Paper Credit Reports Are Not Enough

March 27, 2008

I’ve got a headache. Literally.

In a mortgage market that is arguably one of the most difficult we’ve seen in decades, you’d think today’s mortgage originators would use every available resource to increase their applicant’s qualifying ability. Too often however, they do nothing but order a credit file, glance at the scores and decline the applicant.

[Head throbbing]

For the past six months I’ve been talking with broker after broker in webinars, on the phone and via magazine articles about the simple and very real fact that FICO is punishing applicant credit scores because of errors and issues in their credit files. I could say the same thing this way: “Don’t trust the credit scores on your applicant’s credit report, their probably lower than they should be”.  Yet in all this, it seems I’m the only one that’s learned anything and that being how true the saying, “old habits die hard”, which is to say they don’t really die at all.

Ok, so I’ve given my self a headache by beating my head against wall after wall – but I’m amped up on Advil, so here I go again. Mortgage qualifying depends (to a great extent) on the credit score. While the paper credit report reveals your applicant’s current credit scores, it doesn’t reveal the data used to calculate those scores. The credit report is a composite (merged data from three different sources) which makes it near impossible to understand how the account tradelines relate to the credit scores. But what we do know is that over 70 percent of the time credit scores are wrongfully lowered because of bad file data or the applicant’s improper use of available credit.

So what to do? Since the odds are that the scores you see on a printed credit report are lower than they rightfully should be, it would be helpful to know A) what the scores actually should be and B) what issues need be corrected. You can pour over the paper credit report for hours on end and never answer any of these questions. But, run the file through some good credit proofreading software and you’ll get your answers instantly. You see, you need software to sift through the data solely from TransUnion in order to understand where errors are pulling down its score. Ditto for Equifax and Experian. You can’t use the merged tradeline data in a printed report since it may be a mash-up of data from all three sources. When it comes to qualifying, paper credit reports aren’t enough.

The ironic thing about this… and perhaps the root cause of my headaches is that credit proofreading software doesn’t cost anything since these tools come free when you purchase a paper credit report. All it requires is a change of habit. Most mortgage originators connect to their credit agencies through loan management software like Calyx Point or Encompass, which only pass through a paper (PDF) credit file. Left behind are all the credit proofreading tools that can help them increase file accuracy and raise credit scores. This is the habit that needs breaking. Instead, order the credit file directly through the credit agency’s software so that you can see the true qualifying potential. Then retrieve the existing file into the loan management software (rather than ordering it). There is no extra cost to do this – and it doesn’t add much time to the process. It will however, help you qualify significantly more applicants.

1 Comment | credit proofreading, credit reports, internet software, mortgage | Tagged: , , , | Permalink
Posted by Caped Crusader

Big Companies Can Make Lousy Partners

March 21, 2008

I happen to work in the mortgage industry, a space dominated by large, buttoned up, bureaucratic competitors. And over the past five years I’ve realized that most of these large companies have a tough time getting out of their own way.

The idea that the large company’s suffer from their own inertia began to bubble up about three years ago as we worked in partnership with one of the industries largest organizations. (For confidentiality reasons I’ll call this company AIG). My partner and I developed a business process that could effectively replace the need for physical appraisals, yet guarantee that the value of the residential real estate collateralizing a mortgage loan equaled the sales price. Without getting technical, suffice it to say we used fancy mathematical formulas that could measure risk – and then price an insurance policy accordingly.

It’s a simple, strait forward concept. Why use an appraisal, which after all is simply a personal opinion of collateral value, when you could get an insurance policy guaranteeing the value in seconds. When you consider that it costs only 50% of typical appraisal prices, that there is no cost unless the loan actually closes, and there is no valuation risk it seems like a no brainier.

I then set out to find a large, well connected company to sell this product for us. After several phone calls and preliminary discussions a division of AIG known for selling mortgage related insurance products signed an agreement to become Cogent Road’s sales agent. As a small mortgage technology firm, I believed we needed AIG to get an audience with the large mortgage securitzers which would be most concerned that the collateral backing up their investments was properly valued. I believed large companies only buy from large companies.

We came to AIG with a turn key business process, and the complete software solution needed to execute. All AIG had to do was sell it. Instead, they began ooze bureaucracy into every nook and cranny of the project. Its not their fault really, its simply that they were doing what big companies do…which is cranking out an endless stream of meetings. And meeting meant more interal work (called “action items”) and pages of unnecessary documentation (called “business case studies”). Before they could sell they decided the software should be modified a zillion different ways – and everything integrated with their own client billing system. Ok, fine. We did all that.

Then we had to have more meetings with additional (more senior level, presumably) managers who had no idea what the product even was. However, they knew enough to demand more changes to the software that again we believed were baseless and entirely unnecessary. But fine, we agreed to that too.

And we spent almost a year ironing out a contract with nary a prospective client in sight. AIG demanded what large companies demand and we conceded what smaller companies concede. In the end we had a one year sales agreement and an equitable financial distribution. AIG would get the product introduced to the many different lenders they assured us were practically tripping over themselves to get started. Cogent Road would provide all hardware, software, billing and collections. It was time to sell.

But the selling never happened. In fact, nothing ever happened. During our initial couple of conference calls we realized the big company didn’t really understand what the small company was offering. Slowly, it dawned on us that if they didn’t understand it they couldn’t sell it. And they didn’t. The year came and went and we never heard a word from them. In the end, they never even called us.

Perhaps its my fault because I picked the wrong partner, who knows. But, as I write this I am sitting on a plane en route to a sales meeting with one of the nation’s largest mortgage securitzers. My advice to the smaller company with a good idea; think twice about enlisting a partner to sell it for you. If its your idea, you can communicate its benefits better than anyone. Be confident and start selling.
 

No Comments » | entrepreneurship, internet software | Permalink
Posted by Caped Crusader

Credit Errors Wrongly Lower FICO Scores

March 4, 2008

Last week, during some quick research for an article I was writing, I came across a 2004 article posted on CNNMoney.com which stated 25% of credit files contain errors serious enough to decline a loan application. 

My last blog revealed that “credit use” errors can harm a consumer’s loan chances. I define, “credit use” errors as the multitude of ways people use existing credit cards that unknowingly lower their FICO scores.  The type of credit file errors we’re discussing today have nothing whatsoever to do with the person affected – yet can be financially devastating.

If you could dissect a credit report the way you dissected a frog in biology class, you’d quickly discover that each credit report actually contains thousands of data elements that come from three different companies. These unrelated, disconnected companies are TransUnion, Experian and Equifax. Each company performs essentially the exact same service, compiling loan and payment history on every consumer in America. Ironically, three companies exist because no single one can be depended upon to supply accurate data. This means that the typical credit report actually blends or merges the data from these three different companies to supply (ideally) the most accurate picture of the consumer’s payment history. The silent message here is that these companies make mistakes.

By mistakes I’m speaking of incorrect numbers. Bad data. Outdated information. These are the same mistakes that CNNMoney describes in its 25% error rate. And don’t forget, these are serious errors…large enough to cost the consumer a loan by damaging the credit score.

Last time I checked 25% means that one in four of your loan applicants has a big problem. And this group isn’t helped by the fact that a mortgage originator can’t even tell there’s a problem by looking at the paper credit report. The reason? The credit report reveals a single tradeline which is a merged expression of the data from three companies. And, here’s the kicker, the credit score has no bearing to the tradelines you see on the credit report.

TransUnion, Equifax and Experian each calculate a credit score based on their own data.  Let’s assume that all three companies are reporting a ChargeMore credit card for Jeff. The credit report reveals a single tradeline showing that Jeff has never been late, has a high credit limit of $10,000 and carries a balance of $2,000. Everything looks good to both Jeff and his loan officer. Yet, behind the scenes something altogether wrong occurred. While Equifax and Experian both report the ChargeMore card correctly, TransUnion data reflects an outdated card balance of $9,800, in effect reporting a maxed out credit card. Accordingly, Jeff’s TransUnion score reports lower because it was calculated using an incorrect balance.  Since the credit report looks fine, its not possible to see the bad data that lowered the TransUnion score, and Jeff pays the price when qualifying.

The good news is that it’s now possible to prevent these situations using free software tools supplied by your credit reporting agency. Before taking the printed, paper credit report at face value, this software does a quick, cost free data scan to ensure no errors exist. Most software can not only identify any errors, but can even reveal how many points you’re losing as a result. Your credit agency can fix most errors without any effort on your part in less than 72 hours. I’m still puzzled why most mortgage originators don’t understand this. The vast majority read a paper credit report from within their LOS system, and never even realize credit error detection is even possible, let alone free and immediate.

I’m hopeful you’ll be different, that before you qualify your next applicant using a paper based credit report, you’ll consider it may very well contain serious data errors. Why let a TransUnion, Equifax or Experian mistake cost your client a loan.

2 Comments | credit proofreading, credit reports, mortgage | Permalink
Posted by Caped Crusader