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 Fair Credit Reporting Improvement Act of 2014

9/16/2014

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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.
  • All bankruptcies would have to be removed after seven years instead of after 10 years.
  • All judgments would have to be removed after four years instead of after seven years.
  • All paid (released) tax liens would have to be removed after four years instead of after seven years.
  • All collections would have to be removed after four years instead of after seven years.
  • All late payments and other adverse items would have to be removed after four years instead of after seven years.
  • Any and all adverse debts would have to be removed within 45 days of payment or settlement.
  • Any adverse information regarding a private student loan would have to be removed if the debtor makes nine consecutive payments on time.

Regarding credit scores:

  • Fannie Mae and Freddie Mac would be required to “regularly” revalidate the scoring models used to determine loan eligibility to make sure they’re statistically sound.
  • Fannie Mae and Freddie Mac would have to study the benefits of using “additional or alternative” credit score products to see if they would improve the accuracy of Fannie and Freddie’s own scoring algorithms.
  • Consumers must be informed that there is “no one credit score.”
  • If the credit bureaus sell a credit score to a consumer the fee cannot exceed $10 for the score. The fees cannot apply when the consumer is entitled to a free credit score.
  • A credit score is still defined as a score used to arrange loans, rather than a more comprehensive definition to include insurance, utility or tenant screening scores.
  • Consumers may request a free credit score annually via AnnualCreditReport.com.
  • All auto, mortgage or student loan inquiries that occur within 120 days of each other can only be treated as one inquiry in your score.
  • Disputed credit information may not be considered by credit scoring models in any adverse manner. (This actually already happens in both FICO and VantageScore’s credit scoring systems.)

Regarding credit report disputes with credit bureaus:
        
  • All supporting documents provided by consumers to the credit bureaus have to then be provided to the furnishers of the disputed credit information (normally a bank or a collection agency), despite whether or not the credit bureaus
    believe it to be “relevant.”
  • The credit bureaus would have to provide consumers with a copy of “all” information used by the credit bureaus in carrying out their investigation.
  • The credit bureaus would have to maintain sufficient staff to conduct investigations. This also applies to the furnishers of information.
  • The credit bureaus will have to conspicuously post a summary of consumer rights regarding their ability to dispute items and the bureaus’ obligations to investigate.
  • The credit bureau’s staff must have the ability and responsibility to directly correct errors identified in the credit report.

Regarding credit report dispute investigation standards and practices:
  • The credit bureaus and data furnishers would have to verify they have a record of the items being disputed by the consumer.
  • The credit bureaus and data furnishers must verify that the item is accurate and that it actually is being placed in the correct credit report belonging to the correct consumer.
  • The credit bureaus must conduct an “independent” investigation, separate from the furnishers’ (bank or collector) investigation, in order to identify errors.
  • The credit bureaus and data furnishers must verify that the consumer’s identification information is accurate and complete: includes full legal name, address, Social Security number and date of birth.
  • Any company that furnishes information to a credit bureau MUST retain all relevant records regarding the account for the entire period of time the item is on the consumers credit reports.

NOTE: Most of the above investigation standards already occur.


Regarding the use of credit reports for employment screening:
  • Employers can only use credit reports if the information is a “valid” predictor of employee performance for the specific position of employment, and is more reliable than alternative methods, as determined by the CFPB.
  • Consumers cannot be charged for an employment screening report.
  • The consumer’s credit report must be kept confidential.

Regarding the sale of services by credit bureaus to consumers: 
  • If the credit bureaus are selling a service that has a promotional period then the credit bureaus must provide clear notice when that promotional period ends, if applicable.
  • The credit bureaus may not provide services after the end of a promotional period UNLESS the consumer specifically agrees to continue receiving the product or service.

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.

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Will The Change To FICO Scoring Make A Difference?

9/4/2014

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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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    Dan Garcia

    Trevana Properties is a placement company working with a variety of hedge funds, REIT's, commercial banks, specialty boutique lenders, private investors and other funding sources not widely known to the general public.

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  • Home
  • Business Financial Suite
    • Business Credit Building
    • Frequently Asked Questions
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    • Testimonials
    • About Us
    • Privacy Policy
  • Specialty Products
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