Consumer Finance

FICO’s New Groove

VantageScore-credit-scoring-white-paper

About half of all Americans who took the SAT still remember their score 25 years later. Only about 40 percent of Americans, on the other hand, have any idea what their credit score is.

SAT scores are important — very important, since they play a big role in deciding what college one will get into — but that importance is brief. Once one gets in, their SAT score is officially useless to them; a mortgage underwriter won’t ask about it, credit card companies don’t care about it, and while we can’t be sure that no employer on Earth would make a hiring decision on the basis of it, we are fairly sure that the list of those that do is vanishingly short.

A credit score, on the other hand, can and often will affect any and all of those things — plus a whole bunch of others, like whether one will be able to finance a car or rent an apartment. With the possible exception of a social security number, a credit score is really one of the more impactful set of digits in a consumer’s life.

And if 60 percent of consumers aren’t paying attention to that super important number — well, good news, of a sort — state and federal regulators are paying very, very close attention to consumers’ scores. In the last few years, they’re paying even closer attention to the three agencies — Equifax, Experian and TransUnion — that often provide them, and how good a job they’re doing at getting accurate information out there.

Their efforts have been found to be … lacking, is probably the most diplomatic way to put it.

According to an FTC report in 2013, a full 20 percent of consumers have an error on at least one of their three major credit reports. In 2015, all three credit-reporting firms settled out of court with the state of New York (and then the 31 other states that filed similar actions), and while several practices were at issue, how the agencies report errors was a highlight.

That run of state-based cases also made some notable changes to what negative information can be reported in a FICO score — lapsed gym membership, traffic tickets and library books unreturned that got sent to collections agencies were no longer fair game — as was any collections issue not initially related to lending. The state-based settlements also meant all three agencies will have to remove medical debt collections that have been paid by a patient’s insurance company from credit reports by 2018.

Despite those changes, however, the complaints just kept on coming. In five years of maintaining a consumer complaints database, the credit reporting agencies were consistently the third most popular topic of customer complaint, only trailing mortgage underwriters and debt collectors.

By comparison, the much more widely hated institution of payday lending receives less than a quarter of the complaints from its customers that the credit ranking agencies do. In a statement last month, the CFPB noted that it has identified “significant” issues with the quality of the credit information being provided by furnishers and kept by credit reporting companies.

Among ongoing problems, the consumer watchdog/regulator says it is trying to address fixing data accuracy at credit reporting companies, repairing the broken dispute process and cleaning up information being reported.

“Since we began our oversight work, the CFPB has been uncovering and correcting problems in the consumer reporting industry,” said CFPB Director Richard Cordray. “Because of our work, important improvements are being made. Much more work needs to be done.”

And it seems the three credit reporting agencies got the message — subtle though it was — and decided to further modify what type of negative information it publishes on a credit report.

Which is good news for consumers — but will it be good news for lenders?

The New Rules: Say Goodbye to Lots of Liens and Civil Judgments

Starting July 1, Equifax, Experian and TransUnion will all be removing much, but not all, tax lien and civil judgment data from consumer credit reports, according to the Consumer Data Industry Association.

The standard for removing that data will be failing to completely list important identifying information that goes along with either the lien or the suit. To make it onto a credit report, the person’s name, address, social security number or date of birth must be included in the data before the negative information can be listed.

As it turns out, according to The Wall Street Journal, many liens and judgments do not include all of that data, which means an awful lot of those black marks will be erased.

The streamlining of credit reports is doubtlessly good news for consumers — in fact, probably quite a few. Roughly 12 million U.S. consumers — 6 percent of the total U.S. population that has credit scores — will see increases in their FICO score as a result of this change.

For most, that will be a fairly modest pick-up, worth 20 points or less, but for about 700,000 Americans, scores are projected to rise by at least 40 points — and that kind of jump that can make a big difference.

Some are noting this is also good news for lenders, since such changes might boost economic activity and give underwriters more chances to interact profitably with consumers.

Or not. Some are worried that the changes are a good way to create new troubles by giving credit where credit isn’t due.

Possible Troubles

The concern is that removing tax liens and civil judgments from credit reports will make lenders less able to make accurate underwriting decisions. Consumers with liens or judgments are twice as likely to default on loan payments, according to LexisNexis Risk Solutions — and the fact that administrative mistakes are made in listing those mistakes doesn’t change the risk associated with them.

“It’s going to make someone who has poor credit look better than they should,” said John Ulzheimer, a credit specialist and former manager at Experian and credit-score creator FICO. “Just because the lien or judgment information has been removed and someone’s score has improved doesn’t mean they’ll magically become a better credit risk.”

And those who aren’t concerned about risks are concerned about lack of information about the changes or what they mean. Mortgage lenders surveyed by journalists so far say they’ve heard nothing from the three bureaus and don’t know what the ramifications of the changes will be for their businesses.

David Stevens, president and CEO of the Mortgage Bankers Association was quoted as saying “nobody [in the mortgage industry] knows about this.”

Nor are they sure who to ask.

So did credit scoring make progress this week? For consumers — particularly those who’ve had difficulty getting credit — the answer is almost certainly yes, for now anyway. It remains to be seen how they do with that credit.

For lenders? The picture remains very, very murky.

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