Has Removing Tax Lien Data From Credit Reports Resulting In More Bad Loans?
A year ago, the three major credit bureaus – Equifax, Experian and TransUnion – stopped including public information about unpaid taxes and court debts on consumer credit reports. Moving was part of an agreement with 31 state attorneys general to improve the accuracy of credit reports, as it is difficult to ensure that the borrower and the person named in court records are the same.
A year later, some say the lack of this data contributes to poor lending decisions.
LexisNexis Risk Solutions recently conducted a study which found that lenders make riskier lending decisions because they lack the knowledge they once had on the public record. It should be noted that the company has skin in this game – it sells tax lien and civil judgment data to banks independent of credit bureaus.
But according to other sources, including the National Consumer Law Center, people with privileges or who owe money to the courts tend to have other red flags such as defaults and low credit scores. that tell lenders what they need to know. And the inability of credit bureaus to accurately match public records to credit reports makes the information too suspect, they argue.
The case to include the information
Some lenders find that knowing that consumers face tax liens or owe money in court is helpful in determining creditworthiness.
LexisNexis Risk Solutions said it analyzed data from a pool of loans, including auto loans and credit cards, issued by several lenders in August 2017, when credit bureaus removed half of the tax lien data and all civil judgment records of credit reports.
The study found that 6% of people who were approved for credit had a lien or judgment that was not visible to the credit bureaus. They represented 15% of defaulting consumers.
“For us that was eye-opening information,” said Ankush Tewari, vice president of credit risk assessment at LexisNexis Risk Solutions. “What we find, all other things being equal, is that if two people have the same credit rating, but one has a lien or a judgment and the other does not, the one with the lien or the judgment is much more likely to fail. It is a risk that lenders do not have visibility unless they get liens and judgments from elsewhere.
The study found that consumers whose liens or judgments were removed from their credit reports had an average 16 point increase in their credit score.
The case of information purging
The Consumer Financial Protection Bureau, FICO, and VantageScore have all conducted studies on the impact of deleting lien and judgment data when it happened and found it to be minimal.
the The CFPB study found that only about 4% of consumers with civil judgments or tax liens on their credit report (0.24% of consumers overall) experienced a significant enough increase in their credit rating to move them into a Higher credit rating range, so their credit rating has moved from subprime to near first or near first to first.
VantageScore Analysis found that when all liens and judgments were removed from consumer credit records, 11% of the sample population was affected. About 8% of the sample received an average increase in their credit score of 11 points.
FICO Report predicted that only 5-7% of the population would experience a score increase as a result of deleting public records; in most of these cases, the score increase would be between one and 19 points.
Some argue that deleting public records should not greatly affect lender decisions, as most consumers who have a judgment or lien have other negative information on their credit report as well.
“They are facing financial problems,” noted Chi Chi Wu, an attorney at the National Consumer Law Center. In some cases, consumers have a related ding on their reports, such as a write-off or collection for the debt that is the subject of the judgment.
“The removal of privileges and judgments is therefore not expected to have a major impact on the credit profiles of the vast majority of consumers,” Wu said.
Tewari agreed that many consumers who have lien or judgment also have other derogatory information on their credit report. But he also said that LexisNexis research shows that a traditional credit score that excludes lien or judgment information doesn’t capture all of a consumer’s credit risk.
“A score that includes liens and judgments allows auto lenders and credit issuers to identify and trade a high-risk consumer who has lien or judgment and trade low-risk consumers without privilege or judgment, “he said. Consumers who traded were three times to 4.2 times riskier, he said.
Another argument put forward by government officials and others to justify removing public records from credit reports is that people with tax liens and civil judgments tend to have low credit scores anyway.
Tewari does not dispute this. The LexisNexis Risk Solutions study found that many consumers who were approved for auto loans or credit cards and had liens or judgments had lower credit scores and higher default rates than the general population. . However, he said, top performers are not immune to privilege and judgment.
“The default rate of consumers with a credit score of 700 or greater increases by 154% in our sample of auto loans and by 91% in our sample of credit cards for people with hidden tax lien or judgment compared to those that don’t, ”he said.
Another important factor to consider is why the credit bureaus were pressured to purge these public records in the first place: The bureaus were often unable to accurately match lien and judgment records to good credit reports.
Public records generally do not include the consumer’s Social Security number or date of birth.
“Without this information, it’s very easy to find the wrong consumer, especially if they have a common name,” Wu said.
It is a serious problem with potentially painful consequences for consumers.
If the person applying for credit is named John Smith, the likelihood of obtaining public archival information for a completely different John Smith is high. Such mismatches could prevent people from accessing credit.
Tewari said that LexisNexis has a proprietary way to link public records to credit reports.
“We have no problem linking the records, even without a social security number,” he said.
None of the credit bureaus responded directly to a request for an interview, but forwarded the inquiries to Francis Creighton, president and CEO of the Consumer Data Industry Association, whose members include the credit bureaus and LexisNexis Risk Solutions.
Creighton characterized the position of the credit bureaus as a response to competing priorities.
“The push and pull here is that we always want to include more information and we think it’s valuable information and we don’t want to lose it in reporting,” Creighton said. “But that has to be weighed against the matching problem: can you on a large scale match enough information to be able to include it in the report?” “
Credit bureaus still use certain public records in credit reports, such as bankruptcy records, which contain personally identifiable information to enable an accurate match.
Creighton said credit bureaus all want to provide as much information as possible to lenders to help them make good decisions.
“No one wins when a consumer gets a loan they can’t afford,” he said. “Consumers can lose their homes in a foreclosure, and it impacts the community, and it hurts the lender who made the loan. But if we cannot know for sure that this file relates to this judgment, we cannot put it in the report.