Home : Blogs : Artur Urbanski : Cimpler Blog

Is it OK for real estate agents to coach clients on how to improve FICO score?

William Johnson published recently an excellent post: Out with the Old FICO Scoring System and In with the New. It triggered an excellent discussion on the FICO score itself, but also touched on many other issues, such as the role (and potential liability) of real estate agents evaluating credit report and providing clients with advice. I thought that this subject needs a further discussion.

But let me get back to the topic of this post. Is it OK for real estate agents to coach clients on how to improve FICO score? Let me start my reply with a question. Is it OK to give a client a self – serving advice? Is it OK to advice a client to go ahead with a sale of the property, while it might be better for him/her to refinance it or use an equity loan to satisfy client's immediate need?

To explain where I am going with my questions, let me tell the story that recently happened. A client in San Francisco wanted to refinance his house and cash out. He needed cash to help his wife to set up a business, as she lost her job and they needed additional income. They applied for “cash out refinancing” with a mortgage broker they knew and found out that the only loan they could receive was a high interest, sub-prime loan. The reason – their FICO credit rating dropped down as they excessively used credit cards following wife loosing a job. Based on the mortgage broker input clients realized that they will not be able to afford payments on a new amount. As rents went down and they had 30% equity, they decided to sell the house and rent an apartment. They were planning to use their proceeds to finance wife’s business. They didn’t know what else they could do.

They went to a local real estate office and asked for help in listing their house. Their listing agent discussed the sale with them and happened to ask what are they are planning to do 5, 10, 20 years from now. Clients told him that they would like to buy a house again, as soon as their financial situation improves. Agent, the Bay Area native, knew about hundreds of clients who sold their homes for different reasons and after few years when they tried to buy again, prices went out of their reach. So, he asked his new prospects if he could see their credit report. He analyzed reports, asked additional questions and ran debt payment simulations. Listing agent realized, that’s by appropriate management of clients’ credit, it should be possible for them to improve their credit within 6 to12 months. They didn’t have any late payments and their credit score dropped because they “maxed out” several credit cards. To make a long story short – the listing agent was able to guide clients to improve their FICO score and borrow against the equity. The wife took a part time job to make sure that they could meet their monthly obligations. Within 12 months their credit improved and they were able to refinance with a good rate and monthly payments they could afford.

The listing agent I am writing about happened to have enough credit repair knowledge to guide his clients to a better solution – a better for them, not necessarily better for him, as he lost a commission from sale of the house. He received (a much smaller) loan referral fee (one year later) and he made his clients very, very happy. For your information – the agent didn’t have all the answers and he did not consider himself a credit report expert. However, he knew enough to ask additional questions. He heard about credit repair and simulation tools to simulate an impact of different credit repair actions to ask his mortgage broker for help. He deferred the immediate income from the sale of clients’ house, but he made an important step in building his reputation as a “problem solver”.

What would you do in this situation? Would you help client to solve their problem the way they formulated it (sale of their house), or you would make sure that you understand your clients situation well enough to be able to tell them that other options might work better for them?

As we all know, real estate is changing. More of us compete for clients than ever before. We can differentiate ourselves by providing additional services to our clients. Obviously, we have to focus as we cannot be experts on anything our client might ask for. But clients are learning more every day because of Internet. Can we afford to stay behind?

Let me add one more point. Many might not realize that our ability to show credit reports to clients is very new. Until 2001 all credit reports were secret and lenders were under the obligation from the Fair Isaac Company not to disclose them to clients. So, it is a very recent history that we can discuss credit reports with our clients at all. Let’s take advantage of this relatively knew option and learn enough to read and analyze credit reports to be able to help our clients to understand FICO score and to improve it. If this is not an alternative for you make sure that among your close associates are credit experts that can help you and your clients.

Click here to start learning more about credit repair.

Click here to start learning about credit simulation.

Posted by Artur Urbanski on 07/08/2007 04:42 AM

Comments (47)

credit repair, credit analysis, credit report, fico score, william johnson, fair isaac company, credit simulation, listing agent, mortgage

47 Comments on Is it OK for real estate agents to coach clients on how to improve FICO score?

JUL

2007

As a realtor, honestly I would send them to one of my lenders that knows how to improve credit scores over 6-12 months a year. I could councel them to some extent but I would rather have a lender involved that knows. Great information and links.

I liked your post. I'm afraid that credit scoring is here to stay and I think that is a shame. In my opinion, credit scoring should be illegal. It's discriminatory, it's unfair and it's inaccurate. If you like, check out my post of the same name.

Bob Mitchell

ValueList Real Estate Services, Inc.

Who are you saying should be coaching people on improving their score? Mortgage lenders, please.... Since most states do not have a certification that covers this type of work the only true experts outside of the Fair Isaac system would be an attorney who understands the system. Otherwise advice is just that advice and the real estate agent did the right thing at it appears you are questioning that aspect???

I think it's appropriate for anyone to give this type of advice provided that they possess the required knowledge. As for how the agent handled this client, I believe that counseling the client to their best possible outcome, regardless of personal consequences, will ultimately guarantee success - you get what you give!

Hi Don,
I believe the problem there lies with the fact most people believe they know what they are talking aboutl Most do not and only prove to harm the client. When a piece of advice given by a real estate agent or loan officer, or anyone that service to financial benefit from a higher credit score on the particular client, results in said client having a decrease in their credit score, they could be found liable under the Federal Credit Repair Organization Act.

A combined excerpt from this law states "providing advice or assistance to any consumer with regard to improving any consumer's credit record, credit history, or credit rating".

Because you have a direct vested interest in this client's credit score, most likely in obtaining the loan and generating a commission for you, this law has alot to do with what everyone is concerned about. This is why it is important to only let the professional credit restoration companies discuss particulars like these with your clients.

It sounds like a great idea but I believe it would be outside your area of expertise. What would happen if the advice is given and the score goes down. What if you gave the advice to an Asian and his score went up and then you gave his friend who is Mexican the same advice and his score went down? Me thinks you are asking for trouble.

Thanks Missy. Choice of doing it personally versus using an expert associate is definitely a personal preference. Regarding the risk, let's face it - we are living in a very litigious society. Should we not drive because every time we sit behind the wheel we put ourselves at risk?

Bob, Thank you very much for your comment and adding the link credit scoring should be illegal. Personally, the initial secrecy (as I mentioned it was initially illegal for lenders to talk about credit report to clients) made me quite uneasy. It became a convenient tool and has some statistical validity. Is it fair, is it always accurate, is it discriminatory? It has such huge impact on our life that it definitely should be closely scrutinized. It definitely has a “Big Brother is watching you” feel to it.

Jackie, I believe that agents are in excellent position to provide credit advice to clients. The difficulty is that the only real expert on Fair Isaac algorithm is Fair Isaac Company. Their algorithm is protected by the intellectual property law, so no-one really knows it. A lot of companies “deduced” what it might be and built credit analysis and simulation tools. The one I use is developed by Cal Coast Credit Company. These are good tools, but even if you coach your clients according to results to the simulation you might be inaccurate, as the simulation – is an approximation based on what Cal Coast Credit thinks the algorithm is. Thank you very much for your comment.

Don, I entirely agree with your comment. Thank you.

Dominic, in the situation I described, agents are in excellent position to provide unbiased advice, as often they forfeit the sale commission, as it was the case in the example I described. So called professional credit restoration companies often can not meet this test, as they gain from “promise of a credit improvement. I would appreciate, if you could elaborate more on how such companies do operate and hoe Federal Credit Repair Organization Act applies to them.

Denise - thank you for reply. Regarding the risk, as I mentioned before - we are living in a very litigious society. Should we not drive because every time we sit behind the wheel we put ourselves at risk?

Artur,

I assist people in repairing their credit every day. I will defer a deal any time to improve my clients' situation. Any one who wouldn't doesn't deserve to be in this business.

Steven, thank you very much for your reply. I just hope that your name "The Mortgage Maverick' doesn't reflect the fact that your approach is unusual in the industry.

Please check the reply to my question by William Johnson (you can find original as reply #98 to his post Out with the Old FICO...

"Artur, Thanks for commenting and adding in your post link and the additional resource articles.Excellent post BTW.

Your post is superb and well illustrated from one perspective. The example you used was from an individual agent that knew about and understood the principles of credit repair. You asked me a question. Did I think real estate agents should discuss credit scores with their clients ? As we get more and more into the core of the service business and try to justify our existence , it might not be a bad idea to be providing agents that have an interest ,an opportunity to learn the subject and surrounding guidelines and be able to give this guidance to clients that want it. There are several other professions that might think we are usurping their territory and we best be able to give substantive proof of our expertise if it ever called out.

The real rub for financial planners, tax counseling, credit counseling companies it the type of license that might be required and if we are exceeding our real estate licensing limits when we counsel on credit repair. It is a difficult question to answer that is going to need others to decide.

It would seem to me that this should be at least within the context of services that we ( REALTORS) might be able to expand to but it will require some proof of expertise or certification that we are accomplished in this subject.

Other professions might see this in a different vain and we will likely need more training either way. Real Estate Counseling comes to mind. Real Estate Counseling is a unique profession in and of itself and yet we REALTORS on a regular basis, describe part of our service as counseling the client ( with no particular expertise, licensing or certification as a counselor). Maybe it is time to redefine this real estate profession and what is within it's domain and what is not. It is getting pretty muddy as these situations are occurring more and more often, almost commonplace.

To go back to answering your question, I don't know the answer. In a limited way, yes, I think we can and are helpful by assisting the Buyer in ways that may be beneficial them from our knowledge base. It may come down to a standard of practice. Should we know these things and if yes, prove the educational background. If No, then treading into these arenas will increase the liability and exposure should something go wrong with the advise or the understanding by the client of what was advised.

There is another way around your question. Likely until the question takes a greater significance in the profession, those who could decide, won't. Lawyers on the other hand, might also smell blood and go on the offensive. Those cases have in the past set case law and in many ways redefined what an agent is responsible for knowing and also what areas are considered not within their licensing domain legal,tax,construction,financial planning,etc. In each case, a specific license is involved.

This might be a great thread for a whole new post on what the limits should or should not be in the real estate license. Brokers owners would probably like to keep it as simple and clear as possible. They may feel there is no real money in expanding the services as long as we remain a contingency industry. If we shifted to the legal profession model ( billable time, contingency fees in some cases, flat arranged fees in other situations) for sure we would likely be taking on more and more types of the possible services.

Please look to the William Johnson's post

Should There Be a Limit On What Type of Services a Real Estate Licensee May Provide?

as it relates to our discussion (please check the last paragraph in bold print of my previous comment above).

Thanks for your reply Artur. As long as the realtor did not make any money from the person they gave advice to, at the current moment or down the road, then they would be exempt from the CROA. Many think that only credit repair companies, those that accept money and dispute negative items on behalf of the consumer, have to follow the CROA.

However this is not the case and I've been hearing alot lately on how people are advising other people not to give any advice to the consumer cause it constitutes loan fraud, etc. Being that because one is a real estate agent, or mortgage broker, then surely it would be ok to give advice, however this is more of a liability than it may be worth.

As far as credit repair companies and how it relates to the CROA, the answer is Everything. We live and die by the CROA and use the laws in the FCRA against the offending bureaus and creditors. There is no debate at whether credit repair companies benefit from the promise of credit improvement. However, there is an issue with individuals or organizations that do not primarily run a company under the guidelines of the CROA, give advice that they may later find monetary gain or other valuable consideration, as said individual or organization is now required to obey the CROA.

Real Estate agents and loan brokers give consumers advice all the time. Further to that they feel it is their duty to give advice where they can, because it is the nature of being a good person. The bottom line is advice given may not be good advice which can lead into CROA violations where the consumer is allowed to sue the organization (individual which gave advice) for damages, I.E. cost of the home they missed out on due to lowering a credit score.

Food for thought.

Dominic, thank you very much. It definitely is food for thought.

I see that there is no link to your profile. Are you an Active Rain member? Your comments and posts could add a lot of value to on-going discussions. It is a great forum to educate the community.

I would refer them to a highly qualified lender. A Realtor should feel free to give advice, but credit scores are not their professional area of expertise and it may be opening themselves up to future lawsuits...

Artur,

No, I am not a member, however if I continue to post I should consider it. Two of my employees are members, however, Brian Aber and Matthew Chambers and they do post a great deal of information as well.

I happened to be checking up to make sure all was in order with their posts and ran across this thread and decided to post a couple comments relating to the heading.

Kaushik, what is a difference between mortgage broker and real estate broker? Most of the time none - as they both have (hopefully) real estate broker license. However, if a mortgage broker chooses to operate under the California Department of Corporations license, he is not required to pass any exam – he has just to apply for a license. But let’s get back to real estate licensees. A real estate agent after passing the state exam knows close to nothing about real estate, beyond the terminology, as a loan officer or mortgage broker, does not know much about loans after passing the broker exams (or nothing in case of Department of Corporations license). One becomes a top real estate agent by practicing the service and learning on the way. The same applies to loan officers and mortgage brokers. So, what stops agents from becoming mortgage and credit experts? Here are some possible answers:

choice
interest
desire
willingness to learn (or lack such)
experience and of course
the time

Is it any different for loan officers or mortgage brokers? No with exception of time – after all loans and credit is everything they do. My point is that agents can be as good as or better in providing advice than mortgage brokers. On the top of it, if agents acquire the required knowledge they will become better agents and will be more likely to provide real estate consulting services to their clients.

Dominic, thank you for explanation. Now it all adds up. Bob made several very good comments. I will look for Matthew's entries as well.

JUL

2007

i have no problem with the realtor making these suggestions as long as they are true and the realtor knows what he/she ius talking about

generally realtors i deal with trust me and my knowledge so they have their clients talk with me

i also explain to the realtors the credit repair process so over time they understand better

Thanks Dominic. I appreciate your input.

Artur,

Just a quick note to say hello and how much I appreciate your posts. I see Dominic already beat me to the punch on several subject matters. Thanks again for your input.

Brian

Thank you Brian. I look forward to your future posts and comments.

You may have lost the listing ... but you certainly made those people happy -- they kept their home and in the long run, you'll realize more business by doing the right thing!

It's my obligation to help the client -- and if I can guide them on how they can better their credit -- absolutely, I'll share that information with them.

You did right by your clients and you deserve a pat on the back!!

This is an excellent discussion. It seems to me that the biggest challenge is that the FICO scoring model changes at the whims of the paying customer (i.e. financial institutions) This means that what may be correct today is not correc tomorrow. In addition, the model is not applied consistently across the board so a similar credit profile could have radically different scores. I think that it's ok for Agents to advise as long as they disclaim, disclaim, disclaim. All of us need to protect ourselves. I personally have a lot a familarity with credit repair and I have a passion for it simply because IMO FICO is a very dangerous tool being used against consumers.

The problem is when an agent gives out bad advise from lack of personal knowledge. As I read these AR boards I often come across inaccurate, incomplete and just wrong advise posted into blogs. I could write on this topic forever as there are so many nuances to it.

Rita, thank you for your feedback.

Kate, you definitely should write about that. I believe that agent should and could talk about FICO scores, but at the same time the knowledge on the subject out in the field is very limited. Also, by knowing more agents will not take away business form lenders and Credit rating consultants. Just the opposite. Who will loose? Those who manipulate and withhold credit information and its impact from customers, but this is in the best interest of all real estate and mortgage professionals. Of course, there is a liability issue. For those who don't know a good E&O insurance covers loan related problems under the liability coverage.

JUL

2007

http://activerain.com/blogsview/22154/The-dangers-of-Credit

I am still at odds with this topic. I believe that it is a gray area. Not illegal, but if 'they' want you, this could be the ammo they are looking for.

It is one thing to teach someone how the system works so they can remove inaccuracies..... yet another thing to show a potential borrower how to 'game the system'.

Tom, thank you very much for your comment. I am definitely against showing or teaching how to game the system. However, agents need to understand and be able to explain at least basic underlying principles of the credit scoring system to be able to explain it to their clients. When I was reading your post and comments I was really surprised how much confusion can arise on basic features of the FICO system. Let me give you an example. When clients are advised for example to pay off credit cards without being explained that in short term their credit might go down after they pay off their credit cards and "paying down" instead “paying – of” is a much better short term solution. As I client I want either my agent or loan officer to tell me that. Also, as I mentioned in one of my comments, the fact that the agent knows more it doesn't mean that he will want to do the loan as well. In most cases it will just strengthen and simplify the communication between agents and loan officers.

I am glad that the piggybacking loophole is closing. It was getting out of control.

I do credit seminars when I can. Focus is on credit qualifying for a mortgage and then general 'managing your fico' tips. Man, talk about a loooooong pipeline of business. LOL

I also include a free ebook about credit on my website.

Artur,

Great post and I'm glad to see all of the different opinions. I am amazed to see how many real estate professionals out there believe they know more about credit repair and the laws that pertain. I believe a majority of them are doing their clients a disservice by trying to help them on their own and not recommending a referred credit repair company.

Thanks,

Brian

Tom, you are certainly right regarding a long pipeline of business. I like your Texas Home Loan Chat. This is definitely a great way to talk to and educate clients. Thanks for your comment

Brian, thank you very much for your comments. Overestimating your own ability is always dangerous. In this case it hurts others.

All of we Realtors should know enough to help the average person with information on credit repair. I believe emphatically in doing business from my sphere of influence and what better way to develop your sphere. People that know and trust you to look after their best interest will be an endless supply of referrals in your future!

Sandra,

Excellent points - you just want to make sure the information you provide them is correct, or else you may find yourself in a hairy lawsuit if info given lowers a credit score. What may be good advice for one is not the same advice for another.

If the "client" is one of yours, then advice given would fall under the CROA because they would be coming back to you for the loan, which is considered valuable consideration.

Knowing the specifics of the ever-changing laws is crucial.Now if the consumer knows the in's and out's of the laws as well as HTDI Financial and has years of experience doing this work day in day out, they could possibly get the same results. They can also represent themselves in a court of law, do their own taxes and sell their own homes. But they hire attorneys, accountants, and realtors everyday to get the job done most effectively and as quickly as possible.

Brian

Sandra and Brian, thank you very much for your excellent comments.

JUL

2007

Artur,

This is one of the BLOG's I enjoy reading ... admittedly moreso on the comments and live feed back.

Great job Artur and I look forward to working with you and helping you close more loans.

Talk to you soon,

Brian

What a great and thought-provoking post. Because my business is driven by referrals and long-term relationships with my clients, I would definitely assist them. Or rather, get them started and then refer them to one of the lending experts in credit reports and financing.

JUL

2007

Wow, that's a good story.

Regarding the agent, I think that was very unselfish of him to share his knowledge, even though he didn't make a commission off it. I really believe they will remember him for that and will lead to more referrals because they KNOW he is looking for THEIR best interest.

Regarding whether or not he should even be giving advice... as an LO going over peoples income, credit, etc. clients often ask me questions about taxes, what they can write off, etc. I am not a CPA so I don't feel I should legally be giving advice but I do know some info on the subject. So what I often say is exactly that..."From my experience, I've seen people write off so and so, but I would ask your CPA just to be sure." I think if that agent worded it that way, there's nothing wrong with sharing knowledge.

Good post Artur.

Thank you Brian. I appreciate your comment and support. More is coming very soon and I certainly am looking to your comments and feedback. While a geography might be an obstacle today, it might not be the case tomorrow.

Thank you very much for your comment, Mary.

Pete, Thank you for the comment. The point of the story is that we need quite broad experience to serve our clients better. And while not all agents can or even should "know everything", brokers can help by organizing an office appropriately and provide as much support and training for agent as possible. If this happens, we will have more stories like this one. At the same time, more knowledge will bring more revenue opportunities.

AUG

2007

I believe this job can be done correctly by a trusted mortgage broker who has the clients' interests at heart. On the other hand, I have helped clients in preparation of purchasing their house (to include talking to them about setting up a budget, getting rid of consumer debts, etc.) based on my personal life experiences...

AUG

2007

Hi Lorena,

We should never try to help unless we have appropriate knowledge and background. And this is what experience is for - to share with others. Thank you for your comments. I really appreciate them.

SEP

2007

Artur, I don't know how I found this post. I think it was a link on another post by somebody else. Anyway, I'm glad I did.

Your way of doing business is very agreeable to me. I think we are on the same page. Please take a look at one of my recent posts and let me know what you think: To Be or Not To Be, Legally Speaking

Thank you.

Bill Roberts

SEP

2007

Hi Bill,

Sorry it took me a while to reply. We have just launched an exciting service (I will create a post about it tomorrow, I hope). I read your post and certainly agree with everything you said. I would love to talk to you if possible. Please let me know.

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?