Erroneous or outdated negative items on your credit report can be deal killers – or at least deal delayers – when you’re trying to purchase a house and get a mortgage. They can depress your credit scores, raise your interest rate and potentially cost you tens of thousands of dollars in higher payments over time.
And although the credit reporting industry insists that procedures to handle disputed items in consumer files at the three national credit bureaus are improving, the statistical fact remains: Complaints about credit reporting continue to rank among the highest the Consumer Financial Protection Bureau receives every month. People are frustrated by the lack of a workable appeals process over disputed items, and the fact that consumers – not creditors – bear the burden to prove the accuracy of credit information.
So it’s no surprise that a major legislative proposal has surfaced on Capitol Hill that seeks to disrupt much of the American system of gathering, reporting and using credit information, including potentially significant changes in the credit scores lenders use to evaluate most home mortgage applications.
The 202-page bill, the “Comprehensive Consumer Credit Reporting Reform Act,” (H.R. 5282), sponsored by House Financial Services Committee ranking member Rep. Maxine Waters, D-Calif., covers a wide array of contentious issues, including everything from restricting the use of credit information in most employment hiring decisions to shifting more of the burdens of proof to creditors when they report negative items on consumers who later dispute them.
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It would order credit bureaus to remove all paid or settled debt accounts from consumers’ files within 45 days of payment or settlement, rather than leaving them on file for years. It would require them to notify consumers the first time a creditor reports negative information about them, and would cut the maximum time for retention of adverse information in bureau files to four years in most cases instead of seven, and to seven years from 10 years for bankruptcies.
A number of the changes would have impacts on home purchases and mortgages. Millions of Americans confront credit and employment issues today because their bureau files contain the tragic residue of the Great Recession: Delinquencies and short sales and bankruptcies that were caused by deceptive or predatory lending or loan servicing practices.
The reform bill would require the credit bureaus to remove negative information related to mortgages that the CFPB or courts have found to be connected with deceptive or predatory lending or servicing. This provision alone “should be particularly helpful because it applies to” large numbers of homeowners who are covered by legal settlements over alleged abusive practices by lenders and servicers, said Ruth Susswein, deputy director of national priorities at the nonprofit Consumer Action group.
The bill also seeks to bring reforms to credit scoring. For starters, it would mandate that when consumers obtain their free annual credit reports from the three national bureaus – available at www.annualcreditreport.com – they get their credit scores simultaneously at no cost. It would also modernize the types of scores acceptable at the two dominant players in the home mortgage field, Fannie Mae and Freddie Mac.
Rather than relying solely on a FICO scoring model that critics say is outdated – more than a decade old – and has been superseded by several more accurate and consumer-friendly FICO versions, it would direct Fannie’s and Freddie’s federal regulator to consider adopting more advanced models, including competing systems. Among other improvements, newer FICO models ignore or minimize the effect of disputed or paid off medical accounts, as does the VantageScore 3.0 model, which competes with FICO. Newer models also incorporate rental and other information that demonstrate good credit, provided landlords report payments to the bureaus.
Credit industry experts note that some of these efforts to improve scoring already are underway at Fannie and Freddie. Stuart Pratt, president and CEO of the Consumer Data Industry Association, which represents the three national bureaus, also argues that many of the proposed changes in dispute resolution are being put in place under a 2015 national settlement agreement, and therefore “we question the need for additional law.”
Bottom line: This is part of a significant effort to improve national standards governing credit reporting and scoring – a system that many citizens continue to feel treats them poorly, based on the volume of complaints. Does the bill have a chance? Tough slog in an election year. But depending on the November results in the House, it just might have a shot next year.