Credit Reporting is Changing: How Will You be Impacted?
On July 1, the three major credit reporting agencies—TransUnion, Experian, and Equifax—will implement some major changes to the way they report judgments and tax liens on individual credit reports. As with many new rules, this one has both positive and negative ramifications for borrowers, Realtors trying to sell a home and lenders.
So what are these changes? In accordance with the National Consumer Assistance Plan, the three major credit bureaus will no longer be able to report public records—specifically civil judgments and tax liens—without verifying three pieces of consumer personal identifying information (PII). These three items are:
- Name of consumer
- Address of consumer
- Social Security number and/or date of birth
Civil judgments and tax liens not containing ALL three elements must be deleted from consumer credit reports.
Additionally, the new standards require that the three agencies must update their records every 90 days with the courthouse. This means that changes to public records—such as a paid judgment—will show up sooner than they have in the past.
What does this mean for consumers? For Realtors? For loan officers and banks?
In the short term, it should mean that virtually all civil judgments (the official statement from the Consumer Data Industry Association says “a vast majority”) and about 50% of tax liens will be removed from credit files on July 1. Since public records have a negative impact on credit scores, the immediate result should be improved credit scores for borrowers who are plagued with public records.
Since the rule requires that public record reporting be updated every 90 days, we should also see paid judgments updating more quickly on credit reports. This can help credit scores to improve dramatically, and it can also allow more borrowers to get approved.
Going forward, John and Mary Smith should not have public records and tax liens from 10 other John and Mary Smiths appearing erroneously on their credit reports. The new requirements should eliminate some of the errors today that occur among people with common names and should help to protect the innocent from having their credit ruined just because they share a name with someone who has credit problems.
The new law will also shield the guilty, at least for a while, and that may be problematic. Although tax liens and civil judgments may be initially removed for a time, the attorneys and government entities can refile with proper information. That may result in a time lag between initial prequalification and final loan approval, where a judgment or tax lien that was initially removed can now reappear on the credit report complete with all identifying information. Since lenders have to recheck credit as late as 48 hours before closing, this could cause serious issues for the underwriting of the loan.
Also, even though the reporting requirements have changed with regard to tax liens and civil judgments, underwriting standards have not. No government agency or government-sponsored enterprise will make a loan to a consumer with an open tax lien or judgment. As part of the mortgage application process, the consumer is asked whether he or she has either tax liens or judgments against him or her. If a consumer is less than truthful, the loan originator may not know that there is a problem, since in the past lenders have relied heavily on credit reporting information to fill in gaps in consumers’ memories. As a result, the judgment or tax lien may not be discovered until well into the underwriting process. This could potentially stop some transactions that looked great at the point of prequalification.
How to Protect Yourself
Whether you are a buyer’s agent or a listing agent, talk to the loan originator. Make sure he or she is asking the right questions. If the loan is a government loan—VA, FHA or USDA—ask if the loan originator has run the borrower information through CAIVRS—HUD’s Credit Alert System—prior to issuing a prequalification letter. This system catches many hidden issues that disqualify borrowers.
Finally, recognize that the title company is going to be an increasingly important partner in the loan transaction. The title company can search for public records, liens and judgments and can help identify hidden issues.