How often do you pull a credit report for a prospective homebuyer only to find a rat's nest of bad debt and collection reports? And how often do tension headaches grow out of that revelation? Well, before you reach for the extra-strength headache pills, take a harder, second look at your client's credit report. Chances are that what you're seeing is not as bad as it would seem.
In its latest November issue (November 12,2007), BusinessWeek magazine ran an extensive article covering recent findings that indicate some questionable credit reporting practices by creditors and reporting bureaus. Most of the reporting practices involve people that have previously filed for bankruptcy protection, either under Chapter 7 or Chapter 13 rulings. Under these rules, debtors following the prescribed courses of action set forth by the Federal Bankruptcy courts are supposed to be legally relieved of these debts, and a notation for associated credit accounts is supposed to be entered into the credit file for those individuals. Unfortunately, that is not happening in every case. And this is happening at an alarming rate.
Currently, there are several lawsuits pending against creditors and at least two of the major credit reporting bureaus (Equifax and TransUnion, specifically) for failing to accurately report ‘discharged' debts that were included in bankruptcy court proceedings. The responses from the alleged defendants in these cases range from denial to those of a more cavalier nature- something akin to ‘Well, it happens all the time.'
The impact of this behavior has been shaded from public scrutiny, but it is, nonetheless, a very real problem for quite a few people. In my personal experience, I have had three clients whose credit files were inaccurate and remained unrevised for at least twelve months after their bankruptcy cases were finally discharged. The BusinessWeek article cites one case in which a North Carolina man seeking a home mortgage loan was pressured into paying more than $9500 to Capital One on a credit card debt that was included as part of bankruptcy case that was concluded and discharged in 2002, more than a year prior to his applying for his home loan. Facing a denial of his loan if he did not pay the $9523 to the creditor, the man paid, but not without incurring an enormous setback in his cash reserve. Since then, the consumer has filed a lawsuit against Capital One and recouped his money and the filing fees, but Capital One received nothing more than cursory punitive measures. This practice is not limited solely to bankruptcy filers, but they are the most targeted victims of these practices. And, despite several instances of litigation, there have been no alterations to the corporate practices followed by the company. There will likely be no changes forthcoming until sweeping mandates are handed down by government agencies or until major victories by consumers are registered in the court system.
Until creditors and the reporting bureaus are reined in, the responsibility of ensuring that consumer credit reports are accurate falls squarely on two parties: The consumer and the mortgage professional representing them. Consumers can and should check their credit reports on a regular basis, with the accepted advice being that such inquiries be made twice annually (although some experts indicate that a quarterly examination might not be a bad idea). However, as the average consumer can be overwhelmed by the ins and outs of a credit report and may not know how to take corrective measures, the task should be undertaken by a financial professional. This professional can come with any title, but this individual should demonstrate knowledge and experience relating to credit reporting practices and the legal techniques involved in correcting inaccurate or erroneous information. A mortgage professional is the most likely candidate for this job, as it is he or she that will most often encounter or discover errors that exist.
When as a loan originator or officer reveals a discrepancy or probable case of misreporting, you should investigate the matter thoroughly and not assume the worst of your client. Ask questions and engage your professional wisdom; more often than not, you will know when your client is ‘fudging' the truth or when the client is being honest in reporting that there is in fact an error. Should you discover that there is an error on the credit report, gather the information pertinent to the discrepancy and take immediate action. This may involve contacting the creditor, or, in the case of a prior discharged bankruptcy case, the attorney who handled the client's bankruptcy. After assembling all of the facts in the matter, you may be required to have your client prepare a statement for both the creditor and credit reporting bureaus indicating the nature of the inaccuracy. A helpful resource in cases such as these would be the credit rescoring department maintained by nearly all credit-pulling companies through which we obtain our credit reports. These departments can take a second analytical look at the credit file, and combined with the information you and the client provide can chart a course for quick resolution to the problem. Employing credit-management software will show just how much a client stands to gain by this measure. The results of a simulation using this type of program can be astounding. A recent client of mine benefited by having nearly eighty points added to their credit report. It was a significant difference that took the client from a subprime, high interest loan up to a preferred program with a sharply contrasting interest rate and term.
Doing the homework on a credit report can cause dramatic changes for the good, and you will not only look like a hero to the client, you will have gained a long-term client, who just might be ‘referral-rich'. And, if nothing else, you will have demonstrated the truest facet of due diligence, which is get the facts and act accordingly on those facts. Personally, there is an intangible reward for doing the right thing, even if it is nothing more than being able to sleep soundly through the night.
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