If you pay attention to the news, then you already know that a monumental change in credit reporting procedures occurred at the three major credit reporting agencies (Equifax, TransUnion and Experian) just a few short months ago. You missed the story? Here is the gist.
In July 2017, the credit reporting agencies (CRAs) adopted a new approach to the credit reporting of tax liens and judgments on their consumer credit reports. As a result of these new policies, about 98 percent of civil judgments were removed from consumer credit reports. At the same time, about 50 percent of tax liens were removed from credit reports. For consumers, it was Christmas in July, courtesy of the CRAs.
Although your judgment might have been removed from your credit reports, it could still show up on a public records search and might still stop your mortgage approval.
Since judgments typically have a negative impact on credit scores and loan approvals, a lot of consumers were understandably very excited about the prospect of having their judgments wiped off their credit reports. After all, if a judgment is removed from your credit reports then it cannot hurt your credit scores or stop you from qualifying for a mortgage any more, right? Eh, maybe and maybe not.
If you were under the impression that the deletion of a judgment from your credit reports was going to cure all your loan approval problems then, unfortunately, you might be in for a big disappointment. No more judgments on your credit reports does not automatically equal loan approval.
The Workaround for Lenders
Mortgage lenders rely on the information on your credit reports and your credit scores to help them predict risk. When derogatory entries show up on your reports, such as judgments, studies show there is a higher probability that you will either pay the lender late or, worse yet, flake out on your loan. Either of these occurrences can cause lenders problems. To remain profitable, lenders need to extend loans to people who are most likely to pay back their loans per the terms of their agreements. That’s called “Risk Management 101.”
Since lenders rely so heavily on the data in your credit reports to predict risk, you can probably understand why they were not too excited about the removal of so many judgments. Of course, the removal of inaccurate judgments is great for everyone, but the removal of accurate judgments from credit reports makes it more difficult for lenders to do their jobs. Removing accurate judgments could lead to more loans being issued to people who aren’t the best at paying their credit obligations as agreed. The result for lenders could be costly. It is no surprise, then, that mortgage lenders would look for other ways to get their hands on judgment data.
Removing accurate judgments could lead to more loans being issued to people who aren’t the best at paying their credit obligations as agreed.
It is important to understand that there is still nothing at all illegal about reporting a judgment on a credit report. The removal of this information from credit reports was voluntary on the part of the CRAs due to regulatory concerns and concerns regarding the accuracy of the information. Yet the Fair Credit Reporting Act (FCRA) still allows for accurate judgments to appear on your credit reports for seven years from the date they were filed. Furthermore, judgments can still legally be considered by lenders when evaluating your application for a mortgage.
Since there is nothing illegal about considering your judgments, many lenders will conduct their own due diligence by performing their own public records search, such as via the LexisNexis RiskView Liens and Judgments Report. Although your judgment might have been removed from your credit reports, it could still show up on a public records search and might still stop your mortgage approval, at least until the judgment is paid or an acceptable payment plan has been put into place. If you owe a legitimate, outstanding judgment, chances are high that you will have to take some sort of action before you may be eligible to qualify for a new mortgage loan.
And finally, if you have recently applied for a mortgage loan and kept a copy of your 1003, more formally referred to as the Uniform Residential Loan Application, you’ll notice that on page three of that document there’s a series of questions. One reads, “Are there any outstanding judgments against you?” If the answer is yes but you answered “no,” then you just committed fraud because you lied on your loan application. If you answered yes, and were honest, then good for you. And while the lender is likely to ask some follow-up questions about your judgment, you can sleep well at night knowing you did the right thing.