Special correspondent to National Mortgage Professional Magazine, Dave Sullivan, recently had the opportunity to sit down with Terry Clemans about changes coming to the credit industry. Terry is currently the executive director of the National Consumer Reporting Association (NCRA), a national trade organization of consumer reporting agencies and associated professionals that provide products and services to hundreds of thousands of credit grantors, employers, landlords and all types of general businesses.
Headquartered in the Chicago suburb of Roselle, Ill., NCRA serves members in the U.S. and Puerto Rico. NCRA's membership includes two of every three mortgage credit reporting agencies in the U.S. that can produce a credit report that meets the requirements of Fannie Mae, Freddie Mac and HUD for mortgage lending. Additionally, our members produce reports for employment screening and tenant screening.
What does NCRA stand for and what does the association symbolize? What is the association trying to accomplish?
Clemans: We represent the housing consumer reporting industry. Any time a consumer is obtaining housing, whether they are buying a home or renting a home, the credit and background report for the rental or the credit report for the mortgage transaction is likely done by a member of NCRA. About 80 percent of the mortgage credit reporting agencies in the United States are members of NCRA. Additionally, we have some of the largest resident screening companies in the U.S. as members of the NCRA. NCRA members provide millions of consumer reports a month for the housing industry.
How long has the association been around?
Clemans: NCRA was founded in 1992.
How long have you been associated with NCRA?
Clemans: Well in one form or another, I have been with the NCRA since it was founded. I was an owner of a consumer reporting agency when NCRA was founded, and was one of the 100 companies that were reached out to by a dozen industry leaders who felt they needed their own industry voice back in 1992. I became what was called a charter member, as one of 38 companies that said “Yes, we agree with that original dozen,” the steering committee members of NCRA and the association’s first board of directors, and here is $1,500 to seed the launch of the association.
I was a member for many years, served on a couple different committees, including the board of directors. After selling my company in 1998 to Factual Data, I was approached by NCRA in 2000 to become executive director. I have been in that position since January of 2001.
I wanted to discuss some of the confusion over FICO 9. There has been a lot of talk about how FICO 9 is really going to help people get a mortgage. I know the National Association of Realtors (NAR) has come out with a press release about how great FICO 9 is going to be for people getting mortgages. I wanted to get your take on it and your expectations on where FICO 9 is.
Clemans: I agree with the thoughts and initial reactions about how FICO 9 will improve things. I was listening to a presentation about FICO 9 by one of the FICO developers at NCRA’s Conference recently in Palm Springs, Calif. There are some great features to FICO 9 similar to what the Vantage score's most recent version. Unfortunately Dave, you are right in that FICO 9 is not currently used in the mortgage industry.
Actually, the announcement is always leading, prior to the availability of the score for use. FICO 9 is only now becoming available for a variety of lending options and mortgage will likely be the last industry to utilize FICO 9. The current requirements for mortgage scores from Fannie Mae, Freddie Mac and the U.S. Department of Housing & Urban Development (HUD) are actually two generations behind FICO 9. The required score to be provided to mortgage lenders currently is almost 10-years-old, so history shows it is going to be a while before it’s in use, but there is hope.
One other thing about FICO 9 that I'm concerned about is if people pay off a collection. That collection will no longer impact a credit score, is that correct? Medical collections in particular have a lower impact on the FICO 9 score. Do you think that people, for that reason, will see FICO scores for the most part be higher than FICO 04 scores across the board, over the entire population, scores will be higher now?
Clemans: I am sure some lenders are going to have some concerns about that conversion however, if they look at the research that was done by Fair Isaac and remember that, it supports the same research found by the people at Vantage Score and the FICO changes are similar to the newest Vantage Score model that should provide some relief to the concerns about this change. The research found that paid collections in general, and specifically paid medical collections really had very little predictive value with regards to the consumer’s ability to repay other credit obligations. The conversion to a new score gets into a lot of other factors of course due to scoring models being very complex. But the bottom line is the research showed there is less and less predictive value in collection accounts, especially when it they are paid.
That is probably the most confusing part about credit scoring for people who are currently going through the mortgage process. They feel like they need to pay off all the collections and hope that they'll be improving the score, in reality, they wind up tanking their score initially and then it recovers later and I think it'd be a great improvement.
Clemans: Don't forget “paid collections” are the ones that have the less predictive value. If the consumer still has unpaid collections there is definitely a negative impact that will be factored into the score due to that unpaid collection.
Sure, I think it is an improvement. I hope that Fannie and Freddie eventually move over to something more modern.
Clemans: There have been some great movements in that regard just recently, and even going back to November of last year. Very recently, there was a Congressional hearing with Mel Watt, the director of the Federal Housing Finance Agency (FHFA). In that hearing, the Democratic Senator from Oregon, Jeff Merkley, who has been a longtime supported the Medical Debt Responsibility Act, put a lot of pressure on Mr. Watt to get updated credit scores into use at the GSEs. The Medical Debt Responsibility Act is a bill that NCRA has supported in the last three Congresses that is a very simple one-page bill simply requires a medical collection to be removed entirety from the credit report within forty five days after payment.
Unfortunately, the bill is not going to pass in this lame duck session of Congress; however we are hoping it will be back in the next Congress. There is movement to rectify that scoring problem outside of the bill as you can hear at the one hour and forty minute point of the hearing where Sen. Merkley really put some heat on Director Watt about the old scoring models that Fannie Mae and Freddie Mae are using. Since Mr. Watt is the Director of the FHFA, the regulator for Fannie Mae and Freddie Mac, he has a lot to say in regards to a matter like this.
I'm sure he did, that's good news for consumers and that's all that we're trying to do.
Clemans: Yes, other good news recently is that the Consumer Financial Protection Bureau (CFPB) has weighed in on this topic as well. The CFPB recently held a field hearing in Oklahoma City all about collections, more specifically, the impact of medical collections on a consumer’s credit report. The CFPB has also been doing research on this topic. The CFPB’s research found that 43 million Americans have had a negative impact on their credit report specifically due to medical collections.
Fair Isaac spoke at the CFPB field hearing with similar information that they presented at the NRCA Conference regarding the loss of predictably value regarding the consumers ability to repay debt based on collections in general. Again, medical collections were especially lacking in value when they are paid. This may be due to the complex system in place within the medical billing industry today. Insurance companies and third-party billing companies make this a very tedious process and then the collections agencies can make the billing process even more complex when they get the account. It is not a simple system to work through, and there are a lot of problems in this space. Unfortunately, a lot of people have been harmed by it and that is why you see both Fair Isaac and Vantage score moving away from using paid medical collections in particular as they are just not very predictive to someone's future ability to pay.
I have been through that too recently; we have had some hospital bills come in this year. I always pay them when they come in because I am so paranoid about my credit score. It would be very easy to let those go, thinking they are going to be covered by insurance. Then the bills wind up not being covered or some portion of them not being covered by insurance. Even though collection companies are required to contact you 30 days prior to putting the collection on your credit report. Many times, I know people miss those notifications. It is really unfortunate they have to suffer the way that they do because of a medical insurance glitch.
Clemans: There are all kinds of horror stories out there about that very issue and that is the reason why the CFPB has issued a 53-page report recently on their Web site including a consumer advisory about medical collections. Most of the conversation at that field hearing in Oklahoma City was specifically regarding this topic. We are hopeful that this pressure from the CFPB and the instructions that were given to Mr. Watt by Sen. Merkley will help expedite a newer credit scoring model into Fannie and Freddie. We are hopeful that this is going to create a situation where we will see FICO 9 or Vantage Score put to use in the mortgage industry much sooner rather than later.
I would love to say that this will happen around the first quarter of 2015, in all honesty it might be closer to the first of the year 2016 or 2017 rather than 2015 considering we are still using scoring models right now that are based off of consumer spending and payment patterns that are from prior to the 2008 financial crisis of almost 10 years ago. Any modernization in this area would be an improvement.
Even moving to FICO 8 would have been a great improvement for as long as we have both been in the business, I never thought Fannie or Freddie would ever move off of FICO 04. If you are saying it could be in a year that would be big for the mortgage industry. That update would wind up helping a lot of people and that would be wonderful, you mentioned Vantage Score. I wanted to bring them up they have been around for a little while now and they have been trying to get into the mortgage market and have been unsuccessful. Another scoring model that I thought would never be used in the mortgage industry but now you are saying they are looking at that as well?
Clemans: I believe they are, there have been comments regarding some looks into the new scores being offered and Vantage has been mentioned for potential use at Fannie and Freddie. Vantage has a very good product and although they are not in the mortgage industry currently, they have captured a majority of the credit card industry and have worked into several other industries including the auto industry and personal loans. Vantage Score was created by the three major credit repositories, TransUnion, Experian and Equifax. Barrett Burns, the VantageScore CEO, has been very active in the industry. He is a great guy who is on the board of directors of the Mortgage Bankers Association. Vantage is very active in pursuit of the mortgage industry.
I believe you will see in the not so distant future, with all the changes going on at Fannie, Freddie and HUD, to see the GSEs open it up and have an option for VantageScore or FICO 9. I would hate to see it go to FICO 8, but that is a possibility and ultimately Fannie and Freddie will likely hold that information closely until there is an announcement. As soon as there is something concrete, we definitely be letting everyone know.
It will be big news! The biggest thing that has happened in the credit industry over the last 10-15 years. Almost since credit scores were invented.
Clemans: It will be a definite major change to a very pro-consumer score and a very pro-consumer change at a time where it can help a lot of people and further the housing industry’s recovery by treating people a little more fairly and equitably with regards to the medical collection issue. We have just seen too many instances of consumers scores being harmed by medical bills that were never really their responsibility. The insurance company ultimately paid the collection, but because it took the insurance company so long to pay the bill the collection agency had marked the consumers report and it is just not fair to penalize the consumer for two-, three-, or maybe five-years for a problem in the medical billing processes. Ultimately, the collection account is on their record for seven years, but for the scoring purposes the account really starts to have a very limited impact after four years on most credit score models.
Dave Sullivan is special correspondent for National Mortgage Professional Magazine and marketing director for Credit Technologies Inc. He may be reached by phone at (248) 891-2205 or e-mail [email protected].
