Lenders could miss full credit picture under new policy
Three national credit bureaus to stop collecting substantial amounts of tax lien info
It could be a boon for some home buyers — their credit scores will get a surprise boost — but worrisome for mortgage lenders, landlords and others who depend on credit reports to evaluate their potential customers.
In a little-known policy shift, the three national credit bureaus — Equifax, Experian and TransUnion — plan to stop collecting and reporting substantial amounts of civil judgment and tax lien information on public records affecting millions of American consumers starting July 1.
Both types of information have negative impacts on credit scores and remain in credit files for extended periods. Tax liens are levied against properties when the owner is delinquent on payment of taxes. Civil judgments are ordered by courts in legal disputes, typically involving monetary damages — debts owed by the losing party.
With the elimination of this information from vast numbers of consumer credit files, some lenders are concerned that when they order credit reports to evaluate an applicant, they may no longer get the full picture of the risk of nonpayment posed by the consumer.
David Stevens, president and CEO of the Mortgage Bankers Association, told me that if tax lien and civil judgment data is suppressed from credit reports, “it’s unclear whether creditors will be able to make informed decisions” about loan applicants. Stevens said that blocking this information will raise some applicants’ credit scores artificially, creating “false positives” that make individuals appear lower risk than they are.
A study by credit scoring developer Vantage Score Solutions, which was created by the three credit bureaus, estimated that 8 percent of consumers would see an average score increase of 10 points on its most widely used scoring model if all civil judgments and tax liens were removed from credit reports. Stevens said 8 percent and 10 points may sound small, but in the mortgage business they equate to significant numbers of applicants.
Terry W. Clemans, executive director of the National Consumer Reporting Association, a group that represents companies that provide credit reports for mortgage lenders, said home buyers “who are on the edge” — they need a score increase to get approved for a loan or obtain a better interest rate — “may be of higher risk than (lenders) are aware after this data is removed.”
Tim Coyle, senior director of real estate and mortgage for LexisNexis Risk Solutions, a large data and technology company that sells creditors data on public records including judgments and tax liens, told me in an interview that an internal study by his firm found that borrowers who have a judgment or a tax lien are 5 1/2 times more likely to end up in serious default or foreclosure compared with borrowers who don’t have such items in their files.
For their part, the three national credit bureaus have been tight lipped about the details of their July 1 changes. Mortgage lenders say they’ve heard nothing from the three bureaus and are in the dark about the possible ramifications. Stevens told me that “nobody” in the mortgage industry “knows about this.”
In response to a request for this column, the bureaus’ national trade organization, the Consumer Data Industry Association, provided a statement indicating that the changes are part of the bureaus’ “National Consumer Assistance Plan,” following a settlement in 2016 with 31 state attorneys general over alleged problems with credit reporting accuracy and correction of errors on credit reports.
Eric J. Ellman, the group’s interim president, said the bureaus have adopted “enhanced public record data standards for the collection and timely updating of civil judgments and tax liens.” The standards will apply to new and existing data in files and will require that the public records sources include the individual’s name, address, Social Security number or date of birth. Public records sources will also need to be updated on a timely basis to be eligible for inclusion in credit files. Most civil judgment data and up to half of tax lien information cannot currently meet these tests, according to one industry estimate.
Chi Chi Wu, an attorney with the National Consumer Law Center and an expert on credit issues, welcomed the upcoming change. “To the extent that it’s preventing errors” in credit reports, she said — especially situations where a credit file has one consumer confused with another, which Wu says occurs too frequently — “it should be a good thing.”
How much of a good thing it will be for you depends on what’s in your credit files and how lenders adapt to the elimination of what they consider important information — if it’s accurate.