Credit Scores and Credit Reports, by Evan Hendricks

Chapter 3

Re-Scoring

"If at first you don't succeed..."           

- Old Saying  

When it comes to new mortgages or refinancing, there is a cost-effective, professional service available to improve your credit score in a way that could very well save you thousands of dollars by getting you a better interest rate.

It's called "Re-Scoring," but hardly anybody knows about it.³⁶ How could that be?

Re-scoring is offered by the smaller, independent credit bureaus, sometimes referred to as "resellers." But the contracts these resellers have with Equifax, Experian, and Trans Union prohibit them from offering their services directly to consumers. In other words, if you call a reseller, they can't help you — no matter how much you'd be willing to pay them. If that seems like a restraint on trade, you may be right. An anti-trust lawsuit is pending (more on this later).

Meanwhile, to use a reseller, you have to abide by a kind of "food chain," meeting the following three conditions set by the contracts issued by the Big Three CRAs:

³⁶ Like many other topics related to mortgage credit reporting, Kenneth Harney of the Washington Post is one of the few to write about re-scoring. See Harney's two articles, "Bad FICO Mark? Re-score Your Credit." Washington Post, July 14, 2001, pg. H1; and "Credit Re-scoring: How To Know If It's For You," July 21, 2001; pg. H1.

1. You have to be a prospective customer of a lender or mortgage broker


2. That lender or broker must be a customer of the reseller


3. The mortgage broker must request the reseller's help on your behalf.

Take Time Out

The lender or mortgage broker is under no obligation to tell you that it uses a reseller that could improve your score. If the lender or broker is most concerned with speedy approval, and feels that using a reseller would slow down the mortgage-granting process, then they are not likely to tell you about re-scoring. For some lenders and brokers, the worse the credit score, the higher the interest rate, the larger the loan, the bigger the commission. If you, the customer, are in a hurry and don't know about re-scoring, what you don't know could cost you, and your "haste makes waste." By the way, only a fraction of lenders or brokers use resellers.

The re-scoring system was created because of pressure on the Big Three CRAs from the mortgage granting industry. This happened for two basic reasons. First, the mortgage industry saw that credit report errors were hampering mortgage granting, sometimes causing unjust rejection of applicants. Often, delays were caused and expenditure of extra time and effort was necessary to correct mistakes so a loan could be approved. Second, as the industry moved towards automated underwriting, and loan approval was reduced from months to days-sometimes to hours or minutes-virtually nobody was willing to wait the 30 to 45 days it took to correct credit report errors.

The re-scoring contracts give re-sellers special privileges that allow them to review credit reports and, within a day or so, submit corrections or other changes to a "dedicated" desk at the CRA. Because the changes are made directly to the Big Three CRAs, the consumer's amended credit report can be pulled and verified by Fannie Mae, Freddie Mac or other loan guarantors.

In general, the process is rather simple.

1. The lender or broker forwards the file of a potential re-scoring candidate to the reseller. The reseller reviews that candidate's credit report and advises the lender/broker whether re-scoring will result in enough improvement to make it worth it. Unless the credit report is a overrun by derogatories, it's usually worth it, as sometimes just improving a few points will qualify the borrower for a better rate.


2. The reseller identifies a strategy for changing or correcting the report so the score will be improved.


3. Because the strategy involves actions that the borrower must take, like paying down debt or obtaining documentation from creditors, the reseller prepares a set of recommendations based on the contents of the credit file, the goal score, and the borrower's situation, and sends instructions to the borrower, through the loan officer.


4. The borrower follows the recommendations, obtains proof of the changes from their creditors (including collection agencies or courts if applicable), and supplies the documentation proving the changes to their loan officer.


5. The loan officer forwards the documentation to the reseller, who then verifies the documentation is legitimate and forwards the documentation to the re-score desk at the CRA(s) selected by the reseller or determined by the loan program.


6. The reseller confirms that the changes have been made at the CRAs and that the credit report containing the amended data is now available to the lender and loan guarantors like Freddie and Fannie.

In most cases, the new score will be improved by the amended data. It is important to remember that during the re-score process, other creditors may issue reports to the bureaus changing the data in trades other than the trades selected for re-score. If the change is negative it could possibly cancel out or event reduce any increase the file may have gained from the changes put through by re-scoring work. In a few cases, it may cause a reduction greater than the increase, resulting in a drop in the score. Because of this, and the "black box" of secret algorithms and calculations, there can never be a "guaranteed" increase.

Depending on how much work needs to be done on the credit report, the cost of this process usually ranges from $150-$300, but can run over $1,000 in dramatic cases. Under Equifax's contract, resellers are not allowed to pass through costs to the borrower. This means that the mortgage broker or lender has to eat the costs. Clearly this might dissuade the broker or lender from making it known to their applicant that the service is available, even if their borrowers are perfect candidates for the process, and despite the fact that any borrowers could benefit greatly from reduction in their interest rate.

A reputable reseller, like Lenders' Credit Services, Inc. (LCSI), in Baltimore, Maryland, will carefully screen a borrower's history and only attempt to re-score those for whom success is likely.

But the results can be impressive. LCSI re-scores the credit reports of an average of 25 borrowers per week. The company estimates the results as follows:

• On average, the score improves 30 points. This is significant because the mortgage rates generally improve at 20-point FICO intervals.


• About 1-2 cases a week improve 50 points.


• About 1-2 cases a week improve 70 points.


• About 3 cases a month improve 100 points.


• About 2 cases a week cannot be improved.

The extent of the savings can depend on your starting FICO score, but they can add up quickly. According to Fair Isaac, for the average $150,000, 30-year, fixed-rate mortgage, someone with a 674 FICO score would have monthly payments of $1,028, while someone with a 700 FICO score would pay $862 per month. That's a savings of $166 per month, or $1,992 per year.³⁷

The two most common ways of improving a score are by (a) correcting mistakes, like late payments or outdated balances that make the borrower appear more in debt than he really is, and (b) by "manipulating" debt, either by paying down the amount owed on credit cards (revolving debt), or redistributing debt so it's at least below 50% of the credit limit on each revolving account and as a total of all accounts.

Here are the seven most common reasons to re-score a credit file, and some of the actions the reseller, working with the borrower, must take for each item.³⁸ Clearly the following is useful for anyone who doesn't have access to a reseller and wants to do it on his own. But here's something you'll want to remember: resellers cannot affect changes to accounts that are already "in dispute" with the CRA by the consumer. The CRAs also won't allow a reseller to effect changes due to a "mixed file," that is when a file appears to include identification data on more than one consumer.³⁹ (Resellers are permitted to change a balance or remove a late date that is incorrect, not a trade that "doesn't belong" to the consumer, if the evidence is present that the file is "mixed.")

³⁷ www.myfico.com, visited March 9, 2004
³⁸ The seven points were provided by Ruth Koontz and Paul Wohkittel of Lenders Credit Services Inc. This author signed an agreement with (LCSI) confirming that I was not shown, and did not see, any confidential consumer data.

1. Payment history is incorrect. Letter from creditor, on creditor's letterhead, stating what the correct history should be, or a "Universal Data Correction" (UDC) form (a standard form used by most creditors reporting information to the CRAs) completed and signed by the creditor.


2. Account reports a delinquency that has been brought current or can be brought current. Letter from creditor (all such letters should be on letterhead) stating that the account is now current, and/or with a correct lesser balance, or a UDC form completed and signed by the creditor.


3. Account reports a balance that in fact has already been paid in full. Letter from creditor or UDC form. However, caution is needed in regard to collections and "charge-offs." The older an item, the less effect it has on scoring. Paying off, and/or marking a five-year-old collection or charge-off as "paid-in-full' could cause the score to drop instead of rise. This is because the change makes the "date of last activity" become "recent," instead of "five-years-old." In such cases, it's better to let "sleeping dogs" lie and let them quietly drop off the report at the seven-year mark. The exception to this is when the change is being made not to increase a score, but instead to change something that is interfering with an automated underwriting approval. Remember, Fannie Mae, Freddie Mac, and others automatically scan credit reports for major derogatories, like bankruptcy, foreclosure, and tax liens.


4. Credit report includes an account that does not belong to the borrower. This is a challenge, given the CRAs' refusal to let resellers change mixed files. Still, resellers can re-score when another person has established an account fraudulently. Again, a letter from the creditor or UDC form is needed. If the account is a judgment, a copy of the judgment from the correct court showing the same case number and defendant, is required.


5. Includes an account that belongs to the consumer, but should not show up on the credit report. This includes accounts that are too old to report as defined by the FCRA's seven-year limit. Another example would be a collection that was paid prior to being placed with the collection agency issuing the report, either to another agency or to the original creditor. Some medical collections resulting from insurance disputes can be deleted if the original service provider instructs the collection agency to close the collection file. This usually requires that the debt be paid, and the insurance dispute be documented. Multiple references to the same account can cause problems, especially if there are negative remarks associated with the account. Even good accounts that are duplicated can cause problems. For example, a lost or stolen credit card can result in the old account, complete with its balance and credit limit, continuing to be included (but not updated by the creditor) on the file, along with the replacement account.


6. Includes an account on which the borrower is only an "authorized user." "Co-signers" and "joint users" of credit card accounts are legally obligated for their payment. "Authorized users," on the other hand, are not. Yet Fair Isaac's model scores authorized user accounts as if the user was responsible. If an authorized user account is reported as "maxed out" or with a delinquency, then removing it will help the borrower.


7. Revolving accounts (credit cards) that are "maxed out" or close to it, but which can be paid down or paid off. There are two calculations made on revolving debt involving the credit limit vs. the balance. First, each account's balance-to-limit ratio is analyzed individually. Second, the average balance-to-limit ratio is calculated by dividing the sum of balances of most open and closed accounts by the sum of credit limits for the same accounts. Avoiding a high balance-to-limit ratio in both of these categories is crucial. While there is no "magic" number, Lenders' Credit Services said it achieved the best results when the balance was brought to less than 50 percent of the credit limit. Other re-scorers said that three credit cards, with balances at 1/3rd or below credit limits, was a good target.

"Perfection" in credit scoring is nearly impossible. One re-scorer had three platinum cards with limits of $20,000. Two cards had zero balances, and the third never had a balance over $3,000. Still, this professional's FICO score was slightly over 750-top notch, but far from a "perfect 850." Two of the "Reason Codes" given were "relationship of balance-to-credit limit on revolving accounts" (despite having a very low balance), and "too many open revolving charge cards" (despite only having three underused platinum cards).

"I guess the ideal consumer for FICO is one card with a zero balance," she said. "But who can live like that?"

³⁹ See Chapters 8 and 10 for more information on "Mixed Files"

Payoffs, Big & Bigger

As mentioned before, LCSI on the average improves credit scores about 30 points, or two levels (1/8 percentage point per level) in the lenders' index, for an average improvement of 1/4 percentage point.

Even a change of two or three FICO points can translate into savings, particularly for the larger mortgages. This is because the mortgage rates can change at 20-point intervals. For example, your original score was 698, which translated into a good interest rate, but not the best available. Because the cut-off used by the lender for the next best rate was 700⁴⁰, the re-scorer only needed to improve your score two points to get you a better deal. But if the re-scorer could boost your score 22 points to 720, you would jump two levels. If all the negative drag on your credit score was based on inaccuracies that could be corrected, or revolving debt that could be paid off, you could probably jump 60-100 points and qualify for the best loan rate the lender had to offer.

At LCSI, Koontz tells of the single mother whose score was ambushed by a charged off auto loan. This was caused by the bank misapplying the final payment to someone else's account. The account was coded as a "charge off" about one month before she applied for a mortgage. The incident occurred without her knowledge because at the same time she made the final payment, she also moved. The bank reversed the payment from the incorrect account, applied it to the correct account, and adjusted all of the late fees and interest, along with the payment history on the account, which was returned to its pristine state. Once all the necessary documentation was gathered and submitted, the collection was deleted from the mother's report and her credit score improved by 100 points. Without the change, the borrower would not have qualified for the mortgage because the interest rate she would have been paying would have pushed her payments too high for her to qualify based on her income. After the change, she got the best rate available, saving her thousands of dollars.

⁴⁰ The FICO cut-offs used by mortgage lenders vary greatly. Moreover, FICO is not the only factor.

Harney, of the Washington Post, reported the case of Alexandria C. Phillips, a Los Angeles area lawyer who sought to refinance her Newport Beach condo and purchase a new home in Laguna Beach. Phillips' broker said her FICO scores were: 597 (Experian), 569 (Trans Union) and 580 (Equifax). Considering that 620 and below was "sub-prime," Phillips' scores were horrible. Phillips' broker turned the case over to Richard Le Febvre, whose company, AAA American Credit Bureau in Flagstaff, Arizona, was still doing re-scoring at the time.

Working with Phillips, Le Febvre removed three inaccuracies that were dinging her credit: an erroneous delinquent credit card payment, a "repossessed" Mercedes that actually belonged to someone else, and an incorrectly listed collection action from 1995. Phillips also regularly purchased law office and other professional items with her credit card, thus driving the balance near the "maxed out" point at the time the credit card companies reported to the Big Three CRAs. In five days, Le Febvre had improved Phillips' FICO score from a 580 to a 780, making her eligible for the best loan available.⁴¹

Why Isn't Re-Scoring Available To Everyone?

Equifax, Experian, and Trans Union probably permitted re-scoring to come into existence because a portion of their subscriber base — mortgage lenders — demanded it. But as mentioned before, the Big Three contracts prohibit resellers from offering their services directly to consumers.

⁴¹ Harney, July 14, 2001, op. cit.

Price Squeeze

Although they adamantly deny it, there was some evidence that the Big Three were trying to squeeze the resellers out of the re-scoring business. In the past three years, they had put a "price squeeze" on the resellers, steadily hiking the price they charge resellers for credit reports and for re-scoring. For example, Trans Union was charging a reseller in the Midwest $2.30 each credit report, or $4.60 for a married couple's report, plus 70 cents for a credit score, if he pulled fewer than 500 credit reports per month. But Trans Union offered a commercial bank, which happened to be a customer of the reseller, a rate of $1.60 per individual report, $3.20 for a husband-wife report and 40 cents for a credit score, if they pulled fewer than 1,500 reports per month. For anyone paying attention, this created the appearance that Trans Union was trying to squeeze the reseller out of the market and lure away one of its key customers.⁴²

According to a September 2003 report by the American Antitrust Institute (AAI), Equifax also tried to put a price squeeze on resellers and then "poach" away their customers. A California reseller was approached by a home-equity lender about purchasing 10,000 single-bureau reports per month. The cost to the reseller was $1.75 for each report, plus 50 cents for the credit score, or $2.25. The reseller offered the reports to the home-equity lender at $2.50 apiece-a 25-cent markup. Equifax contacted the home-equity lender directly and offered to sell its reports for $1.90 a piece. Equifax, Experian and Trans Union know all of the resellers' customers and the volume because the FCRA requires resellers to identify end-users to the CRAs.<sup>43

42</sup> Jonathan L. Rubin and Albert A. Foer, "Competitive Conditions in the Mortgage Credit Reporting Industry: A Report By the American Antitrust Institute (AAI)., September 8, 2003
⁴³ Id.

A Massachusetts reseller who bought 3,000-4,000 Equifax reports per month paid $1.70 per report and 35 cents per credit score. Equifax offered to provide credit reports and credit scores to one of the reseller's bank customers for a combined price of $1.30-even though the bank's volume was only 100-300 reports per month. A Florida reseller discovered that Experian's exclusive affiliate for the State of Florida, Credit Data Services, Inc., offered one of the reseller's customers a merged Equifax/Experian report for $1.50-less than half the reseller's wholesale cost for a two-bureau report⁴⁴.

In 2001, Trans Union informed a reseller that it was raising his wholesale prices between 29 to 250%⁴⁵.

Moreover, Equifax and Trans Union have "dramatically" jacked the prices they charge resellers for re-scoring. In 2000, the charge was $5.00-$7.00 per tradeline. In 2001, within 60 days of each other, they hiked the price to $15.00-$30.00 per trade line. Meanwhile, Trans Union and Equifax, through their mortgage reporting subsidiaries, continued offering lenders re-scoring services at $5.00-$7.00 per trade line.

'Baseless Policy'

Along with these price hikes, the three CRAs have specific clauses in their contracts with resellers prohibiting resellers from passing along to consumers any of the prices that the CRAs charge resellers. This means that the reseller must either absorb the cost, or be paid by the reseller's customer, the mortgage lender.

Naturally, this has created friction between resellers and their mortgage broker customers. In the March 2003 issue of the official publication of the National Association of Mortgage Brokers (NAMB), one official wrote:

⁴⁴ Id.
⁴⁵ Id.

"It seems to me that the fastest way to spoil this wonderful new service by making it look like credit repair would be for repositories to insist that credit resellers restrict mortgage brokers and lenders from charging a fee to the consumer for the upgraded credit report."

The NAMB official called this restriction a "baseless policy." The AAI concluded that resellers were caught between the proverbial "rock and a hard place."

"Resellers, faced with the prospect of audits and termination by the repositories, are understandably reluctant to deviate from the express terms of their contracts. But at the same time, they are loath to be perceived by their customers as 'holding the line on a baseless policy' which costs their customers money. The repositories have been asked to clarify the rules, but have so far refused to do so. Thus, while re-scoring is a permissible business for resellers, the repositories have made it difficult or impossible for resellers to profit from it without risking the alienation of its customers."

As mentioned, if indeed the Big Three are putting the squeeze on independent resellers, they might be doing so to take over that portion of the market. But the motivations could run deeper. The AAI report noted that major creditors, even though they often are the cause of inaccuracy, do not want to have to deal with resellers.

"At least one national credit card issuer flatly refuses to accept inquiries from smaller credit reporting agencies," AAI wrote. "The single largest concern of the repositories is to maintain the inflow of credit data, so it is to be expected that they would be protective of large credit furnishers. Thus, smaller resellers engaged in updating and correcting errors created by reporting creditors are often viewed as a liability by the repositories."

The AAI added: "Smaller resellers are also a liability to repositories in another sense. With their primary emphasis on customer service, smaller resellers often shed light on repository practices and the extent of their compliance with laws and regulations. They expose inaccuracies and errors in credit data and also educate the public about the industry and about the legal rights of consumers."

In March 2004, the National Credit Reporting Association and its members filed separate anti-trust lawsuits in federal court in California and California state court against Equifax, Experian, and Trans Union. The case was pending when this book went to press. After the lawsuits were filed, some re-sellers complained of retaliation, as at least one of the major CRAs exercised its right under their contracts to conduct an audit.

Unless the lawsuit results in major changes, consumers should not expect all mortgage brokers to inform them about re-scoring. Those mortgage bankers or brokers who make higher commissions on sub-prime borrowers actually have a disincentive, as re-scoring could cut into their incomes when the borrowers get better rates.

Moreover, because of all the price hikes, cost can be a major factor for brokers and mortgage companies that are expected to absorb the cost of re-scoring. In 2000, the aver-age re-score, consisting of two tradelines corrected on reports issued by two of the three CRAs, would cost the re-seller $28.00 (using the high of 7.00 per trade), a figure that was palatable to most mortgage bankers/brokers. That same re-score would now cost the reseller approximately $120.

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© 2005 Evan Hendricks and Privacy Times, Inc. All rights reserved.