This Week in Broker Magazine

This week's featured story from Broker magazine, our sister publication:

Fixing Credit

Does credit repair help consumers become eligible for a mortgage or is it a scam?

By Amilda Dymi

If subprime is the current dirty word of the mortgage business, the next most unpopular, at least among insiders, is credit repair.

Terminology may appear secondary, yet it is important in conveying credibility, or not, especially in times of crisis.

Currently, the industry is updating the overall process of customer credit reporting. Experts highlight the need for accurate, forward-looking credit data gathering and reporting. Many describe it as credit proofreading, score optimization, or long-term credit improvement, all of which involve data reporting and financial credit profile knowledge, not illegitimate changes of borrower information or fraudulent credit repair. As a result, there is a lot of lender skepticism when dealing with imperfect credit profile clients.

"I want to make it clear that we believe there has been a large misunderstanding with regards to credit restoration and credit repair. We do not support credit repair, which is the manipulation of credit data and the covering up of legitimate information," said managing partner of Cogent Road, Alan Baia.

"What we're seeing is that brokers do not really understand credit scoring. They hear about credit repair and credit restoration. Often, credit restoration is the illegitimate manipulation of a credit profile with the sole purpose of hiding legitimate derogatory information. It often comes with a significant monetary cost to the customer and doesn't generate the results that the broker initiated the program for. So you end up with an unhappy customer. Most of all it is a purposefully and illegitimately manipulation of the customer's credit profile. We in no way support that."

It is worth noting, however, that terminology is one issue. Separating fraud from legitimate credit profile improvement is quite another. Brokers have the option to assist borrowers and future homebuyers with financial education that offers them a chance to acquire the knowledge they need to improve their credit profile in the long term, six to 12 months or more, by paying on time, saving, budgeting and building awareness about what financial transactions damage most their credit profile.

Obviously the above is not the reason why credit repair has come to bear a very negative connotation. "In many cases credit restore companies are fraudulent companies, which is why our company uses the term credit proofreading," Mr. Baia said.

He believes credit proofreading is the only legitimate tool that brokers should be using to educate and support the customer market.

"Proofreading technology is a mechanism we're using to search through legitimate data and legitimate credit usage. The reality is that most customers really don't understand credit scoring. Most customers haven't been really educated on the effects of the daily usage of credit and how can it affect the health of their credit score."

Cogent Road breaks the scoring in two components, data accuracy and usage.

"In the area of data accuracy we have been using our experience as a credit reporting agency since 1993 with understanding that data. We have designed a number of algorithms that analyze data as it is provided by all three bureaus. What the customers and most brokers don't see is what is the underlying data, why is one score different than the other," he said. "When we talk about accuracy, we do not talk about the removal of legitimate data no matter how derogatory. What we're talking about is nuances within that credit file."

Nuances that are more telling since if one of the credit bureaus gets some of the data wrong the broker never sees the missing information. By the same token, if the algorithm finds that a customer has maxed out the credit card, the propensity for risk is much higher and it can have an effect in lowering the credit score.

"When you're looking at such massive data, these things aren't seen by the customer or by the broker. Credit proofreading looks at data inaccuracies within the credit profile in order to identify the items that are legitimate and need to be corrected so the customer score is accurate," he explained. "Because the average customer today has a significantly larger credit history than they ever did before, the financial services industry relies on credit scoring algorithms more than they ever did before."

Another factor that affects customer data is the unprecedented consolidation across all financial industries whether it is in the mortgage, credit scoring or other industries, he said. It contributes to additional layering of the data over multiple channels and databases, which make data reporting more complex and more prone to mistakes and loopholes. Along with the consolidation of the lending institutions, starting back in 2007 he has also seen a trend of mortgage servicing being transferred repeatedly. Typically a loan is transferred from company A to company B and reported by the three credit reporting companies. If one of them has an information loophole in the loan's principal balance for instance then one of the credit scores is inaccurate and can be lower than the real credit score. Sometimes a mortgage loan that was transferred six months ago is not in the system so its component data are not being seen and they can have a tremendous effect depending on the customer's credit profile, he said.

Cogan Road's product "funding suite" provides credit reports for the mortgage origination market. "We analyze our data regularly, look for trends and changes. We developed a number of unique algorithms." For instance, the bureau may think a client has one loan when the client may have two loans, he said. Credit proofreading ensures data accuracy using those algorithms.

Data accuracy in credit reporting is an issue that has touched the mortgage channel from origination to securitizations. Recently Fitch Ratings became the first rating agency with the capability to evaluate and assign ratings to mortgage loans based on VantageScore — so far the only generic credit scoring model jointly developed by the three national credit reporting companies (Equifax, Experian and TransUnion) using the same algorithm that ensures they give "a consistent interpretation of consumer credit files." It is a "major milestone," according to president and chief executive of VantageScore Solutions LLC, Stamford, Conn., Barrett Burns. "Mortgage lenders can now securitize mortgage loans based on VantageScore, which will further raise awareness of our model's strengths and advantages."

According to Fitch, "VantageScore provides highly predictive evaluations of consumer creditworthiness. The model can also score consumers with limited credit histories." Fitch has fully incorporated VantageScore into ResiLogic 2.1, its quantitative model that provides credit risk analysis at the individual loan and pool level for residential mortgage loans. ResiLogic was updated to include national and regional performance factors, loan seasoning and adjustments for high-risk loan underwriting and mortgage insurance. VantageScore was created by America's three major credit reporting companies based on a patent-pending methodology that aims to provide a consistent interpretation of consumer credit files and the ability to score more people.

VantageScore is one of a growing number of scoring systems developed by the industry to bring in new business leads for brokers and lenders while using more accurate FICO expansion scores and enhanced risk-based pricing.

Earlier this year, MicroBilt Corp. of Kennesaw, Ga., and PRBC of Annapolis, Md., teamed up "to help small-to-medium enterprises and financial institutions conduct more business" by bringing into the marketplace an estimated 50 million 70 million American consumers who either have so-called thin credit or have not established credit histories The two companies are merging payment data collected by MicroBilt and PRBC in PRBC's data repository to help more consumers qualify for FICO Expansion scores used by lenders and financial institutions in underwriting new loans. As part of the agreement, MicroBilt will make an equity investment in PRBC.

The current credit crunch is forcing smaller businesses to demonstrate to their financial institutions that they're being very cautious in originating new loans. As a result, it is more difficult than ever for historically underserved consumers with "thin" or no credit histories such as young adults, senior citizens and new Americans to qualify for and receive competitive rates. Businesses, in turn, are being forced to turn away potential customers who pay bills on time but lack credit payment histories based on mortgages, auto loans or credit cards.

"A major segment of the consumer market is still disadvantaged by the traditional reporting industry," commented MicroBilt chairman, Bob Raleigh. "PRBC has done a tremendous job in developing methods and systems of aggregating non-reported bill payment data to help consumers demonstrate good payment track records and qualify for credit at competitive rates. By combining PRBC's data with the trade line data reported to MicroBilt by thousands of smaller companies, we can help this large sector build credit histories and receive FICO Expansion scores much faster, and in turn enabling businesses to grant more credit with less risk."

MicroBilt said the 125,000 users of its credit origination services include tens of thousands of "buy here, pay here" clients such as landlords, community banks and credit unions, many of whom work with immigrants, senior citizens, students. MicroBilt helps businesses verify credit and identity while originating credit. It allows those too small to work directly with national credit bureaus to report trade line data as customers make payments. By contributing bill payment and trade line data reported by smaller businesses to the calculation of FICO Expansion scores, MicroBilt and PRBC estimate smaller businesses, banks and credit unions could grow their overall addressable customer bases by as much as 25%. It is a fact that "many businesses wanted help assessing the credit risk of applicants who lacked a traditional credit report," the company said. A richer data set enable many consumers to get better loans and generate new business.

Data reporting, Mr. Baia said, are as important as customer behavior.

"Many people do not understand how their behavior is affecting their credit health because they have not been educated about it. Education is critical. It still is the biggest challenge."