Just how educational are these scores?

Richard Smith, loan originator, Stearns Lending

As published in Scotsman Guide's Residential Edition, September 2011.

The impact of different credit-scoring models was the subject of one of the hundreds of studies mandated by the Dodd-Frank financial-reform act. The credit-scoring study — titled “The Impact of Differences Between Consumer- and Creditor-Purchased Credit Scores” — was released this past July 19.

The report has some good summary information, but I think it provides little real information and addresses the wrong questions. The concern in the report is that consumers pay for a credit score that lenders will not use — which is true. I often have clients call and tell me their credit score upfront. I ask where they received their credit score and try to explain the different scoring models.

The CFPB report calls the scores consumers purchase “educational credit scores” and points out that lenders do not use these scores. Providing these educational scores is now a multimillion-dollar business. Their impacts, as outlined in the CFPB report, are:

• They increase market confusion.
• With a higher educational score,  consumers might have a false sense of their creditworthiness and apply for a loan that may be denied.
• With a lower educational score, consumers might apply for loan terms that are worse than they could qualify for.

I agree that they cause market confusion. When clients have a higher educational score than the mortgage report, their question often is, “Why does the mortgage credit report have my score wrong?”

But the impacts as described in the CFPB report seem minor. The greater consumer impact from credit scores is not the difference between lender and consumer educational credit scores — although a disclaimer for educational scores would be nice, such as, “This score is provided for educational purposes only.This score is likely not the score lenders will use.”

Rather, the greater impact is the prevalence of inaccurate information and the difficulty of improving credit scores. I think the following suggestions for improving credit scores could help regardless of the model:

• Paying a collection should improve the score, not re-age a bad reference.
• Collections should only be reported once, and those posting duplicates should be fined.
• Collections and charged-off account references should not be re-aged, but only reflect the date incurred.
• Payment plans on collections and charged-off accounts should be reported as new installment references.
• Creditors should report corrections immediately and face fines for failing to act in a timely fashion.
• Creditors should respond to disputes within 48 hours.

The real problem with credit scores is not that consumers are duped into paying for a useless educational score, but that they face a wall of resistance to improve their scores or to correct inaccuracies.

Richard Smith is a loan originator with Stearns Lending. He has originated residential mortgages in Tennessee and Georgia since 1994. Smith writes a monthly column on legislative and regulatory issues for Scotsman Guide. Reach him at (423) 280-0345 or richard@richardsmithhomeloans.com. Visit www.richardsmithhomeloans.com for more information.