In early 2008, with the industry entering a meltdown that made most nightmares serene, a troubling trend emerged. It was the feature of cover story of the issue of Broker Magazine that discussed various methods of credit restoration and improvement. With the mortgage marketplace drastically changing over the past year, it was easy to understand the increased awareness in the maximization of a consumer’s credit score in an attempt to salvage every loan, and make some extra income to boot. Other articles have since been written in several mortgage publications featuring these programs.
With today’s increased underwriting scrutiny, providing decisions that hang on the smallest of credit score margins. The desire to be involved in making credit improvement happen is obvious, but at what cost?
There is no shortage of firms looking to partner with mortgage originators offering various methods of correcting, improving or “repairing” credit, and profits from the process there are two very important missing aspects of “credit repair”—aspects that mortgage originators must carefully consider when working with their clients and credit repair companies. While the firms promoting these programs will address one of the problems, they miss one very important one … mortgage originators must be warned: Being involved with credit “repair” may bring major consequences, including the loss of your ability to originate loans!
In terms of legality
The first issue with credit repair involves its legality. Does the program specifically comply with federal law? In addition to the Fair Credit Reporting Act (FCRA), there are very specific and strict laws about credit repair. One of the most important laws, and one of the most frequently unrecognized, is the Credit Repair Organizations Act (CROA). This is the primary governing law for credit repair companies and it strictly prohibits many practices that are unfortunately still in use by many credit repair companies today.
For a credit repair company to be compliant with the most basic of CROA regulations, they must start with a clear contract spelling out exactly what they will do for the consumer, inform them of their rights and not charge the consumer any fees until all terms of the contract have been completed.
Many of these companies have policies that barely meet the requirements of the law, and would likely fail a CROA legal challenge by a consumer or government enforcement agency. Even a couple of the national credit repositories and Fair Isaac and Company (FICO) got surprised by CROA litigation challenges regarding the sale of their credit reports, scores and credit correction/improvement programs on the Web for violating the pre-payment portion of CROA. If you are interested in further detail, click here for a complete copy of the CROA.
The sale of credit reports
The second issue, and the issue with the greatest potential impact on your ability to continue your mortgage origination business, is related to the three national credit repositories and their policies prohibiting the sale of credit reports to companies in the business of credit repair. Any accurate derogatory data on a consumer’s credit report cannot be removed through legal methods until the statute of limitations expires (seven years for everything other than bankruptcy, which is 10 years). Companies that make claims other than that should have their practices carefully reviewed for both FCRA and CROA compliance.
Since any firm that is found to be in the business of credit repair no longer qualifies to purchase credit reports, if you are discovered and listed on a “do not sell” list of the repositories for being involved in credit repair, what is going to happen to your mortgage originations? This also affects any company that shares office space with a credit repair company. In other words, starting a new “company” to shelter the connection with your mortgage broker business will not work if you are sharing physical office space with the other company. This is one of the items reviewed during the mandatory site inspections prior to receiving clearance for the purchase of credit reports. Mortgage originators now are now being cut off on a regular basis for violating this policy.
In a down market, it is only natural to seek new ways to expand your consumer base and look for new revenue streams. When doing so, careful evaluation should be given to the potential consequences to both your consumer and your mortgage origination business if credit repair is something being considered. Make sure that any company you are considering referring to your consumers meets all of the federal guidelines for legally offering credit repair.
The FTC brochure at this link will help you to determine if the company you are planning to refer is worthy of consideration by your consumer. And, of course, if you are considering getting into this business, remember that being involved in a credit repair company impacts your ability to access credit report information. Make sure to include the loss of access to credit reports for your mortgage operations from any considerations on getting into this business line and if the potential loss of your company is worth the benefits of these programs.
Terry W. Clemans is the executive director of the National Credit Reporting Association Inc. (NCRA).