[REN #306] Major Lending Changes in FICO Scoring and Debt Ratios

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There are two big changes for borrowers this month, that should make it easier for millions of people to get home loans. One change is coming from the three big credit reporting agencies. The other is from Fannie Mae and Freddie Mac. If you have had trouble qualifying for a loan, these changes may give you the break you’ve been waiting for.

Starting this month, credit reporting agencies Equifax, TransUnion, and Experian will eliminate some tax liens and civil judgments from many of their customer profiles. It’s part of an initiative called the “National Consumer Assistance Plan” to improve the accuracy of credit reports.

It also appears to be the outcome of major nose whacking by the Consumer Financial Protection Bureau, along with a negotiated settlement between the credit agencies and the state of New York, and another deal with 31 other state attorneys general.

In January, the CFPB hit Equifax and TransUnion with a combined $23.2 million fine for misleading consumers about how their scores were used and about subscription services that consumers were led to believe were “free”. CFPB Director Richard Cordray said “TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises.”

Then, in March, the CFPB fined Experian $3 million fine for doing essentially the same thing — deceiving consumers about the value of their credit scores. CFPB says that all three agencies would provide credit scores to consumers that they claimed were also used by lenders in determining credit-worthiness. But, in the case of Equifax and Experian, credit scores given to consumers were developed with their own proprietary formulas as a way to “educate” consumers. They were not the same ones given to lenders. TransUnion is accused of doing the same thing with credit scores developed by another company.

The president of a trade group that represents the credit reporting agencies says, “It’s important that consumers understand the impact of how these liens and judgments are reported.” Francis Creighton of the Consumer Data Industry Association says, “The changes that the CRAs are making will improve the quality and currency of data reported, ensuring that the credit reporting system stays strong.”

Some Tax Liens, Civil Debts Removed from Credit Reports

Starting this month, they are promising to remove tax liens and civil judgments from consumer records if they include names, addresses, and social security numbers and/or dates of birth. Complete information is also required for bankruptcies, but the CDIA says that public data for bankruptcies already meet this standard. It says that civil judgments and about half of all tax liens do not.

By some accounts, this could raise the credit scores of some 12 million people by as much as 20 points. Debt obligations will also be excluded if they are not updated at least every 90 days, with any newly filed courthouse records.

The agencies are also about to throw consumers another bone as a result of the state deals. Starting September 15th, credit reporting agencies will set a “180-day waiting period” before they put a medical debt on someone’s record. That’s supposed to give consumers more time to sort out insurance coverage requests and resolve any disputes over charges. The agencies have already removed traffic tickets and court fines from their credit profiles.

Fannie, Freddie Raising Debt-to-Income Ratio

As for the second big change that will help borrowers get loans — Fannie and Freddie will allow borrowers to have a higher level of debt, and still qualify for a home loan. Right now, the debt-to-income ratio is limited to a pre-tax income of 45%. The mortgage giants are raising that to 50%. This is supposed to help all those millennials who can’t qualify for loans because they have too much student debt.

Critics say they those consumers will now have “more” debt and that could be a risk to the market, and to taxpayer pockets. Since Fannie and Freddie are still under the conservatorship of the government, any defaults would be covered by taxpayer funds.

But, Fannie Mae’s chief economist Doug Duncan says he thinks the risk is small because consumer debt is just “one” of the many factors that lenders consider. He says something needs to be done to help younger borrowers who have been left out of the housing recovery because they’ve been unable to qualify for a loan.

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