Most people have come to accept the concept of credit scoring, but if you think about it there are some fairly significant issues that should be examined before credit scoring is blindly accepted.
My first major malfunction with credit scoring is that the fish stinks from the head down. It is estimated that up towards 70% of all credit reports contain inaccurate information. That means that right off the bat that 70% of credit scores are simply not accurate. Sometimes the error is in the consumer's favor, but more times than not it works against them.
Back in the old days, before automated underwriting systems such as DU and LP came around your credit report was actually underwritten by a live person. If I had a borrower who had something on their report that wasn't correct, we would simply write a LOX (letter of explanation), provide documentation that what we were saying was the truth and the underwriter would take the entire picture into account.
The best way that I can explain why the use of credit scoring is a bad idea is to give you some examples:
WAR STORY #1
I was doing a mortgage for a young lady who when I pulled her report had a credit score in the low 500's (bad credit). It turns out that she had six collection accounts on her report that stemmed from a discover card that was charged off 5 years previous. One trade line was the charge off itself by Discover, the second one was the original collection agent, the third one was the second collection agent that took the account over after the first one was unsuccessful in collection on the account. The forth, fifth and six trade lines were collection agencies that had bought and sold the account, but who had continued to report the account out as if they still owned the account.
The first problem with this situation was that what should have been one charged off account was now 6 negative trade lines. While each of the collection agencies should have updated the trade lines or removed them when they no longer owned or were contracted to collect on the account, not one of them did.
My second problem with this particular situation was that the account had never belonged to my client. When this story took place, my client was 21 years old. Meaning that she would have only been 16 when the account was charged off. Younger still when the account (which I think had been opened for 3 years before it was charged off). By law, even if she had "applied" for the account - which she had not - she could not be held liable for it.
I attempted to get the matter straighten out by calling each of the collection agencies and Discover. At Discover I was bounced around like a pin ball and only got their attention when I had an attorney write them a letter threatening to sue them. I then faxed a copy of the client's driver's license to them to prove her age and they agreed to remove their trade line.
The collection agencies weren't so cooperative. Even though Federal law (The Fair Debt Collections Act and the Fair Credit Reporting Act) states that it is illegal for a company to attempt to collect on a debt that they don't own or have not been contracted to collect on by the credit issuer, only one of the collection agencies agreed to remove their trade line when I faxed them a copy of the letter from Discover stating that the debt was not valid.
Eventually, I bull dogged the collection agencies into removing the trade lines upon threat of litigation. However by that time, the home that the lady wanted to buy had gone to another party. I lost out on a mortgage, the agent lost out on her commission and the would be home buyer lost out on the house that she wished to purchase.
WAR STORY #2
Ms. Smith (not her real name) was always very careful about credit. She choose to only keep two charge cards for emergency situations and the occasional internet purchase.
She decided that she wanted to buy a home and figured that she shouldn't have any problems. She had always paid her rent on time and had never in the 15 years that she had credit cards had a late payment.
How wrong she was! We pulled a report on her and her credit scores were in the mid 500's.
Why? Well, actually nobody other than the credit scoring agencies know for sure, but the best that I was able to come up with was that when we pulled her report, she had balances on both of her cards and her credit limits were low.
The computers were "reading" her that she was tapped out since her balances were too high a percentage of her available credit. When I mentioned this to her, she was flabbergasted. She told me that both of her charge card companies had offered to raise her limits on numerous occasions over the years, but that she had turned them down.
I ended up calling each of the credit scoring agencies and pretty much hit a brick wall. Their reply was that they couldn't tell me what went into the score beyond certain generalities. When I pointed out that this lady had never had a late payment in her life, they simply didn't care. The computer was the wizard and knew best!
The quickest, easiest way to fix this problem was to have her call her charge card companies and request an increase to her credit limit. They gladly complied and her credit score jumped from the mid 500's to the mid 700's. Simply by increasing her credit limits. Nothing else.
My major objection here is that if you are going to get judged by a set of criteria, shouldn't you have the right to know what that criteria is? This lady was doing everything right, as far as she knew. I think that most people would agree that she was a good credit risk. Everybody that is except Fair Issac that is.
I could go on and on with more war stories, but I think that you get my drift.
I'm not so naive to think that credit scoring and automated underwriting is going to go away. I can agree that if everything goes right that they have indeed sped up the underwriting process. I guess that my main objection is that the current credit laws need to be enforced and probably tightened. Companies that violate these laws should be prosecuted, fined and even jailed in the most outrageous situations. A quick and FREE system to challenge the information on your credit report should be mandatory.
Fannie and Freddie would go a long way towards correcting this situation by simply allowing a valid appeals process if DU or LP turns your mortgage request down or downgrades you. The computers shouldn't have the last word here. I've attempted to talk with both agencies and was completely rebuffed. I called my congressman and senator's office and received polite acknowledgment letters, but no action.
If you agree with me, call your congressman or senator. Real people are getting hurt every day. Something needs to be done to correct this situation.
If you would like more information, please feel free to drop me a line
R. B. "Bob" Mitchell
ValueList Real Estate Services, Inc.
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