Today Rep. Maxine Waters (D-CA) will introduce the Fair Credit Reporting Improvement Act of 2014. If passed, the Act would result in the most aggressive overhaul of the Fair Credit Reporting Act since 2003 and change the landscape of over 650,000,000 consumer credit reports and credit scores almost overnight. The Act would require the following take place:
Fair Credit Reporting Improvement Act of 2014
Regarding the amount of time an adverse item can remain on a credit report:
All adverse real estate loans (those in foreclosure or otherwise derogatory) would have to be removed from consumer credit reports if the CFPB or FTC deemed them to be caused by deceptive lending practices.
Regarding credit scores:
Regarding credit report disputes with credit bureaus:
Regarding credit report dispute investigation standards and practices:
NOTE: Most of the above investigation standards already occur.
Regarding the use of credit reports for employment screening:
Regarding the sale of services by credit bureaus to consumers:
NOTE: This appears to be in response to consumer complaints about being charged for subscriptions services by the credit bureaus after their trial or promotional free period has ended.
The new FICO 09 score will become available in the fall of 2014. But just because the new model is sold online by the my fico site as well as being available to mortgage lenders, doesn’t mean it will be used by the mortgage industry. For lenders, switching to a different FICO score is a complicated risk.
Lenders who decide to try the new FICO version will go through a testing process before they decide whether to adopt them. Barry Paperno, who worked at FICO for many years, explains:
“(Lenders) begin to test it on their portfolios through a process called ‘validation’ to help determine when,
and if, they choose to go with the new score,” he says. “Briefly, validation consists of looking at past credit decisions and customer credit performance using both the FICO version used in the initial decision and a ‘what if’ scenario using FICO 9. If, from this analysis, it looks like FICO 9 would have done a better job of weeding out more poor performers than the score they used, the lender may decide the possible reduction in future losses will be worth the resources required to switch to FICO 9. If, on the other hand, the validation
shows FICO 9 not appearing to provide any increased risk prediction value, then they’re likely to stick with what they’re currently using. Many of the large banks use their own custom proprietary scoring models in which FICO scores are just one of many components, making changes to these complex scoring systems, as
would be required by a change to FICO 9, is no small logistical feat.”
Lenders will be wary about having to change their whole system since the process takes time and can be quite expensive. Like most businesses, lenders have lots of priorities and the new score might not be one
of them. FICO’s last version, FICO 8, was released in 2008 and has only recently been adopted by a minimal amount of lenders. To date, Fannie Mae and Freddie Mac have not adopted the 2008 version.
In addition, lenders can also consider factors outside the FICO score when approving or declining a loan. The FICO 09 score has gotten a lot of press because it will place less weight on medical debt. However, a lender reviewing a credit report would still be free to question collection accounts or decline applications from consumers whose credit reports contained one or more of them.
Those planning on applying for a mortgage should note that if they are ordering FICO scores from the
myfico site in the fall they may have very different scores in comparison to what the lender pulls. Bankers have to be mindful that they may need to explain this to disappointed and frustrated mortgage applicants.
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