Currently, credit reports provide historical information that identifies an account with how much is owed, the minimum payment due and whether the borrower pays on time. Recent credit inquiries are reviewed to determine any recent debts that may not yet appear as a credit line debt. A credit score takes into consideration the timeliness of payments and includes outstanding unpaid collection accounts, charge off accounts, etc.
Beginning August 24, 2016 credit reports were supposed to undergo a significant change. The new trended credit report was to provide information regarding payment patterns about how, what and when the borrower pays. In other words, a report is to show how much the borrower owes per account and identify the minimum payment amount due and how much is actually paid per payment. As an example, the report may show a $2000 balance due, a minimum payment of $50 a month due but will now also indicate how much is paid per payment – only the minimum amount, more than the minimum or paid in full each month.
A borrower will be classified as a “transactor” (one who pays in full each month) or a “revolver” (one who maintains a balance each month). We had little information regarding exactly how this information was to be used by lenders to determine their “risk” in providing a loan? We were told that the trended data would apply , for now, only to those loans approved via the automated Direct Underwriting (DU) or Loan Prospector (LP) systems and underwriters will not be obligated to take such data into account when manually underwriting a loan. The automated systems, on the other hand, are used to approve the bulk of the conventional loans being originated today.
In the absence of clear definitions, we are left to assume that one who pays in full each month would be presumed a better risk than one who pays only the minimum amount? The borrower who pays more than minimum but less than full amount presumably is another category of risk? But we are informed that the trended information will not affect current credit scores, leaving us to wonder how the information will be used to identify the lenders’ risk in the loan origination process.
Credit scores are used to “price a loan”, with higher scores typically acquiring better terms and rates.
We are told that underwriters will continue this process while paying little attention to the additional trended information but rely upon the credit score itself to determine risk and price. Those of us charged with counseling borrowers are uninformed regarding how the trended information factors into the credit score. In the absence of directions, we must currently try to use common sense to determine how a borrower might now improve a lower credit score. Unfortunately, common sense may not prevail! Hopefully, we will obtain more direction and soon. (we will update this information as we receive more data)
The updated reporting system with its increased information is touted as helping lenders more effectively weigh the risk of granting a loan for any one individual. The promotion notes a TransUnion study that suggests “over 23 million more consumers could be rated as Super Prime resulting in an opportunity for better rates and terms”. On the other hand, we can only guess at the number of potential borrowers who might be negatively impacted.
For instance, studies show that a borrower who pays off their credit card every month is 60% less likely to become delinquent on a mortgage payment than a borrower who only makes minimum monthly payments. . The same study indicated that a borrower who never exceeds a card limit (defined as debt not exceeding 30% of the available credit card limit or never exceeding a $330 outstanding debt on a $1000 credit limit card) is 75% less likely to become delinquent than a borrower who exceeded their credit limit within the last 12 months. The use of this kind of information remains mysterious and seems incongruent when we are told that trended data will not affect credit scores.
Our understanding of trended data and how it will impact a borrower’s credit evaluation is admittedly unclear. We share this information in an effort to inform potential borrowers of the issues and to assure you that we will keep everyone informed with updated information as the issue of trended credit and its use is clarified.