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Credit Score Competition Act revives in Congress

Dear Colleague: 

I’m pleased to report the reintroduction of a bipartisan Congressional bill aimed at ending the lockout on credit-scoring competition on mortgages submitted for purchase by Fannie Mae and Freddie Mac.

On February 8th, U.S. Representatives Ed Royce (R-CA), Kyrsten Sinema (D-AZ), and Terri Sewell (D-AL) introduced H.R. 898, the Credit Score Competition Act.

The bill shares its name and language with a bill that was introduced in late 2015 by Representative Royce, a senior member of the House Financial Services Committee, Representative Sewell (who now sits on the House Ways & Means Committee) and Representative Sinema (another Financial Services member). Six other House members joined as co-sponsors. It was then introduced as H.R. 4211.

Representative Royce explained that “alternative credit score consideration by the GSEs is a win-win: It opens up the market in a responsible manner for those qualified to buy a home and eliminates the government-backed monopoly in credit scoring. That’s why the Credit Score Competition Act has garnered such strong bipartisan support.”

In the last Congress, H.R. 4211 was the subject of hearings last September (9/27) before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit. During that hearing, Representative Scott Tipton (R-CO), a subcommittee member and co-sponsor of the bill, noted that the Credit Score Competition Act would “increase innovation, alleviate portfolio risk and lower systemic risk in housing markets.” Representative Tipton went on to say: “I’d like to encourage all of my colleagues to support this important piece of legislation.” 

Since its reintroduction, the bill has received considerable media attention. Dow Jones noted the following in its daily Institutional News email bulletin:

“For years, lenders who wanted to sell mortgages to FNMA [Fannie] and FMCC [Freddie] have had to use FICO credit scores to underwrite borrowers. That has become a contentious issue in recent years among some mortgage lenders, consumer advocates and realtor groups that say other scores should be permitted and that this would result in more consumers getting approved for mortgages and more loan volume. The score most widely cited for inclusion is called the VantageScore. The FHFA [Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie] has been reviewing whether to allow for other credit scores to be accepted by the GSEs for more than a year.” (emphasis added)

And an article in HousingWire.com, headlined House reintroduces bill to end “FICO monopoly” at Fannie Mae and Freddie Mac, included a quote from me:

“Markets work most efficiently when there’s competition and the status quo is effectively a government-sanctioned monopoly. That is because the GSE Seller / Servicer Guides require lenders to use the three 04 models of FICO for loans that are to be presented for consideration by the GSEs’ automated underwriting systems.

“We are supportive of all of the efforts to bring much-needed competition among credit score model developers into the mortgage origination space,” Burns added. “From the beginning, our ask has always been to allow lenders to choose among today’s more predictive models that score more creditworthy consumers without relaxing credit standards.”

The three national credit reporting companies support this legislation and we encourage others to join us in supporting H.R. 898. The regulatory framework for the mortgage market should support fair competition across the spectrum. The bill is a measured and reasonable call for leveling the playing field for credit-score developers in the U.S. mortgage market so that investors, lenders, the GSEs and American families can leverage the benefits of competition.

All the best,

 

Barrett Burns

Equifax: “Trended data” could increase credit access for 1.5M U.S. consumers annually

A Consumer Credit Impact analysis by Equifax Inc. found that trended credit data used alongside a consumer’s traditional credit report could improve access to credit and/or loan terms for up to 1.5 million consumers on an annual basis.

Trended credit data provides up to 24 months of a borrower’s payment patterns, and offers a historical perspective of specific payment behavior, including scheduled payments, actual payments and past balances.  This expanded, two-year, granular view of the consumer gives the lender the opportunity to extract meaningful insights to help predict future behavior regarding credit.

As an example, trended data attributes would let lenders distinguish between consumers who pay off their balances monthly or pay more than the minimum amount due and consumers who make the minimum payment due almost every month. Assuming both groups of consumers make all their payments on time and that their credit histories and loan characteristics are otherwise about the same, the consumers who pay their full balances monthly or pay more than the minimum amount due would typically be considered lower credit risks based on their trended data.

Trended credit data was first introduced into the mortgage marketplace in September 2016 as part of the mortgage underwriting process in partnership with Fannie Mae. Prior to its introduction, when assessing a potential homeowner’s credit report, mortgage lenders had access to the consumer’s total outstanding balance of credit, utilization and overall credit availability as part of the consumer’s traditional credit report. Historically, credit reports did not contain details on whether payments that were made serviced all or part of an individual’s debt or whether certain patterns existed in the consumer’s balance utilization.

The December 2016 Consumer Credit Impact analysis found that lender access to trended credit data could, on an annual basis, result in:

  • an increase of 4 percent (or 267,000) in mortgages or improved loan terms for consumers who may have previously been ineligible;

  • a boost of 11 percent (or 1.1 million more) in auto loans and/or improved interest rates and terms; and

  • a rise of 4.1 percent (or 65,000 more) in home equity lines of credit (HELOCs) issued to consumers who may have previously been ineligible.

“Giving weight to how borrowers pay off credit debt puts more power in their hands to manage their credit evaluation,” said Peter Maynard, senior vice president Global Analytics at Equifax. “New ways of assessing consumer credit behavior through unique insights is something we are continuing to develop at Equifax, and opportunities to expand credit to consumers and mitigate risk for lenders make these types of approaches solid ones for the entire marketplace.” 

Equifax further expects increasing reliance on trended credit data particularly as some industries, like the auto sector, settle into what some analysts view as more of a post-recession norm. For these lenders, it will be vital to leverage as many insights about consumer-debt behavior as possible to more confidently assess risk and to support a healthier loan marketplace.

Make the right moves for your credit score this tax season

By John Ulzheimer
The Ulzheimer Group

April 18th is fast approaching, which means you have only a few remaining weeks to deal with your 2016 tax returns. And while the topics of taxes and credit reporting don’t normally find their way into the same sentence, they do have considerable overlap. Specifically, if you don’t pay your taxes or you’re fortunate enough to get a refund back on your state or federal taxes, then your credit reports and credit scores may become very relevant to the conversation.

If you don’t pay your tax obligation, then there’s a chance your state or the Internal Revenue Service will file a tax lien in your name. Tax liens traditionally find their way onto consumer credit reports. And although the future of inclusion of tax liens on consumer credit reports is in question, for the time being they are commonly reported to the three national credit reporting companies (Equifax, Experian and TransUnion), and most credit scoring models, including the VantageScore models, treat them as serious derogatory entries, with the potential to lower credit scores considerably.

If you overpaid your taxes during the previous tax year, then you are likely entitled to a refund of some amount. What are you going to do with this unexpected cash infusion? I can tell you what you should do with it: Pay off some of your debt.

Aside from missed payments on your obligations, your outstanding debt—and specifically your credit card debt—is the second-most influential factor in your credit scores. There are several credit scoring metrics that analyze some aspect of your credit card debt, and all of them can lead to lower scores if you’re not performing well.

One of the most overlooked factors in your credit scores is the number of accounts on your credit reports that have a balance greater than zero. Many people believe that just because you’re making your payments on time that you’ll have fantastic scores. This is certainly a great start, but it’s not the only factor that will lead to a great score. If you have several accounts with outstanding balances, then your scores will not be as high as they would be if you had fewer accounts with balances.

If you can use your tax refund to pay off accounts with outstanding balances then your scores will likely improve. This doesn’t mean paying off your mortgage or your car loan, because that’s not realistic. But to the extent you have retail store credit cards, gas credit cards or even general-use credit cards with small balances, you should definitively eliminate them.

Even if you are unable to pay off one or multiple credit card accounts, that doesn’t mean your tax refund can’t be used to improve your credit scores, and perhaps to a significant extent. If you have a credit card that has a balance that’s very close to the credit limit, then your scores are suffering.

This relationship between outstanding balance and credit limit is called the “debt-to-limit” ratio. It’s calculated by dividing the balance by the limit and then multiplying that figure by 100. So if you have a $5,000 balance on a card with a $10,000 limit then your debt-to-limit ratio is 50 percent. That’s better than 60 percent, but not as good as 40 percent—or 30 percent, the level VantageScore Solutions generally recommends you should stay below if you want the best-possible credit scores.

Credit-scoring models typically consider the debt-to-limit ratio for each of your credit card accounts, as well as the total debt-to-limit ratio for all of your cards combined. To calculate the total figure, add up all the credit limits for your cards and all the outstanding balances. As with each individual card, divide the total of your balances by the total of your limits, and then multiply that figure by 100.

You certainly don’t have to pay off your entire credit card balance in order to improve your credit scores. If you can use your tax refund to reduce your outstanding balance from $5,000 to, perhaps, $3,000, then you’ll have reduced the ratio to 30 percent, which is much better than a ratio of 50 percent. And if you can reduce the level even more, perhaps close to 10 percent, then your scores may improve considerably. Add to that the fact that you won’t be paying interest on the credit card debt and it doesn’t take a financial genius to see the substantial benefit of using your tax-refund dollars wisely.

Did You Know…Credit repair companies can’t “fix” accurate records?

The Fair Credit Reporting Act (FCRA) gives U.S. consumers the right to challenge inaccuracies on credit reports. It further allows consumers to challenge or “dispute” that information at no cost. Nevertheless, a category of companies known as credit-repair organizations have evolved based on the business proposition of disputing credit-report information on consumers’ behalf, for a fee.

VantageScore Solutions generally discourages consumers from engaging such credit-repair services, for the simple reason that you can dispute your own credit reports for free, without anyone else’s help. Nevertheless, the sheer number of credit-repair companies, also known as credit-service organizations, makes it clear that many consumers do hire them. Those who choose to do so should keep the following in mind:

Credit-repair is a legal business, but it’s subject to strict federal and state laws that forbid a variety of unethical practices. Chief among these is a federal statute called the Credit Repair Organizations Act (CROA).

The CROA exists to protect consumers from unethical credit repair companies that seek to take advantage of consumers who have poor credit. The challenge for consumers is to sort between those that follow the law and those that do not. Becoming familiar with the CROA and its provisions can help consumers tell the difference.

The CROA includes the following provisions:

  • Credit repair companies are not allowed to guarantee results. “We’ll remove 100% of the derogatory information from your credit reports” is the kind of language that is a violation of the CROA. If a credit-repair company’s marketing literature or salespeople make such claims, you should be aware they are neither legal nor true. On a related note, neither repair companies nor consumers acting on their own are able to remove negative information from a credit report, provided that the information is accurate. (A discharged bankruptcy, for example, stays on a credit report for a minimum of seven years, so there’s no legal way to remove it from a file before then.)

  • Credit repair companies are not allowed to counsel customers to take any steps to alter their identification to “prevent the display” of their accurate credit report. For example, it is illegal to apply for credit using a tax ID number or so-called credit privacy number (both of which happen to be nine digits long, like Social Security numbers) in lieu of a legitimate Social Security number. Any company that suggests otherwise is operating illegally.

  • Credit repair companies are also prohibited from advising consumers to be dishonest in their communications with the credit reporting companies. If, for example, a credit repair agent advises a client to blame overspending or missed payments on a nonexistent identity thief, the counselor is violating CROA. And if the client follows that advice, he or she may be guilty of fraud.

  • Finally, credit repair companies are not allowed to bill you in advance for their services. They can only bill you after they have fully rendered their services. So, if a credit repair organization seeks payment up front, before it does any work, then it is not on the level.
Many consumers who turn to credit repair companies would be better served by seeking credit counseling services, available free through nonprofit organizations in many communities. For counseling focused on housing issues, including avoidance of mortgage default or foreclosure and mortgage-modification assistance, the Homeownership Preservation Foundation (HPF) and its 24-hour hotline, 1-800-995-HOPE, are excellent resources. The U.S. Department of Housing and Urban Development (HUD) also publishes a directory of sponsored counselors at its website.

Five questions with Bill Himpler, executive V.P., American Financial Services Association

 

Bill Himpler

Bill Himpler and his federal government relations team have enhanced AFSA’s presence in the political debate, affecting a number of issues that impact member companies’ ability to offer affordable credit options to American consumers. He has been called on to testify on behalf of the consumer credit industry and AFSA members in congressional hearings. He has also served as an industry spokesman on numerous topics.

Himpler joined AFSA in 2004, after heading congressional relations for the U.S. Department of Housing and Urban Development. The Score is grateful that he made time to share his insights on the ever-changing scene on Capitol Hill. 

What do you see as the top two or three issues that AFSA members should expect to change under the new president?

November’s election changed many game plans in Washington, D.C. With respect to AFSA, President Trump’s election allowed us to switch from defense to offense, from protecting and defending access to credit, to actively expanding it to more Americans. However, just like the unexpected election results, it is a bit difficult to forecast what changes to expect. I think we are realistically going to see a change at the Consumer Financial Protection Bureau (CFPB), either in structure or manner of operation. We are also likely to see some concrete changes to the Dodd-Frank Wall Street Reform Act. Finally, I think we will see—and we are already seeing this to a certain extent—a reduction in duplicative and burdensome regulations overall, making it easier for lenders to offer the credit that Americans need. 

What are the top legislative issues AFSA is pursuing in 2017?

AFSA has some key legislative priorities listed on our website. However, the foremost priority for us is CFPB reform. Congress should move to reform the CFPB to improve its accountability and transparency. The bureau should be placed under a bipartisan commission with an annual budget subject to the congressional appropriations process and oversight. Many members of Congress have voiced their support for these changes, especially Rep. Jeb Hensarling (R-TX), chair of the House Financial Services committee. His updated CHOICE Act would be a great move for financial services and the country as a whole. 

New administrations typically use their first 100 days to jump-start their agendas. Do you see President Trump’s policies as generally hospitable to the financial-services industry? Why or why not?

Generally yes, and we are looking forward to working with members of the new administration and Congress to expand access to credit. Of particular note is Treasury Secretary Steve Mnuchin, who has indicated in interviews and during his confirmation hearings that he views expanding access to lending and CFPB reform as top priorities. It is important to note, however, that we have found that the majority of policymakers in Washington, D.C., regardless of party affiliation, see the important value that financial services companies bring to ordinary Americans.

There are strong expectations in Washington that Congress and the administration will be curtailing or even eliminating regulations imposed under Dodd-Frank. How are you advising AFSA members to prepare for that likelihood?

Let’s be clear—there are portions of Dodd-Frank that are important. However, many of those regulations overlap with existing regulations or duplicate protections that already exist at the state level. We have long argued that some curtailing and elimination of regulations is an important step to ensuring the continued success of the American economy. If there is a silver lining to these burdensome and duplicative regulations, it is a renewed focus on compliance at many companies. We are telling companies to continue—good compliance leads to more informed customers, and this is a great thing.

The AFSA State Government Affairs Committee recently concluded its annual meeting. What were the hottest topics of discussion for AFSA members working with state government?

At Himpler’s request, this answer was provided by Danielle Fagre Arlowe, senior vice president, AFSA State Government Affairs:

AFSA has one of the most active state government affairs departments in Washington and we’re very proud of that. Our meetings are always full of content and discussions and last week’s was no different. There were a whole host of hot topics, but some of the highlights included rate caps, collections, fintech, data breach, federalism, mandatory credit reporting, reverse mortgages, lessons from state exams and litigation, elder abuse and ancillary products.

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