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In case you missed it, or just plain forgot, effective July 1st the 3 credit repositories, Equifax, Experian and Trans Union, will discontinue reporting most tax liens and civil judgments, as well as, any unpaid medical bills of 6 months or less, on consumer credit reports. This is the result of an agreement they made with 31 state Attorneys General.
The reasoning being is that in many cases, the information on the debt is not reported accurately to the bureaus. So, we’ll just eliminate them, as if they didn’t exist.
Why not? Benefit the consumer by potentially artificially boosting their credit score while increasing the lender’s risk.
According to a LexisNexis study, consumers with past liens or judgments are 5 times more likely to default on their mortgage. Interestingly, Lexis Nexis has been testing a new search engine that lenders can use to access and identify this omitted information. Of course, they will make such a search available to lenders at a cost.
This is one more thing to increase the cost to the consumer of getting a mortgage; all in the name of consumer protection.
Consumer advocates say no big deal. If someone has true civil judgments or tax liens they most likely will have other derogatory credit. If that’s the case, then why exclude the other information.
If such information is inaccurate, the lender would normally do some research to clear the data so they can proceed to make the loan.
After all, contrary to some’s belief, lenders are in business to make loans, not decline them. But hey, don’t let the loan experts do their job, deny them important information that may make or break a deal. Then, leave the lender holding the bag when the information is accurate but omitted.
So far, the agencies have made no special announcement on any changes to their credit underwriting resulting from this change in credit reporting. Lenders are required to assess all information obtained to determine if an applicant has any undisclosed debt or liabilities. To do so, they need not utilize any resources other than the application, credit report, and preliminary title report.
Hopefully, they’ll stick to the plan. If not, and loans default that are found to have undisclosed tax liens or civil judgments, or some history of valid outstanding medical bills, the lender may find themselves defending a request for a loan repurchase.
Once again, the need for loan quality becomes glaringly apparent. All relative information must be carefully reviewed and documented to be accurate and timely. When approving a loan, a lender can leave no stone unturned. One slip up could cost a lender a month’s profits.
Even though it may not be required, now you may consider obtaining a supplemental tax lien and civil judgment search, at least on marginal, higher risk loans. It may be better to be safe than sorry. Your call.
Be aware that in these times of eased credit standards, low down payment loans and higher DTIs, when all is said and done, it’s the lender that is ultimately held accountable when things go wrong.
Lend very carefully, my friends.
