Mortgage lenders rely on liens and judgments records to assess a borrower’s creditworthiness and capacity for repayment. For decades, they obtained this information in credit reports during the application process. But as of July 1 this year, the Nationwide Credit Reporting Agencies (NCRAs)— Equifax, Experian, and TransUnion—began removing a large segment of the data from their reporting due to unmet identity verification standards per the National Consumer Assistance Plan (NCAP).
In an effort to reduce instances of records being matched to the wrong individuals, the NCAP states that public records used in credit reports must possess at least three of the following: name, address, Social Security number, or birthdate. According to a whitepaper titled “Linking Liens and Civil Judgments Data” by LexisNexis® Risk Solutions, “Approximately 50 percent of tax lien records and approximately 96 percent of civil judgment records do not contain a [Social Security number]” nor do they meet the minimum requirements. Therefore, the NCRAs will no longer provide the data.
The resulting gap has many lenders worried that they will no longer have a complete picture of an applicant’s risk. Further, many secondary mortgage market investors including the government-sponsored enterprises (GSEs) have not changed their underwriting policies and still require all items be disclosed and resolved before closing.
While the NCRAs will no longer provide a full report on liens and judgments, there are other opportunities in the lending lifecycle to obtain this information. However, the associated costs and risks will vary depending on when lenders choose to access the data.
Liens and judgments tied to the property in question will appear in a title search after underwriting. However, by this time, the loan has already been approved with a set closing date, making this a costly and high-risk option. If a record is found, underwriters must contact the borrower to resolve it and rework the loan. If the issue is more complicated, it can cause a closing delay, which creates a negative consumer experience and hurts a lender’s ability to retain business. Should the loan fall through, it would be a significant loss for the lender, having already invested around 45 days and, according to a report by the Mortgage Bankers Association (MBA), up to $7,209 in expenses.
Soft Credit Pulls
After a loan has been approved, lenders may do a soft credit pull to see if there are any changes or cause for concern with the borrower, such as large purchases or late payments. These reports can include liens and judgments. But you can only do a soft pull during underwriting, pre-closing, and post-closing. Like the title search, this may be too late in the process to identify something without the risk of heavy costs and disrupting the path to closing.
Liens and Judgments Reports
Liens and judgments reports are available for continued access to the data in credit reporting. These can be provided as a supplemental report, which will require additional steps and staff retraining, or as an integrated option that fits seamlessly into the lenders’ credit reporting solution, allowing them to maintain their existing credit review process. With the information available from the onset, lenders can proactively resolve any items before loan approval, thereby minimizing the risks in moving the borrower forward and ensuring a streamlined process. These reports do come with a minimal fee, but the benefits of having the information up front greatly outweigh the costs of an unexpected item appearing at the end of the process.
These reports can overcome the matching challenges that led to the credit report content change by using data that is compliant with the Fair Credit Reporting Act (FCRA). FCRA-compliant data has met stringent accuracy guidelines to link public records to the correct consumer so it can be used in underwriting and credit decisions. Lenders can further corroborate the data through a verification service like DataVerify, which compares information on a borrower across multiple data sources to validate supplied data and alert to variances.
While the removal of liens and judgments from credit reports has been a cause for concern, mortgage lenders can be assured that the data hasn’t disappeared. There are options available to access the records throughout the loan process. But it is up to each lender to determine how much risk they are willing to take and whether they will obtain the information up front during application or further into the loan process near closing.