Some consumers’ credit scores are about to get a big boost. While this is good news theoretically for those with poor credit, lenders and others who depend on credit scores to evaluate their potential customers have good reason to be concerned.
Three national credit bureaus starting on July 1st will stop collecting and reporting substantial amounts of tax lien information and civil judgments. Given the fact that civil judgments and tax liens can be extensive and significantly hamper a borrower’s ability to repay a mortgage, it comes as a surprise that Equifax, Experian and TransUnion will stop collecting these important public records. According to the Chicago Tribune, these liens and judgments currently affect millions of consumers’ credit scores.

Civil Judgments and Tax Liens

Tax liens, which are levied against properties when the owner is delinquent on tax payments, have negative impacts on credit scores and remain in credit files for extended periods of time. Civil judgments, on the other hand, are ordered by the courts and represent debts owed by the losing party. The problem for mortgage lenders is that they rely on companies like Equifax, Experian and TransUnion to provide credit scores on prospective borrowers. Those borrowers who were previously “on the edge” may now get the score increase they need to get a loan – great for borrowers, but not so great for lenders who may be taking on more risk than they want.

Justification for the Change

In an effort to placate these fears, credit bureaus’ trade agency Consumer Data Industry Association released a statement explaining that the changes were part of the “National Consumer Assistance Plan,” a deal struck with 31 states attorneys general designed to increase credit reporting accuracy and make it easier to correct errors in credit reports. The main issue the “National Consumer Assistance Plan” seeks to correct is when a credit file has one individual confused with another. These mistakes have caused severe interruptions to consumers with good credit. So, it remains to be seen whether these changes will be a net positive for consumers and to what extent they will affect mortgage lenders ability to use discretion in the lending process.

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