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Hiding info from credit scores will hurt

By Sasha Padbidri
14 Mar 2017

A move by Experian, Equifax and TransUnion to remove tax liens and civil judgement data from consumer credit reports from July 1 will be a boon to subprime consumers in the short term, but lenders and the ABS markets could suffer in the long run.

The decision will increase the credit scores of up to 12m Americans by at least 20-40 points, according to published reports. 

For consumers whose scores lie just below 660 — the general cutoff for subprime consumers — the credit score boost could potentially result in an upgrade to prime consumer status, giving them easier access to mortgages or student refinancing loans that could save them thousands of dollars.

That 20-40 point boost could make a huge difference in areas like getting accepted for an apartment rental, as well as financial products including mortgages or credit cards.

The importance of catering to this underserved consumer segment was highlighted at last week’s LendIt conference, with regulators and participants on a non-prime lending panel warning that stereotyping and denying access to credit for this set of consumers could have far reaching consequences.

But although this boost to credit scores benefits consumers and encourages spending in the short term, eventually, the consequences of withholding such information will come back to hurt. 

Lenders depend on credit scores in order to measure creditworthiness, and the absence of these data points would this harder. 

The withholding of civil judgement data also includes situations in which collection firms have taken borrowers to court over unpaid debt, which may cause some lenders to tighten requirements for all borrowers or shy away from lending to certain segments of consumers altogether.

Credit scores are also an important tool in securitization — without a proper gauge of consumer creditworthiness, underwriters may find it tougher to provide loss estimates for pools of loans, raising the cost of funding these loans.

Though lenders can still refer to public records to look for lien and civil judgement information, the decision ultimately does not help either consumers or lenders. 

Instead of withholding negative information from credit reports, perhaps the time is ripe for a discussion on why the industry still relies on arbitrary indicators of credit to underwrite loans to borrowers in the first place.

By Sasha Padbidri
14 Mar 2017