Full disclosure - the title of this article is a bit misleading.
Are recent changes to the major credit bureaus’ reporting standards a positive for consumers because some types of negative information will suddenly disappear? Yes, but there are some caveats and unintended consequences.
Borrowers with a tax lien or civil judgment on their report could see an immediate, sharp uptick in their credit score. The reason is the three major firms responsible for reporting credit scores - Equifax, TransUnion and Experian - recently decided this type of debt should be removed from an individual’s credit report, if the information about the debt did not include a minimum of three key data points about the borrower.
It was decided that a negative blip on a person’s credit score should be accompanied by that individual’s name and address, as well as either their social security number or date of birth. Any type of tax lien or civil judgment data that is lacking with respect to the presence or accuracy of this information will be removed.
The stated goal behind the change is to reduce inaccurate information on credit reports. It is at least partly in response to a lawsuit the credit bureaus settled in 2015 with the New York Attorney General that centered on the inclusion of non-loan related items on an individual’s credit score. Items typically considered unrelated to a loan can include parking tickets, overdue library fees and gym memberships.
Similar lawsuits from another 31 states followed the judgment in New York. As a result, many types of negative data sets were deemed irrelevant to credit scores, and the three major bureaus were forced to remove them. The Consumer Financial Protection Bureau (CFPB) followed this up with a report, released earlier this year, calling for the quality of public records data to be improved. To achieve this goal, the CFPB is advocating for the information on credit reports to be updated with more frequency and for the utilization of better identity-checking resources.
As with many other efforts put forth by the CFPB, there is a lofty goal. The move to eliminate inaccurate information acknowledges the fact that a credit score has the potential to exert a profound negative or positive impact on a person’s life. It’s not just about gaining access to cool toys and important items, such as cars, houses, boats, golf clubs and surfboard; a negative credit score could also be a barrier to getting a job.
There are a range of unintended, possibly negative consequences associated with the removal of negative information from a borrower’s credit report. Some potential borrowers will see their credit scores increase substantially, since the change in reporting standards will mean approximately half of all tax liens will disappear and nearly all civil judgments will be removed.
Just because there is no date of birth or social security number associated with a negative report doesn’t necessarily mean it is unreliable. It has been found that potential borrowers with judgments or liens in their background are two times as likely to default on their loan.
In a worst-case scenario, large pools of potential buyers could suddenly realize their credit score is positive and they are therefore credit-worthy. If these buyers were to approach a lender who is more interested in propping up their numbers by pushing as many loans through as possible - instead of doing their required due diligence - the results could be disastrous.
It is easy to see how these loans, since they are associated with a decent credit score, could easily be packaged up and sold as viable, solid investment vehicles.
If the borrowers default - as they are more than twice as likely to do as someone without a judgment or lien in their background - the securities backed by these mortgages could suddenly appear, quite accurately, to be the terrible investment they are and a sharp, economic downward spiral could result.
This is why the recent change of the credit reporting standards is not a win for consumers, since an economic downturn doesn’t benefit anyone.
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Patrick Stoy (NMLS Numbers 39527 and 39166) has 16 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.