Buzzworthy with Ann Fulmer: Risk Management, Borrower Liens and Judgments

(Editor’s Note: the following is a transcript of Episode 1 of Buzzworthy, a monthly podcast appearing in MBA Insights from FormFree, Atlanta, hosted by Ann Fulmer, the company’s chief strategy and industry relations officer. Buzzworthy delivers unbiased analysis of developing mortgage industry news, market trends and regulatory updates in five minutes or less. The podcast can be accessed at https://www.mba.org/publications/insights/articles/current-issue/buzzworthy-with-ann-fulmer-risk-management-borrower-liens-and-judgments.)

Today I’ll be talking about risk management as it relates to borrower liens and judgments. More specifically, what’s changed with liens and judgments, and why do lenders need to pay attention?

One of the most important changes–and the focus of our episode today–is that since July 1, most civil judgment and tax lien data has been eliminated from consumer credit reports. Another important change is that Fannie Mae no longer requires that data to be submitted to the Desktop Underwriter Validation Service.

I think we can all agree that lien and judgment data are important, because it reflects on a borrower’s character as well as his or her propensity and ability to pay. If that’s true, then why aren’t the bureaus reporting that data anymore?

Well, it all started with a multi-year investigation by 31 state Attorneys General offices that questioned the ability of credit reporting agencies to keep financial information up-to-date and to accurately match that data to the correct consumer.

As a result of the Attorneys General investigation and subsequent settlement, Equifax, Experian and TransUnion removed all lien and judgment records that cannot be “triangulated” with a consumer’s full name, complete address and their Social Security number or date of birth.

In response, back in June, Fannie Mae issued a letter to lenders stating that while it still requires that liens and judgments be paid off at or prior to closing, lien and judgment data is NOT required for submission to Desktop Underwriter for risk assessment.

Although some lenders’ reaction was positive–because who doesn’t want fewer I’s to dot and T’s to cross–the settlement actually complicates a lender’s effort to really understand the risk posed by any given consumer.

Here’s why:

When tax lien and civil judgment data disappeared from credit reports last month, around 12 million consumers got an artificial “boost” to their FICO scores.

While most saw their scores rise by 20 points or less, nearly 700,000 consumers saw their scores increase by 40 points.

And last month, as predicted by Bankrate and others, for the first time in history, the average American credit score topped the 700 mark–the approximate threshold for a “good” credit rating.

And here’s something else to chew on.

The change doesn’t just remove existing lien and judgment data from credit reports, it also severely limits what can be reported going forward, meaning that millions of future consumers may end up with artificially inflated scores.

Underwriters need lien and judgment data to verify a satisfactory payment history and to account for the remaining installment payments when calculating ability to repay under QM/ATR rules. They also need it to determine whether a borrower is LIKELY to repay those debts.

That lien and judgment data is critical to making a good credit decision is underscored by a LexisNexis study that found that people with liens or judgments are twice as likely to default on a loan as those with no outstanding liens or judgments.

Apart from the increased risk from flying blind, liens that can’t be cleared will make loans fall through, wasting the time and effort invested by the loan officer, processer and underwriter–not to mention the cost of the title report and other direct loan open for debate, the need to find a solution is not.

Monthly episodes of “Buzzworthy” can be accessed at https://www.mba.org/publications/insights/insights-publication/buzzworthy.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)