We’re more than just a number. However, as a consumer in need of financing or even a job, our personal credit report and FICO score tell quite a story. For many financial institutions, the applicant’s credit score is a key factor in the underwriting and pricing of consumer and mortgage loans. Beginning this summer, financial institutions will start to see changes in both the items included in the credit report and credit scores.
This change results from a settlement with the three major credit reporting bureaus—TransUnion, Experian and Equifax—regarding allegations of inaccurate credit reporting. A couple of primary areas of concern were tax liens and civil judgments on a consumer’s record. In many instances, tax liens and civil judgments don’t include all pertinent record data (consumer’s name, address, Social Security number and date of birth); therefore, these items can’t easily be verified by the entity using the report.
Another issue with tax liens and civil judgments is that information related to these judgments weren’t always updated in a timely manner on credit reports. For instance, a tax lien could have been paid by a consumer but the payment wasn’t up-to-date on the person’s credit report due to a delay in the creditor’s reporting. An initial Consumer Data Industry Association estimate, which represents the three major credit reporting bureaus, stated that approximately 12 million people will see these credit blemishes removed as a result of impending change.
The credit reporting change has caused some financial institutions to use other scores and methods in the underwriting process. For example, VantageScore Solutions, a competitor of FICO, announced the release of its VantageScore 4.0 model in the first quarter of 2017. This updated consumer credit score model will emphasize medical collections and other negative public records less, place an increased emphasis on trended data and use machine learning to create higher scores for consumers with limited credit history.
By looking at data through a period of time—as opposed to a static snapshot of the date the credit report was pulled—it’s believed that trended data will be a better predictor of payment performance and overall credit capacity. A trended data analysis example is looking at the payment performance on revolving debt for a mortgage loan applicant. Research would suggest that applicants who pay off their credit card in full each month are three to five times more likely to meet mortgage payment obligations.
While credit reports likely will remain a staple of the underwriting process, financial institutions should evaluate their underwriting criteria and pricing to help ensure adequate consideration has been given to the possible uptick in the credit scores of future applicants.
For more information, contact your BKD advisor.