Dec 012017

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By G. Steven Bray

The recent hacking of Equifax data has brought the credit bureaus into the headlines again. While the credit bureaus don’t control the FICO scoring model, the most popular model and the one the mortgage industry uses, the spotlight seems to have brought renewed attention to the fairness of credit scoring.

Yesterday, we discussed how FICO 4, the current model of choice in the mortgage industry, doesn’t seem to align with current credit risk factors. Congress is trying to force the industry to consider newer credit scoring models. So, let’s look at the potentially negative effects of the newer models. There will be winners and losers, and some of the losers may be surprised.

The current model rewards consumers who make on-time minimum payments on all their credit accounts. The account balance only seems to matter if the consumer allows it to exceed 30% of the available credit.

The newer models look at this a little differently. They reward consumers who make larger than minimum payments. They also penalize consumers who have large, unused available credit as that is credit that they suddenly could decide to use.

It may be years before any of these changes affect your ability to qualify for a mortgage. However, you are likely to start seeing them when you apply to other types of credit.

Nov 302017

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By G. Steven Bray

Your mortgage credit score is based on a credit model developed almost 20 years ago, and Federal Housing Finance Agency (FHFA) Director Watt says that’s not going to change anytime soon.

Many in the credit industry acknowledge that the FICO 4 model, the use of which is required by Fannie Mae and Freddie Mac, is deficient. It doesn’t differentiate between paid and unpaid collections. Nor is it able to distinguish medical collections, which seem to have little predictive value of credit risk. It also poorly models student loan debt, which has ballooned in the last 10 years, and only incorporates negative information for rent and utility payments.

Congress is trying to force a change through The Credit Score Competition Act, which would encourage Fannie and Freddie to consider other credit scoring models, including the newer FICO 9 and VantageScore models.

Watt contends that Fannie and Freddie already consider the same or greater levels of credit data in their computer models that determine whether a borrower qualifies. He also notes the change would be quite expensive. He prefers to wait until after Fannie and Freddie merge their investment security platforms, slated for 2019.

However, Watt fails to mention that Fannie and Freddie impose a minimum credit score, which prevents folks from qualifying regardless of how Fannie and Freddie tune their computer models. Fannie and Freddie also use credit score for determining interest rates and mortgage insurance coverage.

Credit bureaus may boost your credit score

 Credit Scoring  Comments Off on Credit bureaus may boost your credit score
Feb 152017

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By G. Steven Bray

The three national credit bureaus (TransUnion, Equifax, and Experian) announced that they will change the way they collect public record data. These are items like judgments and tax liens that appear on your credit report. The change is due to concerns the bureaus have with the accuracy of the data. Specifically, the bureaus will:

– require public records to have minimum identifying information including a person’s name, address, and SSN and/or date of birth; and
– require public records to be collected and updated at more frequent intervals.

So, why should you care? The bureaus have analyzed the potential effects of this change and have concluded that:

– approximately 96% of civil judgment records may not meet the new requirements; and
– as many as half of tax lien records may not meet the new requirements.

If a record fails the meet the new requirements, the credit bureaus will not include it on your credit report.

The changes are expected to take effect no later than July of this year.

Will your credit score improve with trended data?

 Credit Scoring  Comments Off on Will your credit score improve with trended data?
Apr 252016

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By G. Steven Bray

Fannie Mae has announced that this summer it’s going to require that lenders start using “trended” credit data to qualify borrowers. What in the world is trended credit data and how will its use affect your ability to qualify for a mortgage?

Currently, your credit report is a snapshot in time of your credit usage. The report shows your current account balances, limits, and minimum payments. A trended credit report shows how those amounts have varied over the last two years. Thus, it augments usage with insights into your credit habits. Do you pay off your credit cards each month? Do you pay more than the minimum balance? A trended report will reveal these habits.

TransUnion claims credit scores based on trended data will increase the number of what it calls prime and super-prime consumers by more than 3 million. Analysts expect those who pay off their credit card debt every month will see their scores rise. Other winners may include folks whose trended data shows their revolving balances decreasing over time.

Settlement with banks may raise credit scores

 Credit Scoring  Comments Off on Settlement with banks may raise credit scores
Jul 152015

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By G. Steven Bray

Last week we discussed recent agreements between regulators and the credit bureaus designed to reduce errors on credit reports. A separate agreement in Federal Bankruptcy Court may provide further relief.

Bank of America and Chase have agreed to update borrowers’ credit reports to remove so-called “zombie debts.” These are debts that had been extinguished in bankruptcy but that the banks still are reporting as active debts on consumers’ credit reports. The banks were accused of leaving the debts because they were profiting from the practice. They have agreed to update consumers’ reports within 3 months.

Citigroup and Synchrony Financial (formerly GE Capital) also had been charged in the lawsuit. Citigroup said it has made a proposal to plaintiff’s lawyers that’s consistent with the other banks’ agreement. Synchrony agreed to implement similar terms last year, but only on a temporary basis.

Defanging medical collections

 Credit Scoring  Comments Off on Defanging medical collections
Jul 132015

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By G. Steven Bray

One of the most frustrating consumer credit issues is medical collections. I estimate that half of credit reports I review have at least one medical collection on them. As often as not, the consumer is surprised to hear of the collection, assuming insurance had covered the charge.

Recent settlement agreements between the credit reporting bureaus and 32 state attorneys general may provide some relief. The agreement mandates that the bureaus wait 180 days before reporting a delinquent medical debt on your credit report. This should give you time to work out any issues with your insurance provider. In addition, the bureaus have been instructed to remove a medical debt from your report after insurance pays it.

Another part of the agreements requires the bureaus to have a human review documentation you submit to support a dispute rather than relying on automated systems.

These parts of the agreements may produce measureable relief for consumers, but I’m not so sure about other parts that add reporting requirements. More data may help regulators, but consumers need changes to dispute resolution systems to make the outcomes more accurate and timely. The bureaus have found that credit monitoring services are very profitable, so they benefit from consumer fear of inaccurate credit reporting.

Taming the credit bureaus

 Credit Scoring  Comments Off on Taming the credit bureaus
Jul 092015

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By G. Steven Bray

An FTC study in 2012 found that one in four consumers probably has mistakes on their credit reports. Based on my experience, I suspect the ratio is higher. Errors can range from duplicated accounts to closed accounts still reporting a payment to incorrectly reported collections.

In order to comply with federal law, the credit bureaus provide a process by which consumers can dispute errors, and consumers used that process 8 million times in 2011. The problem is the process has been described as a “merry-go-round of frustration.” Instead of investigating disputes, the bureaus typically rely on automated systems that result in creditors simply verifying that the report matches what’s in their system, which it should because the creditor provided the erroneous information in the first place. Any information or documentation provided with the dispute tends to be ignored.

With any luck, that may be changing. Regulators recently required bureaus to update their dispute systems to allow consumers to file them online with supporting documentation. They also have required the bureaus to submit reports to identify which creditors have the greatest number of disputes. While the latter doesn’t make the dispute process any easier, it may give regulators insights into how and why inaccurate information persists on consumer credit reports.

Recent settlement agreements with 32 state attorneys general may have the greatest effect, and we’ll discuss that next time.

Bill to remove medical collections will help homebuyers

 Credit Scoring  Comments Off on Bill to remove medical collections will help homebuyers
Jun 032015

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By G. Steven Bray

Congress is considering a bill, the Medical Debt Relief Act, that could be a boon to thousands of homebuyers. The bill would require credit bureaus to remove medical debt from a person’s credit report within 45 days of the debt being settled or paid.

The legislation addresses a breakdown in our health insurance system that allows creditors to ding patient’s credit reports when a medical claim isn’t handled correctly or in a timely manner. Patients are responsible for what insurance doesn’t pay, and I’ve seen many cases where patients didn’t realize there was a residual balance on a bill. Medical providers understandably want to get paid, and their recourse is to file a collection action. Unfortunately for the patient, this action could ruin an otherwise pristine credit score and result in thousands of dollars of extra interest when they apply for a loan.

Congress has tried to pass similar legislation a number of times in the past, so passage isn’t guaranteed. However, numerous consumer and industry groups have endorsed this bipartisan bill, which may give it a chance this time.

Getting spanked for paying your bills

 Credit Scoring  Comments Off on Getting spanked for paying your bills
Feb 262015

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By G. Steven Bray

Before you use your tax refund to pay down your credit cards, here’s something to consider. Your financially responsible action just might hurt your financial situation.

I’ve seen this happen before, and it’s really frustrating. You’ve been carrying a large credit card balance, slowly paying it down, padding the bank’s pocket with your interest payments. You get a nice tax refund and decide to be financially responsible. You use it to pay off half the card balance, thinking it will boost your credit score. Instead, you get a letter from the bank saying they’ve cut your credit limit to just a couple hundred dollars more than your new balance. You’ve done nothing for your credit score because the card still appears to be maxed out, and you’ve lost spending power. What a deal!

So, what can you do? You can try to contact the bank and explain why your financial situation has improved. It may reinstate the limit. It might raise it, but it probably will do nothing.

Minimum credit score for mortgage falling

 Loan Guidelines, Owner-occupied, Residential Mortgage  Comments Off on Minimum credit score for mortgage falling
Jan 292015

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By G. Steven Bray

It’s nice to be able to report some good news. Credit standards are relaxing just a bit. Our minimum credit score for using an FHA loan to purchase a home is now 600. This minimum applies to single-family homes and duplexes, assuming you plan to live in one of the units. The minimum score for 3- and 4-unit homes remains 620.

Even better, if you want to refinance an FHA loan, we can accept a credit score as low as 580. In some cases we’ll be able to use FHA’s streamline process, which means you can qualify regardless of your current income and debts. However, if your credit report shows a foreclosure, your credit score needs to be at least 600.

The minimum credit score for conventional loans remains 620.