Realtors, builders and lenders working with young, first-time home buyers should be aware of an important change affecting credit scores nationwide: The country's largest provider of student loans -- Sallie Mae -- has abruptly stopped reporting its 7 million-plus borrowers' payment performances to two of the three national credit repositories.
That policy switch could sharply lower the FICO scores of large numbers of consumers who have been paying their student loans on time to Sallie Mae for years, but who don't have many other credit accounts on their files. The lower scores, in turn, could make large numbers of student loan holders ineligible for the mortgages they need to buy a first home.
Here's what's happening. Though Sallie Mae has never told its customers about it, the corporation no longer reports borrower loan payments to national repositories Experian or Trans Union. Instead it send reports only to Equifax and a smaller bureau, Innovis Data Solutions.
The problem for would-be home buyers among Sallie Mae's customers is that most mortgage companies order credit files from all three national repositories, and then often underwrite and price the loan using the middle score among the three.
For example, if your Trans Union score was 710, your Experian score 680 and your Equifax score 620, your mortgage rate and fees would likely be based on your middle score -- Experian's 660.
But what happens when two of the three national credit repositories do not have what may be one your most important and positive records of on-time payments -- your student loans with SLM Corp., popularly known as Sallie Mae?
Eric Borgeson, a 31-year-old first-time home buyer in Eagle-Vail, Colo. recently found out. His mortgage loan officer, Chris Neuswanger of Macro Financial Group did a preliminary credit check on Borgeson and found his three national scores qualified him for the lowest-rate loans on the market. Borgeson's excellent on-time payment records were included in the electronic files at Equifax, Experian and Trans Union.
But when Neuswanger later formally submitted Borgeson's mortgage application through Fannie Mae's automated underwriting system, the positive payment histories suddenly and inexplicably disappeared from his Trans Union and Experian files. And the absence of those on-time payments on Borgeson's largest credit account had a sharply negative impact on his FICO scores at those two repositories. His "mid" score at Trans Union was now too low to qualify for the best rate quote through Fannie Mae. He was forced instead into a "non-prime" rate 1 1/2 percentage points higher than he thought he'd get. The rate increase is costing him $200 a month extra on his $237,000 mortgage, he says.
Sallie Mae spokeswoman Martha Holler confirmed last week that the corporation had stopped reporting payment histories -- positive or negative -- to Trans Union and Experian on all 7 million plus of its customers. She said the corporation had become unhappy with the two repositories' policies of selling Sallie Mae customer data to other financial product marketers. But credit industry experts say such data sales are commonplace and affect most companies that report credit data to the repositories. For example, most of the credit card and home equity line solicitations millions of consumers receive weekly are generated through "pre-screening" of credit by financial product marketers. A credit card company might ask one or more repository for all customers of Citibank or Wells Fargo in a particular region who have above-average FICO scores, say 720 or higher.
Then the marketers mail out their loan pitches to the prescreened and qualifying customers at their home addresses.
Sallie Mae's Holler said the company wants "to protect the privacy" of its customers and shield them from such promotions. It moved against Trans Union and Experian, she said, because they declined to withhold Sallie Mae borrowers from prescreening lists available to marketers.
Eric Borgeson said in an interview with Real Estate-Realtor Times last week that "I'd certainly prefer to get junk mail rather than be forced to pay $200 a month extra on my mortgage because Sallie Mae isn't reporting" to all three national credit bureaus.
How to handle this issue for clients who are first time buyers with current or former student loans with Sallie Mae? First, check the Equifax file and FICO score. Then ask loan officers to manually underwrite the loan application, factoring in any positive loan payment data that Equifax can document but that is missing from the Trans Union and Experian files.
Fair Isaac & Co., developer of the widely-used FICO credit scoring system, said last week that it strongly urges all lenders to "report fully and accurately to all three national credit bureaus." Anything less than full reporting is "unfair to borrowers," says a spokesman for the Consumer Federation of America.