Earlier this month, Experian, Equifax and TransUnion announced they will remove some tax lien and civil judgment data from credit reports starting around July 1 (https://www.wsj.com/articles/credit-reports-to-exclude-certain-negative-information-boosting-fico-scores-1489338002). The firms will remove records that don’t include one of three key pieces of data: the person’s name, address and either a social security number or date of birth.
This will be a welcomed move by consumers who will see their credit scores rise. According to Lexis Nexis Risk Solutions, approximately 700,000 people will see their credit scores rise by 40 points.
It’s likely to be welcomed by dealers as well. According to Experian, lenders tightened credit for higher risk customers in Q4 2016, as loans to subprime and deep subprime customers dropped by 5.6 percent. Raising customer credit scores will put more customers into prime and super prime credit tiers and will likely result in more loan approvals. So, on the surface, the decision to drop tax lien and civil judgment information appears to be a win/win.
But, there is a potential downside to this decision, particularly from a lender’s perspective. Removing tax lien and civil judgment data could artificially inflate consumer credit scores, putting more loans at risk. Payment delinquencies are currently rising slightly, with 60-day delinquencies jumping from 0.71 percent to 0.78 percent in Q4 2016. While this is still relatively low, lenders never want to see delinquencies on the rise. Giving loans to consumers who should have lower credit scores could cause a rise in delinquent payments.
The real issue that this decision brings to light is the importance of accurate data in the lending industry. The legal industry, because it is a patchwork of local, state and federal courts, lacks the infrastructure to compile tax lien and civil judgment data into one centralized database. The result is often manual tabulation by court data aggregators. Despite the aggregators’ best efforts, the current system is susceptible to human error and can lead to inaccuracies in reporting.
An inaccurate credit score that works against a consumer can add higher interest rates to their loan, or worse, deny a loan all together. That’s bad for everyone.
But, an inaccurate credit score that ignores real risk can put lenders at peril. That has negative long-term impacts as well. The subprime mortgage crisis that led to the recession nearly a decade ago, while an extreme example, is a painful reminder that providing loans to unqualified consumers can lead to disaster.
The credit bureaus should be applauded for taking actions that can remove an unjustified negative mark on a credit report. If managed correctly, it could have a positive impact on auto sales.
At the same time, the legal system should be searching for ways to upgrade its technological infrastructure to improve accuracy of the information it provides. This will be the best way to ensure consumer and lender interests are protected in the long run.
Ken Hill – Managing Director For 700Credit
