Credit bureau settlement shines light on scores

Credit bureau settlement shines light on scores

KENNETH R. HARNEY on Mar 31, 2017

WASHINGTON – When is your “credit score” irrelevant in buying a house or refinancing a mortgage? A new federal legal settlement with a major credit bureau has the answer- The only score that matters is the one your lender uses to evaluate you, not some random score you got on a website.

All the others you might buy or see – there are dozens of them hawked on the Internet – may be interesting, but they won’t affect the interest rates you’re quoted, the fees you’re charged or whether your application gets approved or rejected.

The new legal settlement from the Consumer Financial Protection Bureau alleges that Experian, one of the big three credit reporting bureaus, “deceptively marketed credit scores to consumers by misrepresenting” them as “the same” as what their lender would use in determining whether and on what terms to offer them a loan.

In fact, said the CFPB, the scores Experian advertised extensively were its own proprietary “educational” scores that virtually no lenders use to make credit decisions.

Experian’s promotions appeared on third-party websites, banner and display ads, direct mailings and sites such as, and, as well as

As part of the settlement, Experian was fined $3 million. The case follows CFPB settlements in January over similar allegations with the other national credit bureaus – Equifax and TransUnion – in which they were required to make $17.6 million in restitution to consumers and pay $5.5 million in fines. TransUnion and Equifax were accused not only of falsely representing the usefulness of their in-house educational scores but also luring consumers into “costly recurring payments for credit-related products with false promises.” All three bureaus denied any wrongdoing.

Which brings us back to mortgages. If you’re like many home buyers and owners, you’ve seen online pitches and ordered your scores, often free. They may have come with tie-ins to credit card offers or credit monitoring and identity theft protection services.

One site may have said your score is 788, ranking you as “excellent” on their scale. Another may have said you look even better – your credit score is 801 and you’re among the credit elite.

Armed with these seemingly sterling scores, you start checking out mortgage company offers. With an 801, you figure, hey, I’m bullet-proof. I’m a prime candidate for the best mortgage deals out there.

Then you apply to a lender for a preapproval and get the sobering news- Your middle FICO score – lenders often pull scores from all three bureaus – is a 716, and that’s what we’ve got to use to price your loan. The score is okay, but it’s 85 points below where you thought you were, and below the cutoff point for the best mortgage interest rates and terms.

FICO scores, which are predominant in the mortgage market and mandated by giant investors Fannie Mae and Freddie Mac, run from 300 to 850. Higher scores mean lower risk to the lender. Lower scores can cost you a lot. According to a March 23 national survey for FICO by Informa Research Services, a mortgage applicant with a 765 FICO would get an average quote of 3.8 percent on a $300,000 loan with a monthly principal and interest payment of $1,405. The same applicant with a 650 FICO would be quoted an average rate of 4.9 percent with a monthly payment of $1,589 – $184 more a month.

But here’s a little complication- The FICO score your lender pulls for your mortgage application may not be the same as the FICO score your credit card company might be sending you every month online. Or, perplexingly, it might even be different from the FICO score you get on

That’s because FICO has introduced multiple models over the years, each with what the company describes as consumer-friendly improvements. The latest is FICO 9. The most widely used is FICO 8.

But most mortgage lenders use the older models specified by Fannie Mae and Freddie Mac. The differences in scores from older to newer may be modest for many applicants, but could be significant for some. Fannie and Freddie are considering updating their scoring models but have not done so yet.

Bottom line- Ask your loan officer which model was used to generate your FICO scores. And never depend on generic scores available online as part of your mortgage planning process.

Are you paying unseen add-on fees for your appraisal?

Are you paying unseen add-on fees for your appraisal?

KENNETH R. HARNEY on Mar 24, 2017

WASHINGTON – Are you getting fleeced on appraisal charges when you buy a house or refinance? Could you be paying as much as double what the appraiser is receiving for actually doing the work, with the excess going to an undisclosed third party?

Many appraisers say yes. And they’re eager to let consumers know that when the appraisal charge is $500 or $800 or $1,000, they’re frequently being paid just a fraction of that. The rest is going to an “appraisal management” company under contract by the lender to oversee the appraisal process. Management companies hire the appraiser, negotiate fees, review the appraisal and send it to the lender. Management companies often select appraisers willing to work for relatively low fees. In exchange, they make assignments available to appraisers that they might not otherwise receive.

Controversy arises when management companies add 35 percent to 50 percent surcharges – or more – onto the final bill to the consumer. Federal rules do not require disclosure of the surcharges, nor do regulations in the majority of states. Appraisers say management companies often seek to hide the amount of their add-ons by prohibiting them from attaching their invoices to the appraisal report the consumer receives.

Worst of all, they say, is when the consumer blames the appraiser for the high fee being charged, unaware that much of it is going into a third party’s pockets.

Ryan Lundquist, an appraiser active in the Sacramento, California, market, told me about a recent experience- The house he was asked to appraise had complicated features and was difficult to value, requiring a higher than typical fee – $800. Subsequently he learned that the management company tacked on an extra $345 – a 43 percent surcharge – hitting the consumer with a $1,145 bill. After the homeowner complained, he learned that the management company said the $1,145 was solely Lundquist’s quote, not theirs, which was a lie.

“I was shocked,” Lundquist said in an interview, “it wasn’t honest, it wasn’t ethical,” plus the borrower was being “gouged.” Forty-three percent extra “just seems too much for a middleman service.”

Lundquist described his experience in a blog post, which drew dozens of responses by appraisers around the country, mainly critical about management companies’ add-ons to consumers’ bills.

“I got chewed out by the owner of the house,” wrote one. “Yes, I charged $700. But he (the owner) paid $1,700″ – a $1,000 add-on. “Now that is an excessive fee.” Another complained that a management company had “hit (the home owner’s) credit card three times” for the appraisal fee before the work was performed and then tacked on a 45 percent surcharge. The owner “yelled at me” for the rip-off, he said. The appraiser ultimately declined the assignment rather than work for the management company.

Richard Hagar, an appraiser in the Seattle area, told me in an email that “I’m still receiving fee ‘offers’ (from management companies) below $400, while the borrower is being charged $800.”

Carl Schneider, a Tulsa, Oklahoma, appraiser, said excessive markups are commonplace, but consumers usually “know nothing about it” because the appraiser is prohibited from revealing the actual fee.

“I resent forcibly being complicit in this fraud,” Schneider said in an interview. “Why can’t they be transparent?

David Doering, a Jefferson City, Missouri, appraiser and president of the National Association of Independent Fee Appraisers, told me “we often don’t know what’s being charged to the consumer. We only hear about it when people are angry.”

I asked the executive director of the appraisal management companies’ national trade group, the Real Estate Valuation Advocacy Association, for comment about fee add-ons and efforts to conceal charges, but he declined to discuss pricing, noting that “I am not a party to any AMC (appraisal management company) contracts.”

Jeff Eisenshtadt, president and CEO of Title Source, whose TSI Appraisal division is a major management company, told me “there’s a tremendous amount of value” his industry brings to the table, but “we believe the consumer really should be focused on the bottom line charge for the appraisal,” not the split between the appraiser and the management company. Consumers don’t care about the individual costs of “the pickles and onions and lettuce” that go into a hamburger, he said, nor should they when it comes to appraisals.

Maybe he’s right. But if you care about where your money is going when you pay for an appraisal, ask the lender or the appraiser. Who’s getting what? And why?

Why millennials are flocking to FHA mortgages

Why millennials are flocking to FHA mortgages

KENNETH R. HARNEY on Mar 17, 2017

WASHINGTON – The Trump administration may not be fond of FHA-insured mortgages – the president canceled a cut in fees for new loan applicants as one of his first official actions – but millennial home buyers apparently are big fans.

A new analysis of loans closed during January found that 35 percent of millennials – those born between 1980 and 1999 – opted for Federal Housing Administration mortgages to finance their purchases, well above FHA’s overall market share of 21 percent.

The analysis was conducted by mortgage technology company Ellie Mae, tapping into its massive database of lenders’ transactions across the country. Meanwhile FHA itself found that 82 percent of its home-purchase borrowers recently have been first timers.

Why the strong attraction for FHA, especially at a time when competitors Fannie Mae and Freddie Mac have introduced new programs offering low down payments? Turns out it’s all about the total package of features for young buyers – not just the small cash outlays required up front.

Twenty-eight year-old Bradley Barron and Amy Gina Kim, who is 30, both work for tech-related companies in the Los Angeles area. They are new home buyers and they’ve chosen FHA financing over conventional bank or Fannie-Freddie alternatives. Like many young couples, they’re carrying a lot of student debt – both have master’s degrees – and both now have well-paying jobs.

“We entered the working world with major student debt and no assets to our name,” Bradley told me last week. Their jobs are “great,” he said, but “we don’t have 10 percent to 20 percent” to put down. Both he and Amy are frustrated that they pay a substantial amount every month in rent that does not contribute toward building equity or an investment nest egg. So “the faster we get into a home, the less money we throw away on rent.”

They consulted with Steven R. Maizes, a vice president of mortgage lending for Guaranteed Rate, a large national retail mortgage banker, who walked them through the pros and cons of their alternatives. FHA turned out to be the answer.

“The vast majority of these [millennial] buyers, in the absence of getting a gift from a family member, simply don’t have” enough down payment cash, plus money to cover closing costs and post-closing money left over in the bank as reserves, said Maizes. FHA’s total package – which has some downsides as well as upsides – clinches the deal for many young first-timers.

So what’s FHA’s total package? Start with down payment. FHA’s minimum of 3.5 percent is low, but it’s not best in class. Fannie Mae and Freddie Mac have programs requiring just 3 percent down, but they come with a variety of eligibility requirements, such as income cut-offs in some cases. VA (Veterans) and USDA (rural loans from the US. Department of Agriculture) allow for zero down payments, but also have major restrictions – veterans status or geographic limitations.

What about credit? Here’s where the differences get really important for millennials, many of whom have middling scores compared with other generational groups. FHA accepts much lower scores than Fannie and Freddie – even below 600 FICOs. The average millennial first-time purchaser closing Fannie or Freddie loans in January had a FICO score of 748; the average for millennial purchasers using FHA was 690. Paul Skeens, president of Colonial Mortgage in Waldorf, Maryland, says that as a rule, whenever low down payment borrowers have FICO scores below 720, “FHA is going to give (them) the lowest payment.”

Now for debt-to-income ratios, which are often a weak point with young, debt-burdened borrowers. Fannie and Freddie typically won’t go higher than a 45 percent DTI (monthly gross income compared with total recurring monthly debt), while FHA can stretch well over 50 percent – even to 56 percent, according to Skeens – provided there are “compensating” positive factors in the application, such as extra-strong income or multiple months of reserves. This flexibility on DTI to the high side is especially helpful for millennials with student-loan debts because FHA includes monthly payments on student loans as part of its debt calculation, even if payments are in deferred status.

One glaring drawback to FHA for some applicants- Unlike the private mortgage insurance that comes with low down payment Fannie and Freddie loans, FHA premiums are non-cancellable for the life of the loan. But most first time buyers don’t remain in those starter houses for long periods of time, so it’s not likely to be a deal-killer.

Many mortgage applicants will get a surprise boost in their credit scores

Many mortgage applicants will get a surprise boost in their credit scores

By Kenneth R. Harney

March 8, 2017

It could be a boon for some home buyers — their credit scores will get a surprise boost — but worrisome for mortgage lenders, landlords and others who depend on credit reports to evaluate their potential customers.

In a little-known policy shift, the three national credit bureaus — Equifax, Experian and TransUnion — plan to stop collecting and reporting substantial amounts of civil judgment and tax lien information on public records affecting millions of American consumers starting July 1.

Both types of information have negative impacts on credit scores and remain in credit files for extended periods. Tax liens are levied against properties when the owner is delinquent on payment of taxes. Civil judgments — debts owed by the losing party in legal disputes that typically involve monetary damages — are ordered by courts.

With the elimination of this information from vast numbers of consumer credit files, some lenders are concerned that when they order credit reports to evaluate an applicant, they may no longer get the full picture of the risk of nonpayment posed by the consumer.

David H. Stevens, president and chief executive of the Mortgage Bankers Association, told me that if tax lien and civil judgment data is suppressed from credit reports, “it’s unclear whether creditors will be able to make informed decisions” about loan applicants. Stevens said that blocking this information will raise some applicants’ credit scores artificially, creating “false positives” that make individuals appear lower risk than they are.

A study by Vantage Score Solutions, a credit scoring developer created by the three credit bureaus, estimated that 8 percent of consumers would see an average score increase of 10 points on its most widely used scoring model if all civil judgments and tax liens were removed from credit reports. Stevens said 8 percent and 10 points may sound small, but in the mortgage business they equate to significant numbers of applicants.

Terry W. Clemans, executive director of the National Consumer Reporting Association, a group that represents companies that provide credit reports for mortgage lenders, said home buyers “who are on the edge” — they need a score increase to get approved for a loan or obtain a better interest rate — “may be of higher risk than [lenders] are aware after this data is removed.”

Tim Coyle, senior director of real estate and mortgage for LexisNexis Risk Solutions, a large data and technology company that sells creditors data on public records including judgments and tax liens, told me in an interview that an internal study by his firm found that borrowers who have a judgment or a tax lien are 5½ times as likely to end up in serious default or foreclosure as are borrowers who don’t have such items in their files.

The three national credit bureaus have been tight-lipped about the details of their July 1 changes. Mortgage lenders say they have heard nothing from the three bureaus and are in the dark about the possible ramifications. Stevens told me that “nobody” in the mortgage industry “knows about this.”

In response to a request for this column, the bureaus’ national trade organization, the Consumer Data Industry Association, provided a statement indicating that the changes are part of the bureaus’ “National Consumer Assistance Plan” that follows a settlement in 2016 with 31 state attorneys general over alleged problems with credit reporting accuracy and correction of errors on credit reports.

Eric J. Ellman, the group’s interim president, said the bureaus have adopted “enhanced public record data standards for the collection and timely updating of civil judgments and tax liens.” The standards will apply to new and existing data in files and will require that the public records sources include the individual’s name, address and Social Security number or date of birth. Public records sources will also need to be updated on a timely basis to be eligible for inclusion in credit files. Most civil judgment data and up to half of tax lien information cannot currently meet these tests, according to one industry estimate.

Chi Chi Wu, an attorney with the National Consumer Law Center and an expert on credit issues, welcomed the upcoming change. “To the extent that it’s preventing errors” in credit reports, she said — especially situations where a credit file has one consumer confused with another, which Wu says occurs too frequently — “it should be a good thing.”

How much of a good thing it will be for you depends on what’s in your credit files and how lenders adapt to the elimination of what they consider important information — if it’s accurate.

Mountain of mortgage paperwork wears down borrowers

Mountain of mortgage paperwork wears down borrowers

Kenneth R. Harney March 1, 2017

Could getting a home mortgage under today’s post-housing bust regulations and procedures be even remotely comparable to going to the dentist to get drilled? Or anything like having your annual physical, where every body part potentially is subject to inspection and prodding?

Has the process of applying and qualifying at a time of superstrict underwriting standards, record-high credit score requirements and hard-wired debt-to-income cut-offs gone a little over the top?

Many applicants and borrowers who’ve been through it apparently think so. Two new national surveys of consumer perceptions found that significant numbers of borrowers believe the current mortgage process is a major hassle.

The surveys were conducted for two consumer websites – Freeandclear (, a mortgage site, and NerdWallet (, which offers personal finance and mortgage information. NerdWallet polled 2,241 adult borrowers, 1,341 of whom had applied for a mortgage and 1,431 of whom already owned a home. The survey was conducted online in mid-January by the Harris Poll. Of those sampled, 42 percent said they found the mortgage process “stressful,” 32 percent found it “complicated.” Forty-nine percent said they had regrets about how they handled the process. Some applicants, especially millennials and Gen X-ers, felt they hadn’t ended up with as low an interest rate as they expected.

One of every 6 said their applications had been rejected for one reason or another- 52 percent because their debt-to-income ratios didn’t meet current standards; 39 percent because their credit reports or scores weren’t good enough for the loan program they sought. Thirty-one percent of those turned down said they were “surprised” at the lender’s decision.

Not everybody was bowled over by the process, however. Forty-one percent of those surveyed found it “manageable.”

The Freeandclear survey, which was conducted in February by an independent third party, polled homeowners ages 22 to 49 who currently have a mortgage. Each survey question received a minimum of 421 responses. In one question, which received 431 responses, borrowers were asked to choose among a set of alternatives that would most closely describe the mortgage process. Forty-one percent said it was most similar to an annual physical. Thirty-four percent said it was like going to the dentist. Twenty-two percent characterized it more favorably, as akin to doing “business with a friend.”

In an analysis accompanying the survey, Freeandclear said that with 75 percent of borrowers comparing the process to either a physical or a dental visit, it’s evident that most people put getting a mortgage in the “unpleasant but necessary” category.

In another question – which also received 431 responses – on the most challenging part of the mortgage process, 56 percent of respondents found excessive paperwork to be the most overwhelming aspect. “Although all the mortgage documents are intended to serve a specific purpose, usually legal or regulatory, the sheer amount of paperwork creates significant difficulties” for many consumers, said Freeandclear in its analysis of the survey results. The second most troubling issue for consumers- current strict qualification requirements for loans, which “have definitely tightened since the mortgage crisis and the tougher guidelines appear to pose a challenge for many borrowers,” according to Freeandclear.

What to make of consumer sentiments like these? There’s no question that in the wake of the financial crisis, federal and state regulations, mandatory disclosures and penalties governing mortgage lending have become far more stringent – and for good reasons. Between roughly 2004 and 2006, at the height of the boom, getting a mortgage too often wasn’t much of a hassle at all. As the saying went, all you needed was to be able to fog a mirror- No down payment necessary. No minimum credit requirements. No verification of income, taxes, assets.

But no-hassle mortgage lending in the U.S. produced hundreds of billions of dollars in losses for lenders and millions of Americans lost their homes to foreclosure. Many families still have not recovered, more than a decade later.

Lenders generally agree that tougher standards and procedures are needed to avoid a repeat.

“I get it,” said Steve Stamets, a loan officer with Mortgage Link, a Maryland-based lender. The process “is a pain. But is it the right thing to do? Yes. If you were lending me $300,000, wouldn’t you want to know as much as possible about me?”

David Stevens, president and CEO of the Mortgage Bankers Association, told me the biggest problem with the system today is that some of the regulations for lenders amount to an overcorrection and are far too inflexible, especially for highly qualified applicants with large down payments and stellar credit scores.

“You can create rules that eliminate risk entirely,” he said, “but nobody’s going to get a loan either.”