Your Mortgage : Electronic Credit Reports Stir Controversy

WASHINGTON —  Thousands of American home mortgage applicants could be denied loans erroneously in the coming months because lenders are switching rapidly to all-electronic credit-evaluation systems that rely heavily on raw, unverified and often inaccurate data supplied by national credit bureaus.

That controversial warning was brought to Capitol Hill in early February by representatives of a key segment of the credit industry itself--independent, local credit reporting agencies who traditionally have prepared the cross-checked, verified reports used by lenders on mortgage loan applicants.

In private meetings with congressional staff, the agencies charged that major lenders are now signing up for so-called “merged infile” electronic reports, rather than performing traditional, time-consuming credit investigations. The merged reports are produced by tapping into data bases of two or three of the national commercial credit repositories--TRW, Equifax and TransUnion--and then eliminating duplicate information electronically.

The merged infile reports are attractive to lenders because they can be obtained quickly on almost any loan applicant--often in just three to five minutes--and at a far lower cost than traditional credit reports.

Merged infile reports go for $11 to $15 apiece. By contrast, the traditional approach--the so-called “residential mortgage credit report,” generally costs $50 to $60 per applicant and takes 48 hours or more to complete. Borrowers ultimately pay for the credit report, whichever approach is used.

Despite the speed and apparent cost savings of all-electronic infile checks, according to Terry Clemans, vice president of American Credit Connection Inc., a Schaumburg, Ill.-based, credit-reporting agency, “the results to the consumer can be catastrophic” when the lender makes decisions on the basis of the computer data.

Clemans cited preliminary results of a new study by the National Assn. of Independent Credit Reporting Agencies (NAICRA) that found that of a random sample of 1,700 computer-merged infile credit reports for mortgage applications, 16% contained erroneous, derogatory information on the applicants--ranging from false data on late charge-account payments to erroneous reports of bankruptcy filings by the home buyer.

Another 3% of the merged infiles contained “tradelines”--open credit accounts--that didn’t even belong to the borrower, and 2% contained erroneous “public filings” like tax liens and court judgments against the applicant. Over 10% of all the merged infiles did not even contain all the outstanding debts that the applicants themselves listed as part of the formal mortgage loan application.

“The point,” said Clemans in an interview, “is that (the raw data) can’t be trusted without follow-up verification. You need human involvement to be fair to the loan applicant.”

Clemans cited Federal Trade Commission statistics indicating that the No. 1 consumer complaint to the agency involves credit bureau data--31,000 complaints filed in the last four years alone. Obtaining merged infile data from the three repositories “is where we (local, independent credit-reporting agencies) begin our work,” said Clemans. Agencies such as his routinely interview loan applicants to sort out bad or conflicting data, and telephone employers, landlords and other creditors to double-check the raw information supplied by computer.

Mortgage lenders contacted for comment on the NAICRA complaints on Capitol Hill disputed the allegations. Ralph Mozilo, executive vice president of the largest mortgage originator in the United States, Pasadena-based Countrywide Credit Industries, confirmed that his company has moved away from use of the traditional mortgage credit report for all but a fraction of its applicants. Countrywide originated $49.5 billion of new loans in 1993, of which about $43 billion utilized merged infile credit checks at application.

The firm’s experience with the new technique is diametrically at odds with the NAICRA study. “I can give you 10 (traditional manual credit reports) and 10 merged infiles and you’re going to see the same information on every one,” according to Mozilo. “I would challenge anybody to show me differently.”

Countrywide uses electronic credit reporting early in the application stage as a way to screen, qualify and if necessary work with borrowers, said Mozilo. “If we see problems, we can ask the applicant right on the spot. We have absolutely no interest in denying loans to good credit risks.”

Other major lenders echoed Mozilo’s points, though most have not moved as dramatically to automated underwriting as Countrywide.

So what does this simmering controversy boil down to for you as a consumer?

First, the next time you apply for a home loan be aware of the strong switch to electronic credit evaluations--and at least the allegation that unverified negative data could go uncorrected and cause a rejection.

Second, if you find that your lender is indeed using quick, low-cost electronic reports, ask whether the savings of $40 to $50 or more are being passed on to you. Some lenders reportedly are charging consumers the traditional $50 and $60 for credit checks that in reality now cost just $10 to $15.