Business Lending

Goodbye Liens and Judgments

Justice can require sacrifice. Take the example of a decision by the three major credit bureaus – Equifax, Experian and TransUnion – to stop including some liens and most judgments in their credit reports.

The change makes life a little less unfair for consumers who fell victim to reporting errors. Many invested precious time and large amounts of money trying unsuccessfully to correct their credit histories and restore their reputations.

But for the alternative small-business finance industry, omitting data on liens and judgments increases costs, creates extra work and can even give rise to an unsettled feeling in the pit of the stomach. “You’re not looking at a full credit report anymore, which is kind of scary,” one alt funder admits.

Yellowstone Capital CEO Isaac Stern provides an example to illustrate what’s at issue. “Imagine I’m the Ford Motor Co. and I want to do a lease with you,” he says. “But I don’t have the information that you happen to have judgments from Chrysler, Chevy and BMW, so I approve your lease. Imagine that! Without full information, how do you make accurate decisions?”

Operating without the data could prove dangerous, agrees David Goldin, who sold his U.S. Capify operations to Strategic Funding Source in January but still runs Capify UK and Capify Australia and remains open to U.S. opportunities. “The IRS could come in and seize credit card processing accounts and prevent the lender from getting paid,” he says. “Once you have a judgment a creditor could come in and freeze bank accounts.”

Fears aside, the change in reporting probably won’t dry up alternative small-business credit – even in the short run, Goldin predicts. Alt funders will adjust quickly, he says, noting that they can compare the old and new credit scores of long-time customers to spot patterns and apply those patterns to their calculations. The industry can also tap alternative sources of information.

Even with those reassurances, the transition would have been easier if the industry had more advance notice, alt funders say. “We found out July 31 when a Reuters rep emailed us and said this is going into effect tomorrow,” recalls Stern. “That was really weird – I’ve got to tell you.” Experian didn’t provide a heads-up even though Yellowstone is one of its largest New Jersey customers, he notes. “We were a little bit annoyed, but what are going to do?” Meanwhile, Goldin says he didn’t begin researching the situation until deBanked asked him about it. “I don’t think anyone really knew about it” much in advance, he says.

But the industry is finding out and taking action. Yellowstone, for example, is performing a performing a workaround by integrating the judgments and liens section of the Clear investigative platform into the information underwriters see when they open a file, Stern says. The integration required a couple of weeks of hard work by the Yellowstone tech team, he notes.

Clear, which is provided by Thomson Reuters, amasses public records that can date back 20 years and can fill more than a hundred pages, he says, adding that you have to know where to look for the relevant information. “You have to dig through it,” he says.

In the past, Yellowstone performed a Clear report on most files just before funding them, Stern explains. Now, the Clear report is scrutinized more extensively and earlier in the process – before the file is approved. As a result, Yellowstone underwriters will have all the information they need, but it will take them a little longer to get it, he says.

Yellowstone incurred the expense of obtaining additional user licenses from Clear, which cost it $800 to $900 monthly Stern says. Experian now charges the same price for less information, he notes.

Accommodating the changes didn’t require more underwriters but it became necessary to hire four additional data entry clerks to input information until the integration with Clear was completed, Stern says. Now that Clear and the Yellowstone systems are working together, the four extra clerical workers will shift their attention to inputting data from the increasing number of applications coming into the company, he says.

Most Alt funders won’t need to employ more people in their underwriting departments because changes to their models will be automated, Goldin says. “I don’t think this is as much of a game changer as people think it is,” he says of the credit bureaus’ new approach to reporting.” It’s just one extra step. It’s more of a nuisance issue than a manpower issue.”

However, a challenge arises for underwriters because leaving out the liens and judgments will result in higher credit scores for some loan or advance applicants, Goldin says. That means some alt lenders may need to go to the trouble and expense of tweaking their risk models to compensate for the change in the scores reported by the credit bureaus, he maintains.

The impact may be greatest among alt funders who rely on quick online decision-making, Goldin says. Adding extra steps to the process increases the difficulty of maintaining the speed that provides a selling point and a source of pride for those companies.

While Clear is helping to fill the gap at Yellowstone, it’s not the only company providing much-needed data. LexisNexis Risk Solutions isn’t a credit bureau and will thus continue to disseminate information it gathers from courtrooms on lien and judgments, Goldin notes. Alt lenders who weren’t already using the vendor’s service or were using it only when an application reached a predetermined threshold will face added expense because of the credit bureaus’ decision, he says.

Indeed, LexisNexis Risk Solutions views the credit bureaus’ hiatus on some liens and judgments reporting as a business opportunity to increase its sales by supplying the missing data, according to Ankush Tewari, senior director of marketing planning in the company’s business services section. The company was already selling data on liens and judgments and anticipates selling much more of it, he observes.

For 15 years LexisNexis Risk Solutions has been selling RiskView Solutions, a product that contains liens, judgments and other information not generally found on credit reports, such as the assessed value of a consumer’s home or a list of a consumer’s professional licenses. It offers no data on loan repayment but its other information helps define a consumer’s creditworthiness and character, Tewari says. Lenders can combine that peripheral information with credit scores for a more complete customer profile that outperforms the credit score alone, he suggests.

And there’s more. LexisNexis Risk Solutions has reacted to the credit bureaus’ decision by creating RiskView Liens & Judgments Report, which lists only those two types of records. “The credit bureaus announced these changes a year ago, and we knew there would continue to have a need for that data,” Tewari says. The company prices the RiskView information based upon the transaction volume, he notes, so a lender pays less per transaction as volume increases.

With this emphasis on liens and judgments, one might well wonder who tracks down the information. Companies like LexisNexis Risk Solutions gather and disseminate public records on liens and judgments from courthouses throughout the United States, says Tewari. Over the years the company acquired some of its competitors and eventually was spun off from its sister company, LexisNexis, which built its name partly as an aid for lawyers researching cases, he notes.

For decades, LexisNexis Risk Solutions has been providing the credit bureaus with raw data not only on liens and judgments but also on bankruptcies, Tewari says. The bureaus have then parsed those files electronically and appended the data to credit reports, he continues.

Problems arose because the credit bureaus’ tech systems could not always link the court documents to the right person when the courts provided only a name and address, Tewari maintains. Courts often limit information in their records to those two identifiers because they’re reluctant to divulge additional identification that criminals could intercept and use to commit fraud, he says.

Tewari traces the bureaus’ inaccuracies in matching court records to the right people to what he calls the bureaus’ “DNA.” The bureaus are accustomed to receiving “clean” information from lenders on a regularly scheduled basis. Conversely, some of the LexisNexis Risk Solutions data, gathered from obscure places like county deed offices, may arrive in a form that’s far from clean, he notes.

However, that lack of court information or inconsistencies in the presentation of that information doesn’t pose problems for LexisNexis Risk Solutions because the company cleans the data before analyzing it. Tests indicate its linking methodology works accurately with just a name and address more than 99.9 percent of the time, Tewari contends. Thus, the company can establish that John Smith at 1234 Maple Street is the same person as John A. Smith at 1234 Maple Street, he says. He considers that linking technology the core of the company’s operations.

The information LexisNexis Risk Solutions can supply becomes vital to lenders because studies indicate that people who have a lien or judgment on file are twice as likely as people without them to default on a consumer loan and five times as likely to default on a mortgage, Tewari says. “The data didn’t become less important because the credit bureaus decided not to include it anymore,” he maintains. “It’s still just as predictive as it was.”

Meanwhile, other types of information can also help lenders make decisions, notes Eric Lindeen, vice president of marketing for ID Analytics, a credit risk and fraud risk management company that offers a credit score called Credit Optics, which it bases on a combination of traditional and alternative credit data.

Alternative credit data is defined as anything the credit bureaus don’t include in their reports, Lindeen says. Examples include the bills consumers pay for cell phones, utilities and cable television, he notes, adding that rent is also sometimes considered alternative credit data. The category also encompasses records from marketplace lenders.

A consumer’s tendency to pay those bills on time, late or not at all can reflect on creditworthiness, Lindeen maintains. That history becomes relevant for alt funders because the small businesses they serve constitute a hybrid of consumer and commercial credit, he says.

Using that data, ID Analytics can spot people who are good credit risks when the credit bureaus still consign them to “thin file” status — the limbo where applicants don’t have enough credit history to evaluate their creditworthiness, Lindeen maintains. About 60 percent of near-prime applicants qualify for credit when lenders factor in alternative data, according to an ID Analytics study he says. At the same time, alternative data can also expose weaknesses among individuals with excellent traditional credit scores, he observes.

Combining alternative data with traditional data has become more important with the bureaus’ decision to stop supplying data on liens and judgments, Lindeen says. Leaving out that data will raise some credit scores, and the effect will be strongest among near-prime individuals with good but not great traditional scores, he notes. With those consumers, a 10-point shift could make a big difference in qualifying for credit, he says.

“Even though it’s a small population, it’s a critical population,” Lindeen says of those newly minted prime applicants. They may number only one in a hundred of a particular funder’s portfolio, but they may advance to another risk pool and consequently invalidate a risk model, he suggests. Over time, risk managers will adapt to the change and oversee a “risk migration,” he predicts.

Overall, between 6 percent and 9 percent of consumers will see their credit scores rise because of the bureaus’ new policy, Lindeen estimates. The change usually won’t exceed 20 points, he says. Still, about 700,000 will see an improvement of 40 points or more, he continues. “That’s a significant increase for a nontrivial population,” he says. “It’s likely their performance will stay the same as their score goes up.”

A study by VantageScore Solutions, the company that provides the VantageScore credit scoring model to the credit reporting bureaus, projected scores would increase an average of 10 points for slightly more than 8 percent of the scorable U.S. population.

Those changes are characterized as “minimal” by Francis Creighton, President & CEO of the Consumer Data Industry Association, a trade group that represents the three major credit bureaus as well as about a hundred other companies – mostly smaller credit bureaus around the country, resellers of credit bureau information and background screening companies.

The credit bureaus decided to curtail reporting of judgments and liens as part of the National Consumer Assistance Plan, or NCAP, Creighton says. NCAP is an agreement reached in March 2015 among the three major credit bureaus and the attorneys general of 31 states, who were pressing for fairness in credit reports. Many observers call NCAP a “settlement” but the agreement did not result from a lawsuit, he notes.

Under NCAP, the bureaus will continue to include bankruptcies in their reports because the records meet the standard of providing a name, address, Social Security number and date of birth and because visits to the courthouse to update records occur at least every 90 days. About half of liens don’t meet those standards and will be removed from credit reports, and nearly all judgments fail to adhere to the standard and will no longer appear on the reports.

Although Creighton declines to say how many consumers were victims of credit reporting errors, he emphasizes the severity of the problem for each victim. “If you were one of the people who had a name similar to somebody else or a similar Social Security number, it would impact you a lot,” he maintains. “I don’t know how widespread it was, but it was disruptive enough for individual people that it’s better just not to have it.”

A Federal Trade Commission study released in 2013 reported that a sample of 1,000 credit reports indicated that 25 percent had at least one error that could reduce scores, according to published reports. Such findings prompted state attorneys general to seek remedies that resulted in NCAP.

The bureaus planned to implement another major portion of NCAP in September when they were to begin waiting 180 days before reporting medical debts, Creighton notes. At the same time, debts for medical expenses covered by insurance policies were to be omitted from credit reports, he says.

Changes brought by NCAP represent part of ongoing efforts to improve the system, according to Creighton. “We want accurate information in the reports,” he says. “That’s good for everybody.”