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What you don't know ... hurts

National Mortgage Professional
Mar 24, 2014

What you don't know ... hurtsJoe Cornocredit scores, interest rates, credit correct for pay, NAMB

I have held back as long as I can about credit scores and how they are managed by various groups and companies. Credit scores play such a pivotal role in determining borrower interest rates that it is very upsetting to see consumers unduly penalized for not having knowledgeable people assist them.

I am not promoting any "credit correct for pay" business. I am directing my comments directly towards the originators and lending institutions that continue their uneducated practice in regard to credit scores. After all, it should be the retail lenders, along with their originators, that seek the best possible loan for their clients.

What really happens is that we accept the scores and place the borrower into a loan program and product that is worse than what the borrower deserves. Not to place full responsibility on the originators and their companies, the creators of such scores never intended or wanted disclosure to the public. The various scoring entities make it nearly impossible to evaluate scores, yet the law requires score disclosure.

With vague reasons listed for a specific score, originators and loan companies have had no one to turn to for assistance. This topic has developed into a training course of mine because there is no where else to learn it. You will not receive it from the various creators and repositories.

They express that it is a complicated and ever-changing process and cannot be understood in a simple training. They list matrices to read credit and explain, with basic words, something that is very complicated. Example: Let me just present FICO scores and updated software.

Fair Isaac, over the years, has continually updated their scoring models. Lenders use various models from past years so there is not one basic model. However, various logarithms and analysis remains consistent within all of the models, but do not stay effective with current credit habits and trends.

The "next generation" model, created in 2001 by Fair Isaac, has not been incorporated by most investors and lenders, currently. The variations between the models can have a major impact on scores. Ginny Ferguson, CMC, National Association of Mortgage Brokers Credit Scoring Committee chair, was quoted in The Washington Post saying, "When lenders use outdated FICO models for pricing loans, we can run into major problems."

It is not just the difference between "classic" and "next generation" scoring models that invoke confusion and eroded scores. The variations of software within repositories have an impact as well. You can currently sign up for Beacon, Beacon Enhanced or Beacon 96 with Equifax alone. Beacon and Beacon Enhanced have been discontinued, but a lender can misread scores in Beacon 96 and Beacon 5.0 because they have not been trained and educated on changes and modifications.

The classic model has five industry versions being used by wholesale lenders. This may explain why one investor accepts a credit score when a competing investor declines the same score. The reason is that they, the lenders, are pulling or evaluating data differently due to their existing model. The two lenders receive different scores on the same borrower due to the fact that they are accessing outdated score models.

The aforementioned scoring models are within the same group (Equifax), not bringing in other repositories. Emperica has three models out and operating today—Emperica 95, Precision Score and Precision 03. Combine these with forthcoming titles like Pinnacle, Fair Isaac Risk Score, Vantage Score and Credit Expert, and the simplicity of trusting and relying on an outdated credit score model comes into question.

There are some easy ways to understand what you are dealing with. First, most lenders and investors utilize a CREDCO source for validating. It is no longer a good idea to pull credit from other sources other than what the lenders use as their bible and drop-dead, absolute reliability. Use a CREDCO base credit source service.

I would not run a credit report as a retail lender anymore. I would pull it through the lender's automated underwriting system/loan origination system, or have the lender pull it for you. After all, your credit report will impact scores, and the lender will re-pull to validate your scores anyway. Commit and dedicate to lenders who will pull the credit for you.

You need to know what type of score you are dealing with before having the wholesale investor run the credit. There are sources available that can issue a "blended" or "independent" score that are within five points of actual credit scores. They do not impact credit pulls or credit scores, and they cost anywhere from $5 to $7. This is invaluable to an originator working with credit scores today.

You need to ask each and every lender what model of scoring they are using. With this information, the credit score suppliers can run the actual model scenario that your lender will be utilizing. Ask your credit supplier, along with the lending source, what model and version of software they are using. You can spend days and a lot of money, chasing after incorrect scores. The variations in scores can be attributed to the discrepancies within the differing software and updates.

Credit scoring, and how to pull real and valid scores, is quickly becoming a trained talent in itself. Become educated on the score models and versions. Learn what to do and how to work systems for scores so that your borrowers do not continue to pay (with their interest rates) on sloppy and outdated systems. With lawsuits ever so prevalent, will any originator and retail lender be immune to such business practices?

It will be the lawsuits, individual and class action that will bring the score disparity on to the front pages of newspapers. I highly recommend that you spearhead consistency and fairness with your individual and company knowledge. Become educated on this rapidly-increasing and damaging problem. I have seen many a great originator and company go broke defending an action that they had no knowledge of.

Outsource such knowledge to an independent source other than your credit provider or lending source. It's sad to say, but today, you need to outsource to obtain legal assistance that will fight the score and obtain a quick response. This is precisely what the independent score suppliers utilize to obtain actual data and scores. They do such without any financial burden to your borrower.

Which side of the fence are you on? Are you an originator and retail lender who uses sources to save the borrower money, or are you just delivering a higher rate of interest that they do not deserve? Your responses to these questions will decide if you are vulnerable or not. More importantly, it decides if you are a service to the borrower or not.

Joe Corno is president of Utah-based We Be Consulting and Seminars. He may be reached at (801) 836-2077 or e-mail joecorno@hotmail.com.