Most civil judgments and many tax liens won’t show up on borrowers’ credit reports
A significant change has taken effect in how Americans’ credit reports are compiled, but it’s not clear yet exactly what impact the new policy will have on private lenders and their clients.
On July 1, the three-national credit-reporting agencies – Equifax, Experian and TransUnion – stopped including any tax liens or civil judgments on a person’s credit history unless those documents contain that person’s name, address and either their Social Security number or date of birth.
Most civil judgments don’t list that information. Approximately half of tax liens do.
Because those liens and judgments won’t show up on their credit reports, about 8 percent of “scoreable” Americans will see an improvement in their credit score, according to VantageScore Solutions. (Or may have already seen a change – the agencies expected the effect to ripple out shortly after July 1.)
Going forward, the credit-reporting agencies say they’ll be checking the public record on a regular basis – at least once every 90 days – to ensure individuals’ histories are kept up to date.
“The changes that the CRAs (credit-reporting agencies) are making will improve the quality and currency of data reported, ensuring that the credit reporting system stays strong,” said Francis Creighton, president and CEO of the Consumer Data Industry Association (CDIA), a trade group.
While millions might see their scores rise, the CDIA predicted only “modest impacts” to credit scoring and predictive performance. VantageScore Solutions found that, for those who do receive a bump in their score, it will be only about 10 points on average.
Several private lenders echoed that assessment.
“The new credit report policy will likely affect a few clients who will see their scores rise,” said Susan Naftulin, co-founder and president of Rehab Financial Group, a multistate lender serving real estate investors. “As certain negative credit items are no longer going to be reported, the elimination of those items will result in a rise in score. For most clients, however, I do not believe there will be an effect.”
Potential for Slower Approvals, Higher Costs
After all, many private lenders do not consider credit scores an end-all, be-all part of their review process. Asset-based lenders are much more interested in the property securing the loan than an applicant’s credit history.
And lenders can usually spot other signs that someone is a bad risk.
“Certain tax liens and civil judgments are being eliminated, but the truth of the matter is that when a person has tax liens and/or civil judgments against them, they generally have other credit blemishes that speak to their creditworthiness,” Naftulin said.
Even with the new policy, lenders have other ways to learn if a borrower has a civil judgment or tax lien.
“Upon receipt of a credit report that shows any blemishes, our company will also order other searches to fill in the blanks that are no longer being addressed by the major credit reporting agencies,” Naftulin said. “Other sources will still be able to report tax liens and civil judgments, so the elimination of these on the credit reports will only serve to slow down the approval process and raise expenses.”
“We will not change any of our internal operations as a result of this credit reporting change,” said William J. Tessar, president of Civic Financial Services, an asset-based private money lender specializing in non-owner-occupied properties. “The tax lien and civil debt information that will no longer be reporting on the bureaus can be pulled up through other resources, which is part of our normal validation of a loan request.”
Corey Dutton, a private lender with Private Money Utah, said that some private lenders will still have pressure from their investors to include tax lien and judgement information in their lending decisions.
“This information may be publicly available, but lenders will now be responsible for collecting and reporting this information from public record, which consumes both time and resources,” Dutton said. “For lenders that want convenient access to this information, LexisNexis Risk Solutions is marketing a ‘liens and judgements report’ to lenders. But at what cost? As if the new lending requirements and disclosures weren’t adding enough costs for mortgage lenders?”
Going forward, credit histories may have less and less meaning for lenders as they begin to adopt an ever-growing set of tools and data sources.
“I think that removing the items that generate largest problems of false negative information is a good thing,” said John Helmick, CEO of Gorilla Capital. “Overall, I think that credit reports and credit scores will be a part of our history but not a part of our future as more reliable measurements of individuals’ creditworthiness are being developed in this age of social media and metadata.”
‘We Do Not Think the Changes Are Necessary’
That’s not to say there’s no risk to the changes. Some experts have voiced concerns that erasing tax liens and civil judgments from credit histories could lead lenders to approve financing for people who are not good risks.
“As a private money lender, I’m not happy about this decision,” Dutton said. “Lenders that exclude this information from their lending decisions may perceive that borrowers are more creditworthy than they actually are. This invites an opportunity for error that private lenders cannot take on.”
But this may be more of a problem for banks and other traditional lenders, who are bigger believers in credit scores and histories.
“Conventional lenders could experience an extra layer of risk as those material items (tax liens / civil debts) will no longer impact the credit score which is normally heavily relied upon in making a decision to extend credit or not, as well as the terms of the loan,” Tessar said.
Naftulin understands why some see the new credit-reporting policies as a benefit to consumers.
“The truth is that only a small number of consumers will be benefited, while all will be affected by the slowdown and expenses discussed above,” she said. “From the lender’s perspective, we do not think the changes are necessary. There are very few times when we have seen a tax lien or judgment that was shown on the report of an otherwise creditworthy borrower. These items are usually accompanied by a host of other credit blemishes.”
Why the Credit-Reporting Agencies Are Changing Their Policies
So why are Experian, Equifax and TransUnion rethinking how they treat tax liens and civil judgments on credit reports?
It’s because of the National Consumer Assistance Plan (NCAP), their combined effort to reduce errors and improve the accuracy of their reports.
Launched in 2015, the NCAP is a result of a settlement between the credit-reporting agencies and the attorneys general from more than 30 states.
Those states acted because too many consumers’ reports contained old or wrong information that hurt their credit and limited their ability to secure loans and jobs.
According to the Consumer Financial Protection Bureau, it has received nearly 190,000 complaints about credit-reporting errors since October 2012. Several people said that even when they reported problems to the credit-reporting agencies, their reports weren’t updated.
“With credit reports as a gatekeeper to affordable credit, employment, housing, utilities and insurance, American families cannot afford to have erroneous judgments on their credit reports,” said Persis Yu, an attorney with the National Consumer Law Center.
“Unfortunately, inaccuracies and errors plague credit reports, with estimates of serious errors affecting up to 25 percent of reports. Sloppy tactics such as attributing judgments to consumers without full identifying information increase error rates.”
The new rules on tax liens and civil judgments are just one of the changes sparked by NCAP.
In September, for example, the agencies will institute a 180-day “waiting period” before adding medical debt to an individual’s credit report. That should give patients more time to challenge charges and pay off what’s often a huge and unexpected expense.
A few years ago, the agencies stopped reporting any debts stemming from any contract or agreement where the consumer didn’t agree to pay – so, traffic tickets or fines.
Experian, TransUnion and Equifax also agreed to form a working group that will monitor the quality and consistency of the data being provided by their sources.