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

1 Credit Reports & Credit Scoring

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


http://www.equifax.com/

http://www.experian.com/

http://www.transunion.com/

Credit Report Basics ?WHO PREPARES THE CREDIT REPORT‏Consumer 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.


Credit Report Basics •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

•


Credit Report Basics •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".

http://www.annualcreditreport.com/

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?













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

Bankruptcy Chapter 13

10 years from the date of entry of the order for

release

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

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

http://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


Pro

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bili

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Defa

ult/D

elin

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0%

LOW

Score

HIGH

Credit Scoring Basics

•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

•


•Who Provides and Uses Scoring?

#1 Poll Question


Credit Scoring Basics 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

Public record and collection items

Severity, recentness and frequency of delinquencies

noted in the trade line section

Outstanding debt

Number of balances recently opened

Average balance across all trade lines

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


Travel and Entertainment cards

Department store cards

Personal finance company references

Installment loans

Other

This information was taken from Fair Isaac Credit Bureau Risk Scores and www.myfico.com

http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx

http://www.myfico.com/

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




Note the Reason Codes

The Different FICO® Scoring Models Standard Models‏

Equifax Beacon 5.0

Trans Union FICO® Risk Score, Classic 04

Experian /Fair Isaac Risk Model V2

Different types of Credit Inquiries‏

Below the Line (“Soft”) Inquiries

Consumer File Inquiries

Credit Seeking Inquiries

De-duping Process Inquiries

‏


•Credit Inquiry Impact on Credit Score

•Above-the-line inquiry: Impacts

consumer’s credit score

Purchasing a car

Applying for a mortgage

Applying for credit cards

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


http://www.bankersonline.com/tools/credscordiscl.doc

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

40

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

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


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










Credit Uses Agency Requirements‏


42

#2 Poll Question


Fannie Mae Credit Requirements with DU®

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


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


44

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




https://www.efanniemae.com/sf/guides/ssg/sgpdf.jsp

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.


: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 Calculated 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

Liabilities in DU®


Freddie Mac Selection & Use of Credit Scores


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

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)

www.myfico.com

Credit Education & Information


http://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


http://www.mortgageinsurance.genworth.com/



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.

‏

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

®Loan Prospector is a Registered Trademark of Freddie Mac

® Desktop Originator/Desktop Underwriter (DO ® /DU ® ) are registered trademarks of Fannie Mae.

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Understanding Credit Reports and Credit Scoring (Webinar Slides)

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