Understanding Credit Reports and Credit Scoring (Webinar Slides)

Understanding Credit Reports & Credit
Scoring
March 2013

©2012 Genworth Financial, Inc. All rights reserved.

Overview & Course Objectives

Credit Reports & Scoring
‫‏‬

Credit Reports & Scoring is designed to help individuals understand their role and responsibilities when
‫‏‬

viewing credit reports. It will prepare Mortgage Loan Originators with the required knowledge in order
to successfully analyze a borrowers credit report. You will obtain a clear understanding of the types of
credit reports and how to access these reports. You will also have an understanding of all credit
reporting and nontraditional credit compliance guidelines.

Upon completion of this course, attendees will be able to effectively:
–Understand Credit Report Types
–Review and Analyze Credit Reports
–Obtain a clear understanding of Credit Scoring Basics
–Understand Agency Guidelines
–Gain knowledge of the legal requirements of FICO Score

Credit Reports & Credit Scoring 1

Credit Report Types
A credit report is a record of the borrower’s credit activities. There are three types of credit reports
•

that provide data on the borrower’s liabilities and payment histories. They are:
 An in-file credit report is credit data received directly from a national credit bureau. This data is not verified.
 A tri-merge credit report is obtained from a credit reporting agency and contains data collected from three national
repositories.
 A factual credit report also called a RMCR (Residential Mortgage Credit Report) is obtained from credit reporting
agencies and contains data collected by the agency from three national repositories. The credit agency verifies certain
data and conducts an interview with the applicant.

• REQUESTING THE CREDIT REPORT
• Make sure when you order any type of credit report you:
 Get the complete legal name of the borrower
 Use the correct spelling of both the first and last name
 Identify any alias the borrower may have
 Confirm whether the borrower uses any generation suffix (Jr., III…)
•

Only businesses or individuals with a “permissible purpose” can access a consumer’s credit report. The
•

consumer must be fully aware that their credit will be accessed and have granted permission to do so.
•

Anyone who obtains a copy of a consumer’s credit report under false pretenses can be fined and jailed for
•

up to a year.


Credit Report Basics
• WHERE IS THE BORROWER’S CREDIT INFORMATION LOCATED?
Creditors voluntarily report the information to Credit Bureaus. A credit bureau is a
•

clearinghouse for credit history information. The bureau may also be referred to as a Credit
Repository. Credit grantors provide the bureau with factual information on how their credit
customers pay their bills. Each bureau assembles that information, along with public record
information obtained from courthouses, into a file on each consumer. There are three major
credit bureaus:
•

• Equifax: (800) 685-1111 www.equifax.com
• Experian: (888) 397-3742 www.experian.com
• Trans Union: (800) 916-8800 www.transunion.com
•

These national agencies maintain centralized databases containing the credit records of more
•

than 200 million Americans. Credit bureaus generate over a half-billion credit reports a year.
•

 Credit bureaus do not rate credit
 Credit bureaus do not approve or reject consumer applications for credit.
 Credit bureaus store and report the information


WHO PREPARES THE CREDIT REPORT?
‫‏‬

Consumer reporting agencies prepare credit reports. These agencies:
 Specialize in obtaining records on the credit history of almost everyone who has borrowed money
 Contact national repositories of accumulated credit records for each area of the country where the
applicant has lived during the most recent two-year period and prepare a credit report
‫‏‬

PRIMARY CATEGORIES OF INFORMATION
‫‏‬

There are four primary categories of information:
‫‏‬

1.Identifying information
2.Credit history
3.Public records
4.Inquiries
‫‏‬

 Identifying info may include: Name, current & previous addresses, social security number, telephone
number, date of birth and current and previous employers
 History of paying bills with credit grantors such as: retail stores, banks, finance companies and mortgage
companies
 All available public record information and judgments, foreclosures, tax liens and bankruptcies
 Information about inquiries during the past 120 days. However, a consumer’s copy will list all inquiries
for the past 24 months.


• WHAT DETAILS DOES THE CREDIT REPORT INCLUDE?
For each debt listed, it provides the:
 Creditor’s name
 Date the account was opened
 Amount of the highest credit or original loan amount
 Required payment amount and unpaid balance
 Current status of the account
 Payment history
 Any remarks or Special Comments to describe the loan situation (real estate loan, loan modification, in
dispute, FNMA loan, etc.)

• Information the Credit Report will Not Include:
 Checking or savings account information
 Medical history
 Purchases made with cash
 Race, gender, religion, or national origin
•


• Free Personal Credit Report
The Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit
•

Transactions (FACT) Act, provide that every consumer is entitled to one *free
Personal Credit Report from each of the 3 national credit reporting agencies
annually
•

Request Online
• www.annualcreditreport.com
•

Request by Phone
• (877) 322-8228
•

Request by Mail
• Annual Credit Report Request Service
• P.O. Box 105281
• Atlanta, GA 30348-5281

*It is important to note that a credit report is free, but a score is not. People often confuse and interchange
"report" and "score".


The Credit Report
Sample
‫‏‬

Credit Reports & Credit Scoring

Sample Credit Report Legend

Sample credit report retrieved with permission from Credit Plus
http://www.creditplus.com/index.html




Note: Based on the type of debt it may be calculated differently by investors


Sample CREDIT REPORT



Sample Credit Report



SAMPLE CREDIT REPORT

Verify the borrower’s PITI payment as the payment listed may only be P&I




Review who is reporting the tradeline information. Some investors may
require a minimum number of tradelines for a score to be considered
usable.



Remember to include all collection amounts that are required to be paid in
the total assets required.



Verify if the Inquiry resulted in new debt and re-calculate the total debt ratio
when applicable.



Review for all Public Records and apply the appropriate credit
requirements




Have the required Fraud reviews been ordered?





23

Credit Report Basics & Example
• HOW LONG DOES INFORMATION REMAIN ON A CREDIT REPORT?
General Information will date back to the initiation of the credit account. Limitations
•

apply to bankruptcies and other delinquent or derogatory items, such as:

Type Limitation
Bankruptcy Chapter 7 10 years from the date of entry of the order for
release
Bankruptcy Chapter 13 7 years from the date of entry of the order for
release

Suits & Judgments 7 years from date of entry or expiration of
appropriate statute of limitations, whichever is longer
Tax Liens - PAID *7 years from date of payment
Tax Liens - UNPAID No limitation
Charged to Profit & Loss 7 years
Criminal Record Limitations No Limitations on criminal conviction
Other Adverse Information 7 years

*Based on IRS reporting

25

Credit Report Basics & Example
CONSUMER DISPUTES (FCRA)
•

 Changes to credit data must actually take place at the repository level in order for the
information to affect the score Consumers must write a letter of dispute regarding the erroneous
information to the appropriate repository referencing the trade line, account number(s), and the
specifics of the reported error
 Under the Fair Credit Reporting Act, a credit repository has 5 days from receipt of a written
investigation request to contact the appropriate credit grantor about the complaint and then to
receive a reply back within 30 days of the original repository notification
 Within 5 days of completion of the investigation, the repository must send a written report to the
consumer with its findings (and a copy of the revised report if there were any changes)

CONSUMER DISPUTES (FCRA) OUTCOMESConsumer Disputes may result
•

in three possible scenarios:
 No response from the creditor at all…the data is REMOVED
 Confirmation from the creditor…the data STANDS
 Revision by the creditor…the data is CHANGED
In all cases, the consumer is NOTIFIED of the results.

For more on consumer rights, go to: www.ftc.gov/credit


Credit Scoring
Model, Score Ranges
‫‏‬


Credit Scoring Basics
• WHAT IS A CREDIT SCORE?
 A Statistical Model
 A Predictor of Future Performance Based on Prior Experience
 A Model Base on Known Performance
 A Scorecard Factoring in Many Characteristics
 A Value Falling in a Range from approximately 300 to 850
Default/Delinquency
Probability of

0%
LOW HIGH
Score

28

• Who Provides and Uses Scoring?
• FICO
The most common credit score in use was developed by Fair Isaac Company
•

(FICO).
 Evaluates the borrower’s credit data
 Assigns a “score” which predicts borrowers’ likelihood to repay credit obligations
•

• Fannie Mae, Freddie Mac, and large banks have introduced score-based underwriting systems.
•

• Most major mortgage companies either:
 Use scoring through the systems provided by their investors
 Develop their own scoring technology
•


#1 Poll Question


Benefits of Credit and Mortgage Scoring
‫‏‬

 Scoring enables lenders to:
 Achieve consistency & objectivity in underwriting
 Identify high risk loans from a credit perspective
 Bring efficiency, consistency and profitability to all aspects of the industry

Scores are indicators of risk and performance for the credit portion of the file. Underwriters


continue to use their knowledge and experience, as well as agency guidelines to evaluate risk
and make loan decisions.


Credit Scoring Basics-FICO Model
 Payment information  Travel and Entertainment cards
 Public record and collection items
 Department store cards
 Severity, recentness and frequency of delinquencies
noted in the trade line section  Personal finance company references
 Outstanding debt
 Installment loans
 Number of balances recently opened
 Average balance across all trade lines  Other
 Relationship between total balances and total credit
limits on revolving trade lines
 Credit history
 Age of oldest trade line
 Number of new trade lines
 Pursuit of new credit
 Number of inquiries and new account openings in the
last year
 Amount of time since most recent inquiry
 Types of credit in use
 Number of trade lines reported for each type
 Bankcard
This information was taken from Fair Isaac Credit Bureau Risk Scores and www.myfico.com
http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx


Credit Scoring Basics-FICO® Model
Sample Credit Report- Reason Codes

Note the Reason Codes



The Different FICO® Scoring Models
Standard Models
‫‏‬

Credit Inquiry Impact on Credit Score
•

 Equifax Beacon 5.0
 Trans Union FICO® Risk Score, Classic 04 Above-the-line inquiry: Impacts
•

 Experian /Fair Isaac Risk Model V2 consumer’s credit score

Different types of Credit Inquiries
‫‏‬
 Purchasing a car
 Below the Line (“Soft”) Inquiries  Applying for a mortgage
 Consumer File Inquiries
 Applying for credit cards
 Credit Seeking Inquiries
 De-duping Process Inquiries  Other loans/financing
‫‏‬

Below-the-line-inquiry: No impact on
•

consumer’s credit score
 Consumer obtaining their own credit report
for monitoring purposes

 Companies offering pre-approval programs
to consumers

 MI Company queries


The Different FICO® Scoring Models
• 30-Day Buffer:
No Auto or Mortgage inquiry within 30 days from the current inquiry is counted in the
score
• De-Dupe Periods (Depending on Score Version):
14-days – All Auto inquiries within a rolling 14-day window count as 1 Auto inquiry; All
Mortgage inquiries within a rolling 14-day window count as 1 Mortgage inquiry
45-days – All Auto inquiries within a rolling 45-day window count as 1 Auto inquiry; All
Mortgage inquiries within a rolling 45-day window count as 1 Mortgage inquiry
• Factor or “Reason” Codes
Reason codes are listed in DESCENDING order of importance and are displayed with
each score
Reason codes show which area of the consumer’s credit did not score as highly as
possible. In some cases – these reasons highlight issues not associated with
traditional “derogatory” information.
These codes can be relayed back to the borrower to explain how they can
change/improve their credit profile (over time)
Score factors seem less “relevant” for higher-scoring consumers as they merely
indicate the reason why they did not score HIGHER
•


Legal Requirements
Fact Act, Notice to Home Applicant, RBR Notice
‫‏‬


Legal Requirements of the FICO® Score –
The FACT Act
•

What must be disclosed or provided to the Consumer?
•

 Consumer’s current credit score
 Range of possible credit scores under the model used
 Up to five key factors that affected the score
 Date the score was created
 Name of the person/entity that provided the score
 Notice to Home Loan Applicant


Credit Score Information Disclosure
• http://www.bankersonline.com/tools/credscordiscl.doc
•

• Notice To The Home Loan Applicant
•

In connection with your application for a home loan, the lender must disclose to you the score that a consumer-reporting agency distributed
•

to users and the lender used in connection with your home loan, and the key factors affecting your credit scores.
•

The credit score is a computer-generated summary calculated at the time of the request and based on information that a consumer reporting
•

agency or lender has on file. The scores are based on data about your credit history and payment patterns. Credit scores are important
because they are used to assist the lender in determining whether you will obtain a loan. They may also be used to determine what interest
rate you may be offered on the mortgage. Credit scores can change over time, depending on your conduct, how your credit history and
payment patterns change, and how credit-scoring technologies change.
•

CREDIT REPORTS & SCORES
•

Because the score is based on information in your credit history, it is very important that you review the credit-related information that is
•

being furnished to make sure it is accurate. Credit records may vary from one company to another.
If you have questions about your credit score or the credit information that is furnished to you, contact the consumer reporting agency at the
•

address and telephone number provided with this notice, or contact the lender, if the lender developed or generated the credit score. The
consumer-reporting agency plays no part in the decision to take any action on the loan application and is unable to provide you with specific
reasons for the decision on a loan application.
•

• If you have questions concerning the terms of the loan, contact the lender.
•

The following company provided the credit score used in making a decision for your loan request. The company that provided the credit
•

score also provided the credit file that your score is based upon.
•

• Experian
• 701 Experian Parkway
• PO Box 2002
• Allen, TX 75013-0036
• Toll Free 888-397-3742


CREDIT REQUIREMENTS
The Federal Reserve Board and Federal
Trade Commission (hereinafter, the
"Agencies") jointly adopted the Risk Based
Pricing Rule ("Rule"), which was published
on January 15, 2010. Compliance with the
Rule was required by January 1, 2011. The
Rule requires a creditor that uses a credit
report or score in connection with a
consumer's application for, or a grant,
extension, or other provision of, credit that is
primarily for personal, family, or household
purposes, to provide the consumer a Risk-
Based Pricing Notice ("Notice") when, based
wholly or partially on the credit report or
score, the creditor grants, extends, or
otherwise provides credit to the consumer on
material terms that are materially less
favorable than the most favorable material
terms available to a substantial proportion of
consumers from or through that creditor.
http://edocket.access.gpo.gov/2010/pdf/E9-30678.pdf


Risk-Base Pricing (RBP) Notice

http://www.icba.org/files/ICBASites/PDFs/FinalRulesonRiskBasedPricing.pdf

http://www.scoreinfo.org/Disclosure-Notices/Risk-Based-Pricing-Notice.aspx


Credit Uses
Agency Requirements
‫‏‬


#2 Poll Question


Fannie Mae Credit Requirements with DU®

https://www.efanniemae.com/sf/technology/ou/du/pdf/ducreditscoremodel.pdf


DU Credit Score Requirements
‫‏‬

Credit scores are not an integral part of DU's risk assessment (DU performs its own
‫‏‬

analysis of the credit report data); however, lenders must request credit scores for
each borrower from each of the three credit repositories when they order the three
in-file merged credit report. If one or two of the credit repositories do not contain any
credit information for the borrowers who have traditional credit, the credit report is
still acceptable as long as
–credit data is available from one repository,
–a credit score is obtained from that repository, and
–the lender requested a three in-file merged report.
If the transaction does not meet the above requirements, or if every borrower on the
‫‏‬

loan application lacks at least one credit score, then DU will issue an Out of Scope
recommendation. The loan may be manually underwritten by establishing a
nontraditional credit profile for the borrower(s).
2013 Selling Guide
Part B, Origination Through Closing
Subpart B3, Underwriting Borrowers
Chapter B3-5, Credit Assessment
Section B3-5.1, Credit Scores
B3-5.1-01, General Requirements for Credit Scores (11/13/2012)


Fannie Mae Credit Requirements
Representative Credit Score
‫‏‬

B3-5.1-02, Determining the Representative Credit Score for a Mortgage Loan (08/21/2012)
[1] https://www.efanniemae.com/sf/guides/ssg/sgpdf.jsp

2013 Selling Guide
Part B, Origination through Closing


Fannie Mae Credit Requirements
What is the representative score?
‫‏‬



2013 Selling Guide
Part B, Origination Through Closing
B3-5.1-01, General Requirements for Credit Scores (11/13/2012)


https://www.fanniemae.com/singlefamily/originating-underwriting


B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-
‫‏‬

establishing Credit (05/15/2012)


Credit Processing
‫‏‬

– Authorized User Accounts: DU considers authorized user accounts in it’s credit risk
assessment. FICO scores may be impacted but DU’s risk engine looks at the trade lines
and makes a credit recommendation.
– Lenders typically should underwrite without the benefit of these trade lines unless your
borrower is the authorized user and you have confirmed they have been making the
payments on the account.


Liabilities Calculated in DU®
The total monthly obligation is the sum of the following:
‫‏‬

– Monthly housing expense (PITI)
– Monthly payments on installment debts and other mortgage debts that extend
beyond ten months (including deferred installment loans);
– Monthly payments on revolving debts (unless payoff and closing out);
– 30 Day charge accounts -monthly balance will not be calculated in the DTI but
included as reserves in the “required funds to be verified” with DU 9.0
• Do not Omit or mark paid by close
• Verify MOP is “O” on credit report and mapped correctly into DU
– Monthly payments on lease agreements, regardless of the expiration date of the
lease;
– Any net loss from a rental property
– Any deferred student loan with no payment lenders may use 2% of the UPB or
obtain documentation of what the actual payment will be
– Any debit that significantly impacts the borrower’s ability to pay their monthly
obligations must be counted


Liabilities Calculated in DU®
The total monthly obligation is the sum of the following:
‫‏‬

– Monthly alimony, child support, or maintenance payments that extend beyond
ten months
– Nonreimbursed Employee Expenses (when a 24 month average can not be
calculated the monthly expenses is used in the DTI and NOT used to reduce
monthly income)
– Business debt in the borrower’s name unless-
• the account in question does not have a history of delinquency,
• the business provides acceptable evidence that the obligation was paid out of company
funds (such as 12 months of canceled company checks), and
• the lender’s cash flow analysis of the business took payment of the obligation into
consideration.


Liabilities in DU®
Updated Logic for Disputed Trade lines with 9.0
‫‏‬

– IF DU doesn’t issue the disputed tradeline message, the lender is not required to
further investigate
• Lenders must include the payment, if any in the borrower’s DTI


Freddie Mac
Selection & Use of Credit Scores

http://www.freddiemac.com/learn/pdfs/uw/credit_scores.pdf


Freddie Mac’s Use of Credit Scores
‫‏‬

For an Accept Mortgage and an A-minus Mortgage, Loan Prospector has
determined that the Borrower's credit reputation is acceptable.
– In all other Mortgages, the Seller must thoroughly evaluate the Borrower's credit reputation
in accordance with the requirements set forth in this section and document in the Mortgage
file the Seller's conclusion the reputation is acceptable.

Single-Family Seller/Servicer Guide, Bulletins and Industry Letters
Single-Family Seller/Servicer Guide, Volume 1
Chs. 37-38: Credit Underwriting
Chapter 37: Underwriting the Borrower
37.7: Evaluating Borrower credit reputation (08/21/12)


Freddie Mac’s Requirement on Inquires
Inquiries on the credit report generally reflect the Borrower's requests for
‫‏‬

new or additional credit. Inquiries made for other purposes, such as general
solicitations not initiated by the Borrower or monitoring inquiries by current
creditors, typically are not shown on the credit report.When the credit report
indicates that a creditor has made an inquiry within the previous 120-day
period, the Seller must determine whether additional credit was granted. A
letter from the creditor or, if such a letter is unobtainable, a signed
statement from the Borrower may be used to determine whether additional
credit was obtained. If additional credit was granted, the Seller must obtain
verification of the debt and must consider the debt when qualifying the
Borrower subject to the requirements in Section 37.16, Monthly debt
payment-to-income ratio.

Single-Family Seller/Servicer Guide, Bulletins and Industry Letters
Single-Family Seller/Servicer Guide, Volume 1
Chs. 37-38: Credit Underwriting
Chapter 37: Underwriting the Borrower
37.7: Evaluating Borrower credit reputation (08/21/12)


Credit Education & Information

www.myfico.com


Credit Education & Information

http://www.myfico.com/crediteducation/brochures.aspx


Genworth Guidelines
Access Genworth website www.mortgageinsurance.genworth.com
‫‏‬

• Click on rates and guidelines


Legal Disclaimer
Genworth Mortgage Insurance is happy to provide you with these training
‫‏‬

materials. While we strive for accuracy, we also know that any discussion of laws
and their application to particular facts is subject to individual interpretation,
change, and other uncertainties. Our training is not intended as legal advice, and
is not a substitute for advice of counsel. You should always check with your own
legal advisors for interpretations of legal and compliance principles applicable to
your business.

GENWORTH EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES,
‫‏‬

EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH
RESPECT TO THESE MATERIALS AND THE RELATED TRAINING. IN NO
EVENT SHALL GENWORTH BE LIABLE FOR ANY DIRECT, INDIRECT,
INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES OF ANY KIND
WHATSOEVER WITH RESPECT TO THE TRAINING AND THE MATERIALS.

‫‏‬
® Desktop Originator/Desktop Underwriter (DO ® /DU ® ) are registered trademarks of Fannie Mae.
®Loan Prospector is a Registered Trademark of Freddie Mac

©2012 Genworth Financial, Inc. All rights reserved. 62

Understanding Credit Reports and Credit Scoring (Webinar Slides)

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