Q/A with Stan Baldwin of Informative Research

MBA NewsLink recently posed questions to Stan Baldwin, chief operating officer of Informative Research, Garden Grove, Calif.

Baldwin has been in the mortgage industry for more than 30 years. Founded in 1946, Informative Research has grown from a local credit reporting agency to a national data and technology company providing a broad range of risk management products to the financial industry.

MBA NEWSLINK: What is trended data and how has it come to be required by Fannie Mae?

STAN BALDWIN, INFORMATIVE RESEARCH: Trended data refers to the information that has been collected by the three major credit bureaus over time. It has historically not been leveraged for mortgages, since the classic tri-merge credit report presents a relevant snapshot of credit background rather than a lengthy history.

Two of the three bureaus have presented the case that Fannie Mae and other investors can benefit by having additional information in order to provide a deeper picture of a borrower’s credit and spending trends. Trended data credit reports provide information going back two years on every account in the consumer’s report, allowing a far more extensive evaluation of each borrower’s use of credit. Fannie Mae decided this was a good idea, and so is requiring that trended data become part of every loan submission in the future. Freddie Mac has not yet made a similar requirement, but is expected to fairly soon.

NEWSLINK: When will lenders be required to include trended data in credit reports submitted with Fannie Mae loans?

BALDWIN: The original date was set for early this summer, but it has been moved to the weekend of September 24 to allow more time for preparation. Fannie Mae CEO Timothy Mayopoulos announced the requirement in October 2015 at the MBA Annual Convention in San Diego, but for some reason there was little note taken by the industry or the press at that time.

We in the credit reporting industry take the data from the bureaus and provide the actual credit reports used in the vast majority of mortgages across the country, and we were somewhat surprised that so little buzz was created by Fannie Mae’s announcement. There is significant impact expected as a result of the requirement, and lenders need to understand the implications.

NEWSLINK: What is the impact of the trended data requirement on lenders’ systems, costs and processing time?

BALDWIN: First of all, adding 24 months of credit information to each applicant’s credit report means that lenders will be dealing with a lot more data than to which they are accustomed. Loan origination software systems that are unprepared could have issues handling reports that are suddenly twice or three times as long. In addition to the system issues, credit report costs are increasing by 15-25 percent because of the additional fees credit reporting agencies pay the major bureaus for the information. This cost will presumably be passed on to consumers, adding to the cost of getting a loan.

There is also a more hidden cost associated with trended data credit reports, but it might well end up having the most impactful effect: additional time in the loan process. With all the supplementary information to review, underwriters will naturally be inclined to review it–even if the credit score and the standard information provided means that additional review isn’t really necessary. If the data are there, risk control professionals will likely tend to examine it.

Further complicating matters, data streams are sometimes incomplete, particularly on trade accounts. This means that there might be an interruption in the 24-month stream on an isolated trade line, prompting an underwriter to request the missing data. Even if it has zero impact on the credit decision, requests will be made and the loan stops moving through the pipeline until it comes in. I’ve seen this happen, causing days of delay that seem wholly unnecessary. Multiply this times the millions of loans that lenders create over the course of a year, and the hidden costs become a more significant issue.

NEWSLINK: How can lenders prepare for the new requirement?

BALDWIN: Since the new data costs were effective by August 1, most lenders should already be receiving the additional information and may or may not have noticed an impact on their processes. The bureaus started including trended data in the early summer, though it is not required by Fannie Mae until the early fall.

Lenders can get prepared by reviewing their systems and LOS packages to ensure they can deal not only with the heavy-payload credit reports they are receiving, but can view the information onscreen as needed. They can work with their staffs to minimize the impact on workflow, such as understanding whether looking at every single month of credit data over the course of two years is required in the decision process. They can also look at some of the alternative tools that are being provided by the credit reporting agencies to help them deal with the huge increase information flowing in. In some cases CRAs are not sending the data at the lenders request, however that will need to change once DU 10.0 is released.

NEWSLINK: What are the implications of trended data in credit reporting for consumers?

BALDWIN: Consumers are typically charged for credit reports, and lenders often use several during the course of the loan process. With a 15-25 percent increase in charges for credit reports, there is quite an impact for consumers as a whole–they will be spending millions more collectively, while receiving little tangible benefit as a result. As to whether there will be competitive issues for lenders in dealing with consumers, that depends on how well lenders manage their trended data reports versus finding low-cost ways to reduce the impact for consumers.

In addition to cost, there will be impact on consumers who have worked hard to repair credit issues over time. Previously, late payments would drop off the radar screen and consumers could present a current and positive credit profile for lenders. Trended data makes that less possible by surfacing issues dating back as far as two years. How this affects their perceived creditworthiness remains to be seen, but trended data could well result in making qualifying for loans more challenging for some consumers.

NEWSLINK: Given how little initial buzz took place, how can discussions about trended data gain more traction in the real estate finance industry?

BALDWIN: Despite the scarcity of dialogue currently taking place, the issue may become more visible as the requirement goes live on the weekend of September 24. Some will not be ready, while others will be prepared but perhaps not fully appreciative of potential unintended consequences surrounding the new standards.

The ability to drill down into borrowers’ credit may have the beneficial effect of influencing more institutional investors to return to the mortgage securities space, creating greater liquidity for the industry. These considerations are likely to drive more conversations and press coverage, creating more traction in the process.

NEWSLINK: What are the options for lenders to minimize the impact of the trended data requirement?

BALDWIN: The credit reporting agencies have had a year to work on ways for lenders to minimize the impact to systems, workflows and costs. For example, instead of pulling a full credit report at the application stage, there are prequalification analytics available that do not use trended data and therefore do not carry the additional expense. Informative Research has also led the CRA space with an option that only exposes the 24-month data upon request. This is a workflow alternative that can help keep the staff from the distractions of looking through screen after screen of irrelevant data, only clicking through to the information when necessary. Production management can make this option the standard procedure and possibly prevent significant delays that can impair processes and harm referral partner and customer relationships.

All things considered, trended data may well work out to be a great thing for lenders and consumers alike, especially when the industry has fully grasped its potential and real-world effects. Investors certainly deserve the right to know the full credit picture when they put millions at risk. Trended data does that, but the industry needs to be prepared for a digital tsunami of information.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions; articles and/or Q/A inquiries should be sent to Mike Sorohan, editor, at msorohan@mba.org.)