Magazine article Mortgage Banking

Credit Reports: Does Accuracy Count?

Magazine article Mortgage Banking

Credit Reports: Does Accuracy Count?

Article excerpt

"Ladies and gentlemen: In the near corner, wearing white trunks and weighing in at 225 pounds of pure muscle and steroids we have our challenger: merged in-file reports. In the far corner, wearing black trunks and weighing in at a paltry 125 pounds is our aging defending champion, the residential mortgage credit report."

Put another way, this metaphor could read, "In the near corner, directly accessible through a computer, relatively inexpensive, available within 5 to 10 minutes and containing all the consumer in-file credit information from the three major national credit repository data bases, is the merged in-file credit report. And in the far corner, costing anywhere from $38 to $85 per credit file, taking anywhere from 24 hours to 20 days to complete and typically containing its share of inaccuracies and incompleteness, stands the residential mortgage credit report, more commonly referred to by practitioners as the RMCR."

Does that sound about right? Will the residential mortgage credit report become a relic, or, more importantly, is the three-bureau merged in-file report the wave of the future whose time is now? By first appearance, the merged in-file report certainly makes sense.

Let's take a brief look at the history behind this line in the sand separating the opposing forces. In 1988, FHA, VA, FmHA, Fannie Mae and Freddie Mac came out with new guidelines defining what must be contained within a borrower's credit report to be acceptable to these agencies. By and large, the secondary mortgage market adopted these same standards. The big kicker when these standards were released was that producers of the residential mortgage credit reports must use two of the five available repository data bases. Obviously, certain other rules and guidelines important to quality assurance were covered in this 1988 rewrite; however, for the time being, let's focus on the repository rule.

Since 1988, the Department of Justice has allowed the credit reporting industry to continue its consolidation, which had started 15 years earlier. As a result of this relaxing of the antitrust issues, only three major national credit repositories remain: Equifax, TRW and TransUnion. So the credit-reporting agencies responsible for producing the RMCRs, instead of picking the best two out of five available sources for their credit investigations, now select two out of three. As logic would have it, if two credit sources are better than one, then three should be the best possible combination. Right? Wrong.

In August 1989 I wrote an article for Mortgage Banking entitled, "Credit Reports: Faulty Files?" The major theme of the article was that the credit information contained within the repository in-file credit reports, although good, was not always accurate. To quote from that story, "We have found that the major credit repositories contradict each other 20 percent of the time when two repositories are compared. The error rate jumps to 30 percent of the cases reviewed when the borrower information from three repositories is compared." In the article I claimed that errors were found in the consumer credit profiles in two cases out of five--an error rate of 40 percent.

The reaction that I received from the mortgage industry for this bold claim was one of relative indifference and apathy. On the other hand, I struck a nerve elsewhere and suddenly received a rash of attention from the general media as well as consumer advocate groups. My story appeared in USA Today, Time, Newsweek and several syndicated newspapers. I was forced to defend my statements for obvious reasons, as both my own trade association, Associated Credit Bureaus, and the "three sisters" (Equifax, TRW, TransUnion) prepared for war. Eventually I got beyond the initial onslaught with assurances that, as blood kin, we'd all better take a look at the quality of data issue.

Accordingly, my initial study was expanded to analyze 6,000 mortgage credit applications over a six-month period spanning 1989 to 1990. …

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