Understanding Credit Reports & Credit Scores

Transcription

1 Understanding Credit Reports & Credit Scores April Genworth Financial, Inc. All rights reserved.

2 Overview & Course Objectives Credit Reports & Scoring Credit Reports & Scoring is designed to help individuals understand their role and responsibilities when viewing credit reports. It will prepare Mortgage Loan Originators with the required knowledge in order to successfully analyze a borrowers credit report. You will obtain a clear understanding of the types of credit reports and how to access these reports. You will also have an understanding of all credit reporting and nontraditional credit compliance guidelines. Upon completion of this course, attendees will be able to effectively: Understand Credit Report Types Review and Analyze Credit Reports Obtain a clear understanding of Credit Scoring Basics Understand Agency Guidelines Gain knowledge of the legal requirements of FICO Score 1

3 Credit Report Types A credit report is a record of the borrower s credit activities. There are three types of credit reports that provide data on the borrower s liabilities and payment histories. They are: An in-file credit report is credit data received directly from a national credit bureau. This data is not verified. A tri-merge credit report is obtained from a credit reporting agency and contains data collected from three national repositories. A factual credit report also called a RMCR (Residential Mortgage Credit Report) is obtained from credit reporting agencies and contains data collected by the agency from three national repositories. The credit agency verifies certain data and conducts an interview with the applicant. REQUESTING THE CREDIT REPORT Make sure when you order any type of credit report you: Get the complete legal name of the borrower Use the correct spelling of both the first and last name Identify any alias the borrower may have Confirm whether the borrower uses any generation suffix (Jr., III ) Only businesses or individuals with a permissible purpose can access a consumer s credit report. The consumer must be fully aware that their credit will be accessed and have granted permission to do so. Anyone who obtains a copy of a consumer s credit report under false pretenses can be fined and jailed for up to a year. 2

4 Credit Report Basics WHERE IS THE BORROWER S CREDIT INFORMATION LOCATED? Creditors voluntarily report the information to Credit Bureaus. A credit bureau is a clearinghouse for credit history information. The bureau may also be referred to as a Credit Repository. Credit grantors provide the bureau with factual information on how their credit customers pay their bills. Each bureau assembles that information, along with public record information obtained from courthouses, into a file on each consumer. There are three major credit bureaus: Equifax: (800) Experian: (888) Trans Union: (800) These national agencies maintain centralized databases containing the credit records of more than 200 million Americans. Credit bureaus generate over a half-billion credit reports a year. Credit bureaus do not rate credit Credit bureaus do not approve or reject consumer applications for credit. Credit bureaus store and report the information 3

5 Credit Report Basics WHO PREPARES THE CREDIT REPORT? Consumer reporting agencies prepare credit reports. These agencies: Specialize in obtaining records on the credit history of almost everyone who has borrowed money Contact national repositories of accumulated credit records for each area of the country where the applicant has lived during the most recent two-year period and prepare a credit report PRIMARY CATEGORIES OF INFORMATION There are four primary categories of information: 1.Identifying information 2.Credit history 3.Public records 4.Inquiries Identifying info may include: Name, current & previous addresses, social security number, telephone number, date of birth and current and previous employers History of paying bills with credit grantors such as: retail stores, banks, finance companies and mortgage companies All available public record information and judgments, foreclosures, tax liens and bankruptcies Information about inquiries during the past 120 days. However, a consumer s copy will list all inquiries for the past 24 months. 4

6 Credit Report Basics WHAT DETAILS DOES THE CREDIT REPORT INCLUDE? For each debt listed, it provides the: Creditor s name Date the account was opened Amount of the highest credit or original loan amount Required payment amount and unpaid balance Current status of the account Payment history Any remarks or Special Comments to describe the loan situation (real estate loan, loan modification, in dispute, FNMA loan, etc.) Information the Credit Report will Not Include: Checking or savings account information Medical history Purchases made with cash Race, gender, religion, or national origin 5

7 Credit Report Basics Free Personal Credit Report The Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transactions (FACT) Act, provide that every consumer is entitled to one *free Personal Credit Report from each of the 3 national credit reporting agencies annually Request Online Request by Phone (877) Request by Mail Annual Credit Report Request Service P.O. Box Atlanta, GA *It is important to note that a credit report is free, but a score is not. People often confuse and interchange "report" and "score". 6

8 The Credit Report Sample

9 Sample Credit Report Legend Sample credit report retrieved with permission from Credit Plus 8

10 Sample Credit Report Legend Sample credit report retrieved with permission from Credit Plus 9

11 Sample Credit Report Legend Sample credit report retrieved with permission from Credit Plus 10

12 Sample Credit Report Legend Sample credit report retrieved with permission from Credit Plus 11

13 Sample Credit Report Legend Sample credit report retrieved with permission from Credit Plus Note: Based On The Type Of Debt It May Be Calculated Differently By Investors 12

14 Sample Credit Report- Summary of Scores Sample credit report retrieved with permission from Credit Plus 13

15 Sample Credit Report- Tradeline Verify the borrower s PITI payment as the payment listed is only be P&I or I Only Sample credit report retrieved with permission from Credit Plus 14

16 Sample Credit Report Tradeline Review who is reporting the tradeline information. Investors may require a minimum number of tradelines for a score to be considered usable Sample credit report retrieved with permission from Credit Plus 15

17 Sample Credit Report-Tradeline Remember to include all collection amounts that are required to be paid in the total assets required. Sample credit report retrieved with permission from Credit Plus 16

18 Sample Credit Report-Tradeline Verify if the Inquiry resulted in new debt and re-calculate the total debt ratio when applicable. Sample credit report retrieved with permission from Credit Plus 17

19 Sample Credit Report-Tradeline Review for all Public Records and apply the appropriate credit requirements Sample credit report retrieved with permission from Credit Plus 18

20 Sample Credit Report- Bureau Info Sample credit report retrieved with permission from Credit Plus 19

21 Sample Credit Report-Creditor Sample credit report retrieved with permission from Credit Plus 20

22 Sample Credit Report Sample credit report retrieved with permission from Credit Plus 21

23 Credit Report Basics & Example HOW LONG DOES INFORMATION REMAIN ON A CREDIT REPORT? General Information will date back to the initiation of the credit account. Limitations apply to bankruptcies and other delinquent or derogatory items, such as: Type Bankruptcy Chapter 7 Bankruptcy Chapter 13 Suits & Judgments Tax Liens - PAID Tax Liens - UNPAID Charged to Profit & Loss Criminal Record Limitations Other Adverse Information Limitation 10 years from the date of entry of the order for release 7 years from the date of entry of the order for release 7 years from date of entry or expiration of appropriate statute of limitations, whichever is longer *7 years from date of payment No limitation 7 years No Limitations on criminal conviction 7 years *Based on IRS reporting 22

24 Credit Report Basics & Example CONSUMER DISPUTES (FCRA) Changes to credit data must actually take place at the repository level in order for the information to affect the score Consumers must write a letter of dispute regarding the erroneous information to the appropriate repository referencing the trade line, account number(s), and the specifics of the reported error Under the Fair Credit Reporting Act, a credit repository has 5 days from receipt of a written investigation request to contact the appropriate credit grantor about the complaint and then to receive a reply back within 30 days of the original repository notification Within 5 days of completion of the investigation, the repository must send a written report to the consumer with its findings (and a copy of the revised report if there were any changes) CONSUMER DISPUTES (FCRA) OUTCOMES: Consumer Disputes may result in three possible scenarios: No response from the creditor at all the data is REMOVED Confirmation from the creditor the data STANDS Revision by the creditor the data is CHANGED In all cases, the consumer is NOTIFIED of the results. 23

25 Credit Scoring Model, Score Ranges

26 Credit Scoring Basics WHAT IS A CREDIT SCORE? A Statistical Model A Predictor of Future Performance Based on Prior Experience A Model Base on Known Performance A Scorecard Factoring in Many Characteristics A Value Falling in a Range from approximately 300 to 850 Probability of Default/Delinquency 0% LOW Score HIGH 25

27 Credit Scoring Basics Who Provides and Uses Scoring? FICO The most common credit score in use was developed by Fair Isaac Company (FICO). Evaluates the borrower s credit data Assigns a score which predicts borrowers likelihood to repay credit obligations Fannie Mae, Freddie Mac, and large banks have introduced score-based underwriting systems. Most major mortgage companies either: Use scoring through the systems provided by their investors Develop their own scoring technology 26

28 Credit Scoring Basics Benefits of Credit and Mortgage Scoring Scoring enables lenders to: Achieve consistency & objectivity in underwriting Identify high risk loans from a credit perspective Bring efficiency, consistency and profitability to all aspects of the industry Scores are indicators of risk and performance for the credit portion of the file. Underwriters continue to use their knowledge and experience, as well as agency guidelines to evaluate risk and make loan decisions. 27

29 Credit Scoring Basics-FICO Model Payment information Travel and Entertainment cards Public record and collection items Severity, recentness and frequency of delinquencies Department store cards noted in the trade line section Personal finance company references Outstanding debt Installment loans Number of balances recently opened Average balance across all trade lines Other Relationship between total balances and total credit limits on revolving trade lines Credit history Age of oldest trade line Number of new trade lines Pursuit of new credit Number of inquiries and new account openings in the last year Amount of time since most recent inquiry Types of credit in use Number of trade lines reported for each type Bankcard This information was taken from Fair Isaac Credit Bureau Risk Scores and

30 Credit Scoring Basics-FICO Model Sample Credit Report Reason Codes Sample credit report retrieved with permission from Credit Plus Note The Reason Codes 29

31 The Different FICO Scoring Models Agency Acceptable Models Equifax Beacon 5.0; Experian /Fair Isaac Risk Model V2SM; and TransUnion FICO Risk Score, Classic 04. Credit Inquiry Impact on Credit Score Above-the-line inquiry: Impacts consumer s credit score Purchasing a car Different types of Credit Inquiries Below the Line ( Soft ) Inquiries Consumer File Inquiries Credit Seeking Inquiries De-duping Process Inquiries Applying for a mortgage Applying for credit cards Other loans/financing Below-the-line-inquiry: No impact on consumer s credit score Consumer obtaining their own credit report for monitoring purposes Companies offering pre-approval programs to consumers MI Company queries 30

32 Models & Consumer Confusion The scores available at myfico.com include six versions of the FICO Score from TransUnion, six versions of the FICO Score from Equifax, and seven versions of the FICO Score from Experian. These versions of the FICO Score will also be made available to qualified FICO resellers and affinity clients that make FICO Score-based products available to their customers. 31

33 FICO Score 9 FICO (NYSE:FICO), a leading predictive analytics and decision management software company, announced today that the new FICO Score 9 introduces a more nuanced way to assess consumer collection information, bypassing paid collection agency accounts and offering a sophisticated treatment differentiating medical from non-medical collection agency accounts. This will help ensure that medical collections have a lower impact on the score, commensurate with the credit risk they represent. These enhancements help lenders because it leads to a more predictive score. The median FICO Score for consumers whose only major negative references are medical collections will increase by 25 points. 32

34 The Different FICO Scoring Models 30-Day Buffer: No Auto or Mortgage inquiry within 30 days from the current inquiry is counted in the score De-Dupe Periods (Depending on Score Version): 14-days All Auto inquiries within a rolling 14-day window count as 1 Auto inquiry; All Mortgage inquiries within a rolling 14-day window count as 1 Mortgage inquiry 45-days All Auto inquiries within a rolling 45-day window count as 1 Auto inquiry; All Mortgage inquiries within a rolling 45-day window count as 1 Mortgage inquiry Factor or Reason Codes Reason codes are listed in DESCENDING order of importance and are displayed with each score Reason codes show which area of the consumer s credit did not score as highly as possible. In some cases these reasons highlight issues not associated with traditional derogatory information. These codes can be relayed back to the borrower to explain how they can change/improve their credit profile (over time) Score factors seem less relevant for higher-scoring consumers as they merely indicate the reason why they did not score HIGHER 33

35 Legal Requirements Fact Act, Notice to Home Applicant, RBR Notice

36 Legal Requirements of FACT Act and FICO What must be disclosed or provided to the Consumer? Consumer s current credit score Range of possible credit scores under the model used Up to five key factors that affected the score Date the score was created Name of the person/entity that provided the score Notice to Home Loan Applicant 35

37 Credit Score Information Disclosure Notice To The Home Loan Applicant In connection with your application for a home loan, the lender must disclose to you the score that a consumer-reporting agency distributed to users and the lender used in connection with your home loan, and the key factors affecting your credit scores. The credit score is a computer-generated summary calculated at the time of the request and based on information that a consumer reporting agency or lender has on file. The scores are based on data about your credit history and payment patterns. Credit scores are important because they are used to assist the lender in determining whether you will obtain a loan. They may also be used to determine what interest rate you may be offered on the mortgage. Credit scores can change over time, depending on your conduct, how your credit history and payment patterns change, and how credit-scoring technologies change. CREDIT REPORTS & SCORES Because the score is based on information in your credit history, it is very important that you review the credit-related information that is being furnished to make sure it is accurate. Credit records may vary from one company to another. If you have questions about your credit score or the credit information that is furnished to you, contact the consumer reporting agency at the address and telephone number provided with this notice, or contact the lender, if the lender developed or generated the credit score. The consumer-reporting agency plays no part in the decision to take any action on the loan application and is unable to provide you with specific reasons for the decision on a loan application. If you have questions concerning the terms of the loan, contact the lender. The following company provided the credit score used in making a decision for your loan request. The company that provided the credit score also provided the credit file that your score is based upon. Experian 701 Experian Parkway PO Box 2002 Allen, TX Toll Free

38 Credit Score Requirements The Federal Reserve Board and Federal Trade Commission (hereinafter, the "Agencies") jointly adopted the Risk Based Pricing Rule ("Rule"), which was published on January 15, Compliance with the Rule was required by January 1, The Rule requires a creditor that uses a credit report or score in connection with a consumer's application for, or a grant, extension, or other provision of, credit that is primarily for personal, family, or household purposes, to provide the consumer a Risk- Based Pricing Notice ("Notice") when, based wholly or partially on the credit report or score, the creditor grants, extends, or otherwise provides credit to the consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that creditor. 37

39 Risk-Base Pricing (RBP) Notice

40 Credit Uses Agency Requirements

41 Fannie Mae Credit Requirements with DU 40

42 Fannie Mae Credit Requirements with DU 41

43 Fannie Mae Credit Requirements 42

44 Fannie Mae Credit Requirements 43

45 Fannie Mae Credit Requirements with DU 44

46 Fannie Mae Credit Requirements with DU 45

47 Fannie Mae Credit Requirements with DU 46

48 Fannie Mae Credit Requirements with DU Credit Processing Authorized User Accounts: DU considers authorized user accounts in it s credit risk assessment. FICO scores may be impacted but DU s risk engine looks at the trade lines and makes a credit recommendation. Lenders typically should underwrite without the benefit of these trade lines unless your borrower is the authorized user and you have confirmed they have been making the payments on the account. 47

49 Fannie Mae Credit Requirements with DU 48

50 Fannie Mae Credit Requirements with DU 49

51 Freddie Mac Selection and Use of Credit Scores 50

52 Freddie Mac s Use of Credit Scores For an Accept Mortgage and an A-minus Mortgage, Loan Prospector has determined that the Borrower's credit reputation is acceptable. In all other Mortgages, the Seller must thoroughly evaluate the Borrower's credit reputation in accordance with the requirements set forth in this section and document in the Mortgage file the Seller's conclusion the reputation is acceptable. 51

53 Freddie Mac Credit Reputation 52

54 Freddie Mac s Requirement on Inquires 53

55 Credit Education & Information

56 Credit Education & Information

57 Legal Disclaimer Genworth Mortgage Insurance is happy to provide you with these training materials. While we strive for accuracy, we also know that any discussion of laws and their application to particular facts is subject to individual interpretation, change, and other uncertainties. Our training is not intended as legal advice, and is not a substitute for advice of counsel. You should always check with your own legal advisors for interpretations of legal and compliance principles applicable to your business. GENWORTH EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THESE MATERIALS AND THE RELATED TRAINING. IN NO EVENT SHALL GENWORTH BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER WITH RESPECT TO THE TRAINING AND THE MATERIALS Genworth Financial, Inc. All rights reserved. 56

58 Thank you! Genworth Financial is the NAFCU Services Preferred Partner for Private Mortgage Insurance. More educational resources are available at Save the date! May 27 th, 2:00 pm 3:00 pm ET. That MI Guy! Genworth Financial, Inc. All rights reserved. 57