On April 16th, the three Nationwide Credit Reporting Agencies (NCRAs) announced the latest development to their position on the inclusion of public records in consumer reports. Last July saw the removal of 50% of tax liens and 100% of civil judgments from credit reports due to enhanced accuracy standards set out in the National Consumer Assistance Plan (NCAP). The latest change excludes all remaining liens – leaving no liens or judgments on consumer reports.
We previously commented on the factors driving these changes and the expected impact on lenders and consumers. An important item to note is NCAP is not a compliance requirement issued by a regulatory agency. Nor does it indicate any concerns with the use of liens and judgments for credit decisioning purposes. The decisions were driven by concerns around the NCRA’s ability to accurately link a consumer to a public record with limited Personally Identifiable Information (PII) – in this case, social security number and date of birth. At the time of the initial announcement, much of the focus and concern was on the impact to credit scores and risk models. Estimates put the shift in scores at anywhere from 20 – 40 points depending on the sub-population.
Over the past 8 months, LexisNexis® Risk Solutions has continued to provide reliable public records including liens and judgments for use in credit decisioning. While our existing users have benefited from uninterrupted access to this content, many others across various industries including mortgage, telecommunications, auto finance, card, and short-term lending have come to us to better understand how to incorporate the lost data back into their risk strategy. These engagements have informed key learnings on the value and best practices around using liens and judgments as part of a holistic credit strategy, including:
- Consumers with a lien or judgment are twice as likely to default on a consumer loan as someone without a lien judgment. The correlation is even stronger in mortgage lending where the difference can be as high as 5x.
- The impact to model performance is portfolio specific. While some prime and/or super prime portfolios may not be as adversely affected as a subprime portfolio, results are hard to predict without a thorough analytical validation.
- Many financial institutions have underwriting rules, guidelines, policies, and model governance frameworks that rely on liens and judgments as key inputs. The removal of this data can cause unforeseen consequences to business practices and outcomes.
- In the case of a federal tax lien, there is often no associated tradeline thus no leading indicator that will be a factor in the credit score.
- Borrowers that have liens or judgments that result in levies on checking accounts and wage garnishment have a diminished ability to repay leaving a critical blind spot.
The latest developments bring on new challenges for lenders and consumers. The removal of this data eliminates visibility into the credit behavior of consumers and creates gaps in understanding their potential to manage future credit obligations. We continue to believe that the incorporation of high-quality public records data is fundamental to a sound and sustainable lending strategy.