Credit union lenders have another wrinkle to iron out come July 1: the elimination of a large chunk of tax liens and civil judgments from the reports produced by the three major consumer reporting agencies (CRAs) — Experian, Equifax, and TransUnion.
The change in credit reporting standards is part of the National Consumer Assistance Plan (NCAP), an initiative launched by the reporting agencies in 2015 as the result of a legal settlement to improve credit report accuracy and make it easier to correct errors.
Opinions vary, but many credit unions are working under the assumption there will be a 10-point increase on average in consumer credit scores because of the CRAs meeting the new accuracy data standards.
However, LexisNexis Risk Solutions, which sells a report that will continue to list the affected judgements and liens, cites FICO data in saying the scores of 11 million consumers will increase up to 20 points and the scores of 700,000 more will increase at least 40 points.
According to LexisNexis, approximately 11% of U.S. consumers have a tax lien or civil judgment on file. The three CRAs will eliminate roughly 50% of tax lien data and 96% of civil judgments from their data reports.
This, Lexis-Nexis argues, creates a “blind spot” for risk underwriters that will impact lenders and disrupt the industry, especially in mortgage lending.
“Without this information, it will be difficult for credit unions to properly assess members and prospective members,” a LexisNexis spokesman says.
Others aren’t so sure.
Based on what we typically see when underwriting, we see this as a positive move.
According to a FICO research brief, there will be a significant change in the collection of civil judgment and tax lien public records, but the reporting agency’s analysis “indicates no observed material impact to the FICO score due to expected NCAP changes.”
And Joel Pruis, a senior director at Cornerstone Advisors who joined the consultancy after a dozen years with Experian, says the credit bureaus still will bear direct responsibility for the validation of their models and will have to continue providing documentation and other assurances to customers who seek it.
The Credit Union Take
Experian customers include consumer lending vice president Marcus Wertz at Greater Nevada Credit Union ($716.0, Carson City, NV). He says his conversations with the CRA leads him to believe the impact won’t be as sweeping as it sounds because not all liens and judgments will fall off.
“To determine our true exposure, we might need to conduct thorough analysis to compare the before and after changes,” Wertz says. “This could have an impact on risk and therefore require continuous monitoring of scores and risk validation.”
Adds Brandy Bruyere, NAFCU’s vice president of regulatory compliance: “Credit unions are still assessing their options and whether they will adjust risk-based pricing as a result. Ultimately, it’s a credit union business decision.”
If this information will not be consistently present, it could plausibly result in higher delinquencies and higher losses to our member-owned cooperatives.
“We’ll remind our underwriters to look for other common sense clues or items that are still present in the credit report that might indicate a lack of willingness to pay past obligations,” says Scott Arkills, president and CEO of Silver State Schools Credit Union ($731.0M, Las Vegas, NV).
Chris Kirkley, lending manager at Peninsula Credit Union ($175.5M, Shelton, WA), says he’ll be using analytics to review average credit scores over the past three months before the change as a baseline to then view credit score averages after the change.
“We’ll continue to monitor, as we do now with our interest rates, for anomalies and make adjustments as needed,” he adds.
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No Hurdle Here
A consultant whose client list includes numerous Low-Income Credit Unions says he’s heard no concerns about the impact on his clients’ risk models.
“Many credit union lenders I work with say they’re pleased with the changes since it will help them qualify more loans,” says Scott Butterfield of Your Credit Union Partner.
Debbie Taverna, vice president of consumer lending at Digital Federal Credit Union ($8.0B, Marlborough, MA), says she’s not concerned about the change, either.
“Based on what we typically see when underwriting, we see this as a positive move,” she says, noting as an example tax liens that applicants have paid but still appear on the credit report.
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Taverna also says the effect at DCU would be muted by the fact that 50% of her loans are A and B paper.
The change also plays into the philosophy of relationship lenders, who give more weight to other factors besides credit reports and FICO scores in deciding credit worthiness.
Ankush Tewari, senior director of market planning at LexisNexis Risk Solutions, says his company is working with the Filene Research Institute to provide risk information that can enable that approach.
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All About Relationships
One veteran lender notes that credit unions often move to the front of the line for troubled borrowers notably because of the cooperative philosophy of relationship lending.
“Although not a factor that makes a bad credit risk good, it’s worth noting that many borrowers will repay their credit union even when they’re having difficulty repaying other creditors, including tax authorities,” says John Cook, vice president of lending at Redstone Federal Credit Union ($4.9B, Huntsville, AL).
Cook also says the potential borrowers most impacted by the deletion of some judgments and liens from their credit reports will primarily already have credit scores of 600 or less, as people having problems paying property taxes or civil judgments are probably struggling to pay their other bills, too.
But the presence of liens and judgements in some instances but not others could create problems for credit unions, which often go the extra mile to understand the cause of reported credit issues, says Arkills at Silver State Schools.
“If this information will not be consistently present, it could plausibly result in higher delinquencies and higher losses to our member-owned cooperatives,” the CEO says.