YOUR MORTGAGE : Inaccuracies Plague Quickie Credit Checks

Some of the nation’s most experienced mortgage credit specialists have a blunt warning for home-mortgage applicants: The headlong rush by the mortgage industry to switch to electronic underwriting has potentially dangerous side effects for consumers and financial institutions alike.

That’s because the major electronic systems rely heavily on “quickie” on-line credit checks that specialists say often contain erroneous, incomplete or outdated information. When no examinations of credit data are made by real, live human beings, they argue, three serious problems may result:

--Applicants who should have been approved for a loan get turned down because of bad information in their credit files. Correcting the file can take weeks--leaving the applicant in limbo, subject to rate increases or the loss of a fleeting home purchase opportunity.

--Applicants who should have been rejected sail through unchallenged because the quickie credit check failed to include key pieces of information only a manual investigation would turn up: Bad debts with local merchants who don’t report to national credit databases; court judgments for non-payment of debts; fraudulent information about employment, length of residence or assets that can be spotted only by traditional, person-to-person checkups and interviews.

--Lenders and investors then get stuck needlessly with ticking credit time bombs: Loans in their portfolios that shouldn’t be are destined to slide into foreclosure. This, in turn, could trigger financial losses to shareholders, investors and even the tax-paying public.

The credit accuracy problem is particularly heightened now, according to credit industry experts, because lenders nationwide are beating the bushes for new applicants to replace the loan volume they had during the 1992-1993 refinancing boom. Compounding that is the nationwide push--initiated by the Clinton Administration--for mortgage companies to rapidly expand the number of loans they make to lower- and moderate-income and first-time buyers. The biggest private sources of low-down-payment mortgage money, the Federal National Mortgage Assn. (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), both have revised their traditional underwriting guidelines to enable larger numbers of such consumers to qualify for home loans.

One prominent Midwestern credit bureau executive, Don Miller, president of Indianapolis-based Mortgage Credit Services, says market forces this fall have produced “the worst-looking credit applicants that I have seen in 35 years in this business.”

By that, Miller says, “I mean the entire credit reporting industry is seeing more people with credit problems applying for loans.” Lenders scrambling for new business are reaching out to consumers “who would have been rejected out of hand during the refi boom,” according to Miller.

This is “the worst conceivable time,” Miller says, for lenders to be switching wholesale to electronic credit checks that tap into the three national credit repositories--TRW, Equifax and TransUnion--and merge their raw data files by computer software into a single report.

Miller and other credit reporting leaders have no objection to tapping into the repositories’ files. To the contrary: All credit agencies depend upon these same national databases, and Miller says all three “do outstanding jobs given the data they receive.”

The problem, Miller says, is that a lot of important local information on consumer credit behavior never makes it into the big databases. Local merchants or public agencies either don’t supply it or it arrives with inaccuracies from the local department stores, banks and other businesses who do supply it.

To document that assertion, Miller points to a study of 1,710 randomly chosen mortgage credit application files completed last July by the National Assn. of Independent Credit Reporting Agencies (NAICRA). The objective was to examine what an electronically merged in-file contained on an applicant compared with a traditional, manually evaluated mortgage credit report.

The results were sobering: Fully 44% of the on-line files had key information missing on credit balances or payments. In 16.5% of the reports, derogatory information about applicants--allegations of missed payments, unpaid debts, mortgage delinquencies, etc.--had to be deleted after local credit bureau investigators checked out the data with the help of applicants. Another 5% of the files either contained erroneous public record data or listed credit transactions that had no connection with the applicants.

Miller, a NAICRA board director, said the study results have been presented to Freddie Mac, whose new national automated underwriting system makes heavy use of electronically merged credit files. A Freddie Mac spokeswoman said that the corporation had no comment yet on the findings. However, Freddie Mac and other pioneering firms in the switch to high-tech loan underwriting cite the attractions of on-line credit evaluations: They cost less--$11 to $15 versus the $45 to $55 average charged for manually evaluated, traditional reports. They are also lightning-fast--90 seconds for basic data versus the two or three days typical for credit reports using local investigators.

But are the savings worth it? “Not if you’re an applicant turned down because of bad data in your [electronic] file,” says Kyle McMahan, CEO of Norcross, Ga.-based Southern Mortgage Reporting Co. Too heavy use of computerized quickie credit reports, he says, “is going to create a whole new category of people discriminated against unfairly”--unwitting, unknowing victims of high-tech underwriting.

Distributed by the Washington Post Writers Group .