Lenders rely heavily on consumer credit reports and FICO scores to help them make an informed decision. Although some prospective borrowers may feel that this is unfair, it’s one of the best ways for lenders to determine whether or not an applicant has a proven history of making timely payments. Unfortunately, a new credit reporting policy that’s set to begin on July 1 will reduce the efficacy of this process.
Credit Reporting Policy: What Lenders Need to Know
With only three months left until this major credit reporting change takes effect, it’s vital for lenders to educate themselves about what is, and what isn’t, going to be different. Currently, TransUnion, Experian and Equifax report all tax liens and civil judgments. These negative items have brought down the credit score of millions of Americans, and they help lenders see a history of seriously delinquent behavior.
However, as of July 1, all of this is going to change. The three major credit bureaus will quietly stop collecting data on most tax liens and civil judgments, which in turn will prevent them from reporting about these borrower issues. As a result, borrowers who have these negative items in their past will get a nice bump in their credit score.
This could definitely cause some pain for lenders who end up inadvertently working with a consumer who has a non-reported history of civil judgments and tax liens. On the plus side, every other form of credit reporting appears to be remaining the same. Therefore, any other issues should be reflected in their credit score.
How Will This Impact Credit Scores?
According to VantageScore Solutions, an estimated 8 percent of U.S. consumers will have a better credit score on July 1. The average increase will be around 10 points, but this could be enough to push many consumers into the acceptable range for a loan.
Sadly, what lenders won’t know is that people who appear to be qualified may actually be a huge risk. This is because anyone who has a tax lien or judgment has a 5.5 times higher chance of ending up defaulting on their loan. When you put all of these pieces together, it’s clear that lenders are being put in a position where they’ll have to take on the burden of increased payment collection issues.
The credit reporting change is likely to make lenders more cautious when working with consumers. Fortunately, they can still rely on the same high level of service they’ve always received from Lakeside Title Company. We cannot mitigate your credit risk, but we can make the title portion of a mortgage go as smoothly as possible.
