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Center for Housing Policy study: Housing woes extend beyond mortgage payments

National Mortgage Professional
Oct 08, 2008

Interest in credit scoring by Congress gets more detailedTerry W. Clemanscredit reports, House Financial Services Subcommittee on Oversight and Investigations, What Borrowers Need to Know About Credit Scoring Models and Credit Scores On July 29, Rep. Melvin Watt (D-NC), chairman of the House Financial Services Subcommittee on Oversight and Investigations, held a hearing titled: What Borrowers Need to Know About Credit Scoring Models and Credit Scores. The objective of the hearing was to obtain testimony about the use of credit scoring models and how credit scores are used in the extension of credit. Additionally, Congress wanted information about the consumers ability to access his credit score. While the hearing was split into two witness panels, the first featured testimony from credit scoring model developers from the national credit repositories and Fair Isaac Corporation on typical credit scoring basics, background and development processes in generic terms. The second panel of witnessesthe researchers, scholars and the consumer privacy experttestified on some of the most compelling issues, which allowed the hearing to shift focus from informational to the development of an investigational perspective. Rep. Watt commented that this could set the stage for another, more in-depth hearing on some of the issues that are most crucial to credit scores, such as multiple score types, missing data elements and non-traditional credit scores. As a credit industry representative, it is enlightening to observe these hearings, as it provides insight into the knowledge bases of the specific representatives on the subject. From the question and answer exchanges with the witness panel, one can also access the members interest level in the subject matter, and this hearing brought some of the leaders into the spotlight. Clearly, the credit score veterans of the group present are Rep. Watt, and Reps. Emanuel Cleaver (D-MO) and Gene Green (D-TX). Rep. Cleaver, in particular, has an interest in exploring the impact on the systems of all the non-traditional credit trade lines, like utility company payments, landlords and many small creditors, that either by choice or repository limitations have no ability to report to the national credit repositories. Rep. Cleavers story about his grandmother, who never used credit except for rent and payments on a small insurance policy (both of which would not show up in the credit databases), raised the question of why fiscally responsible individuals who make these types of financial choices should be deemed poor credit risks. Today, we are fortunate to be able to gather these missing trade lines and make them available for use in mortgage lending via programs like Payment Reporting Builds Credit (PRBC), which offers a FICO-branded credit score on bills that the consumer has already paid. Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development currently accept these non-traditional reports and scores, and from the interest showed by members of this committee, there will be additional pressure from Congress to expand their acceptance. Evan Hendricks, publisher and editor of the Privacy Times newsletter and author of the book Credit Scores and Credit Reports: How the System Works, What You Can Do, also testified in the hearing. Hendricks introduced two additional topics that currently create confusion for many consumers, as well as some of the representative in the hearing. The first issue regards the vast difference in the various credit score types offered to consumers, and that many of the scores most commonly available to consumers today are not the same scores used by lenders for loan underwriting. Of all the Web sites offering consumer credit reports and scores, most offer some version of what Hendricks refers to as FAKO scores. These scores are FICO knockoffs that many times are not accurate predictors for the consumers actual FICO score. The second issue raised by Hendricks was that even if a consumer does obtain an actual FICO score, unless that score was obtained from a credit report from a potential creditor, the consumer credit data file used to calculate the score will most likely be different from the consumer credit data file used to create the score when the purpose of the file access is for consumer disclosure. This is due to the difference in procedures used by the credit repositories in matching data for creditor requested credit reports vs. the reports used for direct consumer disclosure. Since each has its own specific purpose, each is accessed with that specific purpose in focus, often creating much different results. When the data in the report is different, the impact on the score calculated from that data as reported to the consumer is not the same as when it is reported to the creditor, even if the same FICO scoring model is in use on both reports. If the future brings further focus on these types of credit scoring issue details in Congressional hearings, their awareness of how the system really worksincluding its weaknesseswill provide the potential for some great returns for the American consumer. The foundation has been built by this hearing, and this subcommittee seems focused on bringing Congress a greater understanding of the process and the fairness in the specifics that are so important to the final outcome. For more information about the testimony from the What Borrowers Need to Know About Credit Scoring Models and Credit Scores hearing, click here. Terry W. Clemans is executive director of the National Credit Reporting Association Inc. (NCRA). He may be reached at (630) 539-1525 or e-mail [email protected].
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