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Credit Bureau Scores are one of the many elements that are reshaping today's mortgage industry. Credit scoring has been around since the 1950s, and Credit Bureau Scores - scores based solely on credit bureau data - became widely available in the 1980s. Today, Credit Bureau Scores are used extensively in such industries as bankcard and auto lending. Following are answers to frequently asked questions by those new to credit scoring in mortgage lending.
Where
can I find a copy of the California Senate Bill 1607 Release of Credit
Scores to Consumers?
Why is the
score on a report I ordered different than the score another Broker ordered?
What is a Credit Bureau Score and how is it calculated?
Why did a credit report receive the score it did?
How can a borrower increase their FICO Score?
What if a score is affected by information that is not theirs?
If derogatory information is removed, how much will the score increase?
What would happen to the score if balances were paid and accounts closed?
Do inquiries affect the credit score?
Should the credit score be passed on to the borrower?
Why can't some files receive credit bureau scores?
Doesn't using credit scores mean fewer people will get mortgage loans?
If scores are obtained from more than one bureau, which one should
I use?
Are there other types of scores that can be used?
Why
is the score on a report I ordered different than the score another Broker
ordered?
There are several reasons this can happen. Creditors report
to the credit bureaus every day, therefore information like balance and
status may have changed. There may be new entries or additional inquiries.
Another reason is that there are different versions of Credit Scoring
Models. We believe in using the most current, up to date versions.
What
is a Credit Bureau Score, and how is it calculated?
Credit bureau scoring is a statistical means of assessing how likely
a borrower is to pay back a loan. A Credit Bureau Score is based
on the data available in the borrower's credit report. The score
measures the relative degree of risk a potential borrower represents to
the lender or investor. it is not a measure of a borrower's income,
assets, or bank account, although those and other factors may still be
considered by lenders and investors, independent of the score. Fair Isaac
Credit Bureau Scores range from approximately 375 to 900 points, and are
available through the three national credit data repositories (Equifax,
Trans union, and Experian). All of these three models are often
referred to as "FICO" scores. The scoring programs reside
at these credit bureaus and are called:
Beacon - an Equifax score
Empirica - a Trans Union score
Experian/ Fair Isaac Model - an Experian score
This score is calculated at the repository, and is based solely on the data within that repository's individual credit file. Fair Isaac is not able to access a borrower's credit bureau data, make corrections to credit bureau data, or calculate a score. A Fair Isaac Credit Bureau Score, sometimes referred to as a FICO score, is calculated by a system of scorecards. In developing these scorecards, Fair Isaac uses actual credit data on millions of consumers, and applies complex mathematical methods to perform extensive research into credit patterns that forecast credit performance. Through this process, Fair Isaac identified distinctive credit patters. Each pattern corresponds to a likelihood that a consumer will make his or her loan payments as agreed in the future. The score is based on all the credit-related data in the credit bureau report - not just negative data such as missed mortgage payments or bankruptcies. The types of credit information used in the credit bureau scorecards are typically the same items an underwriter would use to make a credit decision. These can include:
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Payment
history |
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Outstanding
debt |
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Credit
history |
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Pursuit
of new credit |
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Types
of Credit in use |
Fair Isaac observes a very large number of credit report histories of mortgage borrowers to determine which credit report items or combination of items are the most predictive of future risk; this data indicates the amount each item contributes to an accurate assessment of credit risk. Fair Isaac Credit Bureau Scores do not use race, color, religion, national origin, sex, marital status, or age as predictive characteristics. occupation and length of time in present residence are also not used in the Credit Bureau Scores. Also, any information that is not present in a repository credit file is not used in creating a Credit Bureau Score.
Why
did this credit file receive the score that it did?
To understand why a credit report scored the way it did, look at the four
reason codes returned with each score. These are the top reasons,
in order of severity, why it did not score higher, although other factors
probably contributed. Mortgage brokers and lenders should receive
these reasons along with the score when the score is obtained through
a mortgage credit reporting company. A complete list of these score
factor reasons accompanies this document. The reason codes are either
a number or a letter followed by a brief description. For example
a credit report with a score of 563 may have the following factors:
02 - Delinquency on accounts
01 - Amount owed on accounts is too high
09 - Too many accounts opened in last 12 months
19 - Too few accounts currently paid as agreed
These score factor explanations can be relayed back to the borrower to explain how they can increase their score over time. Score factors are less meaningful for higher-scoring credit records as they merely point to the reasons why the file did not score even higher.
How
can a borrower increase his or her Fair Isaac Credit Bureau Score?
Over time a borrower can improve the information in his or her credit
report by paying credit obligations on time and using credit wisely.
As derogatory data in the credit report gets older, it has less influence
on the score. A missed payment from four years ago will not count
as much as a missed payment that is six months old. A credit score, like
a credit report can be thought of as a snapshot of an individual's changing
credit record. Scores from different repositories will be different
because of the different data available in the consumers file at each
repository. If a request is made to obtain another report in order
to get an updated score, then the score is likely to change for many reasons;
however, it is not possible to limit how that score will change.
The credit items on the report are updated often, so new items are likely
to have been added since the previous report was generated. In addition,
existing items will have aged. Repeatedly requesting a borrower's
credit report may substantially increase the number of inquiries on the
repository report, which may affect the score adversely.
What
if a score if affected by derogatory credit information that the borrower
believes is not his or hers?
Consumers who want to address what they believed is erroneous information
on a mortgage report should contact the credit reporting agency which
developed the report. The Fair Credit Reporting Act (FCRA) allows
the credit reporting agency a "reasonable period of time" generally
not to exceed 30 days, to reinvestigate consumer disputed items.
a significant number of credit grantors use an automated system for investigating
disputes and respond to the dispute within a few days. most credit
reporting agencies make a special effort to quickly resolve disputed information
affecting a mortgage decision. Consumers wishing to dispute items on their
credit files with the credit repository can do so thought the following
numbers:
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Equifax - (800)685-1111 |
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Experian - (800)422-4879 |
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Trans Union - (800)888-4213 |
The credit score is generated using the credit information at one of the three national credit repositories. Therefore, changes made solely to the mortgage credit report and no to the credit repository information will not affect the score. It is the policy of many lenders and investors, including Freddie Mac and Fannie Mae, that if gross inaccuracies appear on the credit file, erroneous information can be documented and the score disregarded. The applicant is not required to go through the procedure of changing the information at the credit repository for the purpose of altering the credit score in these cases.
If
the derogatory information is removed, how much will the score increase?
Because the score uses all the credit-related data on the credit bureau
report and takes into account compensating factors, removing or changing
one specific derogatory item will not guarantee an increase in the Credit
Bureau Score. In some cases a change in the credit bureau report
would have little or no effect on the score. And because there are
multiple scorecards using complex mathematical formulae at each of the
repositories, it is not possible to estimate how much the score will change
if specific derogatory information is removed from the single repository
report. Again, it should be stressed that erroneous derogatory information
on a credit file can be documented to compensate against a low score.
The lender can weigh all factors and documentation provided by the borrower
and may choose to disregard the score. it is not required by most
lenders and investors that an applicant go through the procedure of changing
information at a credit repository for the purpose of altering a credit
score when erroneous information is present.
What
would happen to the score if an applicant were to pay off his or her balances
and/or close some accounts?
It is not possible to ensure that scores would increase in this case.
Such actions may upset the mix of available credit, and actually decrease
the score. It is important to remember that the point of the scoring
is not to calculate an up-to-date debt ratio - the debt ratio is still
considered by the lender independent of the score. Therefore it
is not critical that balances be completely up to date for the purposes
of scoring. The score reflects data available on the credit report
to assess the consumer's current payment patterns as well as payment history.
Do
inquiries affect the credit bureau score?
The number of inquiries may or may not be a factor in the score, and
when it is a factor, it is typically not a strong one. However,
if a borrower is very close to the score threshold, and can show that
there are one or more inquiries that are related to this particular loan
process, and the number of inquiries appears as one of the four reason
codes, then the lender may be able to make an exception for the borrower.
It is up to the lender, as in all circumstances, to decide what is a sufficient
risk. Since the law requires a record of all inquiries into the file to
be kept, inquiries cannot be removed from the credit report. Inquiries
that occur from a consumer requesting their own credit file are not used
in determining the score. also inquiries that are incurred when
lenders access consumer credit files in the process of pre-approved credit
solicitations or for managing existing accounts are not used by the score.
Occasionally, a consumer in the market for a new loan may have their application
presented to a number of lenders in a short period of time, resulting
in multiple inquiries. This practice, known as "shot-gunning."
is prevalent in the auto industry and results in a large number of recorded
inquiries for a single application for new credit. Similar occurrences
have been observed in the mortgage origination process. Fair Isaac
has taken this practice of "shot-gunning" into account when
considering inquiries as a predictive factor. To minimize the impact
of dealer "shot-gunning" as well as situations when the consumer
or consumer's mortgage broker "shops" multiple lenders for credit,
all auto and mortgage related inquiries occurring over a 14 day period
are treated as a single inquiry. In addition the credit bureau risk
models use an "Inquiry Buffer". With the introduction
of an inquiry buffer, all mortgage and auto related inquiries that occur
within 30 days of the time of scoring are ignored.
Should
the credit score be passed on to the borrower?
Because there are different types of scoring models on the market
that have different scales, a score by itself has little meaning to the
borrower. In addition, a lender can establish score cut-offs at
any point along the score range; therefore, the interpretation of the
core in terms of loan approval is relative to each lender's individual
business strategy. Because there is no point of reference for a
borrower to understand his or her individual score, it should not be passed
on. When a consumer is declined credit due to a low score, the score factor
codes should be communicated to the consumer. Providing the score
alone as the reason for declination does not provide the consumer with
actionable information that can e used to increase their score over time,
and is not in compliance with Regulation B of the Equal Credit Opportunity
Act.
Why
can't some files receive credit bureau scores?
In order to receive a Fair Isaac score, a credit bureau file must
contain at least one account that is older than six months, and at least
one account that has been reported to the credit bureau within the past
six months. Both conditions can be met by the same account, and
a bureau file containing just one account can get a Fair Isaac score.
In addition to these credit conditions, the bureau file must not contain
any indication that the consumer may be deceased. If you are requesting
a credit score on one or more credit repository files used to create a
merged report or RMCR, and a score is not returned, you must verify that
the credit conditions (e.g. at least one account that has been reported
in the last six months and open longer than six months) have been met
on the file generated by the scoring credit repository. your mortgage
credit reporting company, or the repository in question, will be able
to help you with this verification.
What
does a score mean?
A Fair Isaac Credit Bureau Score is a means of rank-ordering potential
borrowers based on the likelihood that they will pay their credit obligations
as agreed. A higher score indicates better credit quality.
If all other things are equal, borrowers with a score of 660, for example,
are less likely to default on a loan than borrowers with a score of 650.
The Fair Isaac Credit Bureau Score models at each credit repository are
of similar design and the scores are scaled to indicate a similar level
of risk across all three bureaus. In other words, a score of 680
at one bureau will represent the same relative risk as a score of 680
from another bureau. This risk is defined in terms of the number
of accounts that remain in good standing compared to those that default.
Doesn't
using the score mean fewer people will get mortgage loans?
No, in fact the opposite may be true. Credit Bureau Scoring is just
one of several ways that lenders and the secondary market decide whether
to lend someone money, and under what terms. Lenders or investors set
the underwriting guidelines. The investor typically sets score cuts-offs
such that they offer mortgage loans to the same number of borrowers irrespective
of the use of scoring. The lender used the Credit Bureau Score to determine
if the borrower exceeds the acceptable level of risk for the product being
offered. If the score on a borrower's credit report is too low for
a given product, that does not mean the score is too low for other products.
In the past we have seen that once lenders are able to accurately identify
the credit risk of all applicants, they can create products designed and
price for various market segments, ultimately extending credit to more
people.
If
Credit Bureau Scores from more than one bureau are obtained on a mortgage
credit report, which score should I use?
Each credit file at each repository is capable of being scored.
If a mortgage credit report is created using files from all three repositories
for a borrower, it is conceivable to have three separate credit scores.
Freddie Mac has recommended that a lender rely on the middle score when
working with three scores or the lowest score when using two scores.
Some lenders or investors may require a credit score from a specific credit
repository based on the perceived strength a repository may have in a
geographic region. Borrowers and co-borrowers will also have separate
scores. When considering which score will be the basis of a credit
decision, Fair Isaac suggests that a lender rely on the same logic used
currently to determine which of the two credit files is used. A
typical and conservative approach is to use the lower of the two so that
both the borrower and co-borrower meet minimum credit criteria.
Are
there other types of Credit Bureau Scores that can be used in the mortgage
industry?
Yes, In a recent industry letter, Freddie Mac made reference to two
types of credit scores that correlated strongly with mortgage performance.
these were the "bureau scores" created by Fair Isaac as well
as the "bankruptcy scores" created by CCN-MDS. Both of
these types of scores are available through the three national credit
repositories. Fannie Mae issued a similar industry letter which
only referenced Fair Isaac Credit Bureau Scores. Fair Isaac is not
able to comment on the specific details of the CCN-MDS bankruptcy scores;
therefore, this material refers only to the Fair Isaac Credit Bureau Scores.