Tax liens and civil judgments have historically been considered a part of consumers’ credit reports and are inherently a contributing factor that leads to lower credit scores, higher interest rates and more difficulty in consumers obtaining credit. As of July 1, the leading providers of credit reporting and data validation services in the U.S., including Equifax, TransUnion and Experian, will remove the inclusion of tax liens and civil judgments from the millions of credit reports that contain such information.
The determination by the credit bureaus to remove this data from consumer credit reports stems from a 2016 settlement by the credit bureaus with 31 state attorneys general. The state AGs brought suit against Equifax, Trans Union and Experian over alleged reporting inaccuracies the majority of which were related to tax liens and civil judgments.
The implications of removing tax liens and civil judgments means that the doors to credit opportunities will be widened for many more consumers; however, with that comes the risk that there could be more borrowers who will incur defaults thus creating a higher risk for lenders. With the removal of just two entries from consumer credit reports, millions of individuals will have increased credit scores of about ten points. This rise in a consumers credit score may result in a consumer being approved for a mortgage loan where historically, with the lower score, such consumer’s application would be denied for the same loan. Furthermore, the increase in credit scores and the likely escalation of individuals qualifying for loans will result in a business growth for servicers as they see higher amounts of loans being processed and in need of servicing.
An apprehensive welcome
Consumers and consumer advocacy groups that are aware of the oncoming modification to credit reporting appear to be welcoming the change; however, there are many implications to lenders and the overall economy that must be addressed. The concern, particularly among lenders, is that when consumers are applying for loans, lenders will not be able to properly evaluate the credit-worthiness of the applicants. Borrowers could appear to be lower-risk without lenders having the added benefit of insight into tax liens and judgments, and therefore lenders could end up lending to individuals who are more likely to default on loans.
In addition to credit results that may no longer be an accurate reflection to assess a borrower’s ability to make payments on a loan, the changes to the reporting might not allow the lender to accurately determine whether the borrower would actually qualify for the loan. The U.S. Department of Housing and Urban Development (HUD), Fannie Mae and Freddie Mac require outstanding judgments shown on the credit report to be paid off. HUD further requires all court ordered judgments to be satisfied prior to being eligible for a Federal Housing Administration (FHA) insurance endorsement; if a borrower is delinquent on a federal debt – such as a tax lien – the borrower is not eligible for the product. Furthermore, judgments need to be paid in order for borrowers to be eligible for a loan issued by the U.S. Department of Veterans Affairs (VA) loan.
Notwithstanding the risk, the changes to the credit reporting will allow lenders to accept borrowers who have a credit score that is at the “threshold” of being approved for a mortgage loan. By opening up the lending door to have borrowers with historically lower credit scores, lenders will reach a previously untapped market. However, to prevent default across this population, it will be up to the lenders to provide conservative loan amounts and to educate these consumers to help them with responsible borrowing. By doing so, lending institutions could possibly create a niche market for those that are actually able to afford a home loan but need a little extra assistance during the approval process to get a mortgage loan. The 10 point increase in credit scores could be the door that allows for this extra push needed for a hesitant borrower. It will be critical for lenders to embrace this change and move the lending market to this type of practice across the board, and not just in small pockets of our country.
Providing the solution to added risk
Some industry veterans have studied the impact of the upcoming credit reporting changes. A survey conducted by data and technology company LexisNexis Risk Solutions found that a loan held by a borrower who has a tax lien or judgment is five and one-half times more likely to end up in either a default or foreclosure scenario when compared to a loan held by a borrower with no existing tax liens or judgments. If there aren’t any liens and judgment searches integrated into the credit report, how do the lenders and those originating or modifying the loans make the determinations as to whether the borrower are eligible and to protect themselves against the risk of default?
In an attempt to address the gap and to provide protections to lenders against this risk while providing an efficient service, CBCInnovis has partnered with LexisNexis to offer the LexisNexis RiskView Liens and Judgements report, which will be available in July alongside the timing of the traditional credit reporting changes. CBCInnovis will offer clients a product which will include the traditional credit report as well as a report that would include outstanding tax liens and judgments related to the potential borrower. CBCInnovis is providing this seamless integration at no cost to the company’s customers nationwide for 30 days to allow its customers enough time to ensure they price their cost correctly. In providing the report, the customer will not see a change when ordering a CBCInnovis credit report. CBCInnovis is currently the only provider that has marketed such a product with seamless integration.
The CBCInnovis product will also be compliant with the Fair Credit Reporting Act (FCRA), allowing lenders to be able to take adverse action. This is very important for the market and it should be considered in any potential solution that is being brought forth to lenders and servicers since not all of them are FCRA complaint. If the product is non-FCRA complaint, the lender or servicer customer could not take an adverse action on the mortgage application should the borrower have derogatory liens or judgments.
The trickle-down to servicers
Servicers are not immune to the risk that the lack of lien and judgment searches in the new credit reporting system will bring. Servicers have independent liability (in addition to liability passed-on by the lender) for loans that lead to regulatory violations. In particular, servicers are subject to fair lending violations that can be caused by making risk credit decisions. The Consumer Finance Protection Bureau has made it clear as early as October 2013 that servicers are subject to the same fair lending liabilities as lenders, and regulators look to ensure that borrowers are protected even after the traditional loan process is completed.
Servicers often have to make determinations based upon credit and thus having access to credit reports, liens and judgment searches is just as important to servicers as to lenders. For instance, in determining loan interest rate modifications, servicers must consider the borrowers’ credit scores. In making these credit decisions, servicers are subject to a variety of government agency oversight and the laws or regulations promulgated by these agencies to ensure fair lending or, in this case, fair servicing. Such regulations include, for example, FCRA and the Equal Credit Opportunity Act (ACOA).
Thus, the more informed servicers are in making credit decisions, the more likely the servicers can show compliance with such regulations. Utilizing CBCInnovis for credit reports will allow the lender to take advantage of CBC’s seamless integration with LexisNexis’s RiskView Liens and Judgment Report which will prove valuable for servicers when making a loan mod determination. In addition to being able to have tools to show compliance with regulations, the utilization of CBCInnovis credit reports will help servicers combat the risk of modifying loan terms for borrowers who may not actually qualify for such terms.
Another added benefit to lenders and servicers for using CBCInnovis is that they will not need to establish a separate process in place with added cost to review a stand-alone non-FCRA solution. Using a stand-alone solution will feel like a bunch of data is being thrown at your staff and will certainly increase processing time which will in turn lead to added cost.
The credit reporting changes will open up the doors to a more diversified group of borrowers, increasing the number of loans that are originated and, in turn, need to be serviced. With the onset of a more diverse group of borrowers, there could be in increase in potential fair lending violations – particularly based upon minority borrowers where there could be unintentional disparate impact violations. While lenders and servicers should use vendors such as CBCInnovis for Credit Reports with seamless integration to LexisNexis RiskView Liens & Judgment Reports to help in guiding them in their credit decisions, servicers will have to implement other measures to prevent perceived discrimination to borrowers – whether intentional or not.
Regulators review servicers’ ability to facilitate and manage transactions with their clientele including, for instance, how servicers make accommodations for customers with limited English proficiency. The regulatory agencies also review, for instance, whether servicers are employing enough personnel that speak languages other than English to provide borrowers with enough access to present questions or concerns about their loans. Finally, a common regulatory audit of servicers will also look at employee training to determine if there is training provided to employees on how to relate and understand minority borrowers.
With the oncoming changes to credit reporting there lies uncertainty for both lenders and servicers. Until the changes are implemented and the related parties have had time to analyze the impact upon the market, there is an important question that remains. Will an increase in lending and servicing loans lead to an influx in profit or will the increased business bring only an increase in risk?
Debbie Hoffman is chief legal officer for Digital Risk, a division of Blackstone’s Mphasis company that provides quality control, valuation and fulfillment solutions. Martin Arana is sales director, mortgage servicing, for CBCInnovis, which offers a suite of credit decisioning and automated income, employment and property tax verification tools geared for the mortgage industry.