As published in Scotsman Guide's Residential Edition, July 2008.
Today's housing market scares many consumers and mortgage brokers. Homeowners face dramatically increased monthly payments because of adjustable-rate mortgages, and market saturation makes it almost impossible to sell a home. Mortgage professionals must also cope with a tight loan market while having to deal with clients with less-than-perfect credit scores.
One way for brokers to get through the hard times and to help consumers is to make sure that their clients' credit scores are accurate.
Often, credit scores are affected negatively by inaccurate information. In fact, a 2004 study of the three major credit bureaus found that 79 percent of credit reports contain incorrect information. The same study reported that 25 percent of people had a credit report that was so inaccurate that it kept them from receiving financing.
Inaccuracies can have a major impact on the interest rate that mortgage borrowers receive. For this reason, some brokers have turned to credit-repair companies to help their clients.
In theory, the idea is perfect: Improve a client's score before the borrowing process begins. Saving clients money can lead to more completed deals and to enhanced customer loyalty.
In reality, however, many brokers don't know what to look for in a credit-repair company. Often, they find themselves searching for information and fighting against a lack of communication from unethical repair companies.
Some credit-repair companies charge exorbitant fees and deliver few results. These events jeopardize loan closings and a broker's reputation.
Here's a look at what to avoid and what to embrace.
What to avoid
To avoid problems, consider the following tips when searching for an ethical credit-repair company to help your clients:
Don't pay by month: Many credit-repair companies charge monthly rates without a specified timeline. Because they get paid monthly, there is no incentive for these companies to expedite the repair process. Clients often never see the dispute letters, and the repair companies only send out a few each month. In reality, the dispute process usually requires three rounds of letters per unwarranted trade line. With three credit bureaus, it could require nine letters for each discrepancy.
Don't pay upfront: Some credit-repair companies try to collect large payments upfront. This is illegal under the Credit Repair Organizations Act. Brokers should beware of companies that require any investments before the work is completed.
Don't allow "piggybacking": This illegal practice involves overriding password-protected documents and issuing fake credit accounts to customers. Piggybacking occurs when an individual becomes an authorized user on the credit card account of another person with excellent credit. Within a few months, the unknowing consumers have their scores used to increase the piggybacker's rating.
Don't allow password hacking: Another illegal tactic is to buy software that breaks into password-protected documents. This allows hackers to change credit reports.
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