negatively affect first lien position of the transaction.
So, how can lenders ensure they are mitigating this new risk?
While the gold standard for identifying negative items has been the credit report, there are other solutions out there that can provide the lender with the information they need to make the right credit decision at initial application. Vendors such as LexisNexis give lenders the ability to pull specific credit data through their solution, such as undisclosed debt, liens and judgements, and other property the borrower may own. Other vendors (such as DataVerify and First American) are currently working on similar solutions.
While there are several solutions available, it is critical that lenders implement a process that is in compliance with the Fair Credit Reporting Act. If a lender takes an adverse action on a loan using data that is not FCRA-compliant, the lender could be getting a visit from the CFPB! If an FCRA-compliant solution is not an option, the lender can still use the data to conduct additional research, which could include obtaining an Errors & Omissions report from their title company, or simply asking the borrower.
At the end of the day, it is the goal of lenders to close loans, but what is equally important is that the loans they close are of good quality. There is nothing more painful than getting a repurchase demand from an investor or finding out that a loan you put on your books has already defaulted.
Leora A Ruzin is AVP of Secondary Marketing and Systems Operations for Credit Union Mortgage Association, Inc. She can be reached at firstname.lastname@example.org