Module 3.5 Flashcards
what is a credit beaurau
A credit bureau is an agency that collects, maintains, and sells information about everyone who has a bank account and/or a credit card or has had legal dealings concerning credit issues. The information is sold in the form of a credit report.
2 requirements to pulling credit
the requestor has the individual’s permission to access the information; and
the request is related to credit, collection of a debt, rental of a house or an apartment, or an application for employment or insurance.
what is a credit report
is an historical record of a person’s use of credit and his or her repayment behaviour for the past six years, as reported to and recorded by a credit bureau. It is the most detailed information that you can access about a person’s credit worthiness.
what information is included on a credit report
personal info
credit info
banking info
collection info
consumer statement
Credit report inquiries
what is a onsumer statement
any statement made by the individual to explain a particular situation, such as a dispute with a financial institution or a fraud warning
what is included in personsal info
Name, current and previous address(es), social insurance number, telephone number, date of birth, current and previous employer(s)
what is in credit info
Credit or retail cards, lines of credit, loans, or mortgages; with credit limits, current balances, on-time and late payments
what will you see on banking info
Current bank accounts. May report NSF cheques. This may be a restricted view for brokers but not for bankers. For example, banks that report their mortgage balances and history are allowed to see mortgage information reported by other lenders.
what are credit report inquiries
A list of everyone who has inquired about the individual’s credit (for example, the individual, a lender, or any other authorized organization)
what is not included on a credit report
medical history
purchases not made on credit
debts for which the ind is not personally liable (debts of a business owned by individual)
how does a credit report indicate future behavior
uses years of information :
whether the individual is an active user of credit
useful data for assessing his or her ability and willingness to pay off financial obligations
additional information to confirm identity
Good credit indications
A “good” credit report typically shows a variety of credit and loans from a variety of lenders over a number of years with a pattern of consistent, on-time repayment.
Bad credit indications
A “bad” credit report typically shows some credit and loans, several “maxed-out” credit cards, and a pattern of failing to make payments on time. There may also be evidence of short-term borrowing (perhaps to cover living expenses) and even bankruptcy.
Min amount of information to pull a credit report
The minimum amount of personal information required to obtain a credit report includes full name, address, and date of birth. (If the applicant is willing to provide his or her social insurance number (SIN) that is also helpful. Be aware, however, that no one is required to give you a SIN.)
If borrower does not have credit report because new to canada, what documents must you get
bank statements and/or reports bank account history landlord references utility and phone/internet bill foreign bank reports/credit reports co-applicant, co-signor, or guarantor information
What are credit scores sometimes referred to as
FICO
Technically, FICO scores are only used in the United States, and are named for the company (Fair, Isaac, & Company = FICO) that developed the mathematical model from which credit scores are derived. Both Equifax and Trans Union use the FICO model to calculate credit scores although they may use different kinds of data in the calculations.
what is Equifaxes scores called
Beacon
ranges from 300 to 900
what are trans union score referred to as
Empirica
which range from 150 to 934
what is bankruptcy navigator index
predicts the likelihood of a consumer filing for bankruptcy within 24 months and is scored in a range of 1 – 999. The lower the score, the greater the likelihood of the consumer filing for bankruptcy.
what is the consumer risk predictor
predicts the likelihood of a serious delinquency (90 days past due or worse) within 24 months and is scored in a range of 300-900. The lower the score, the greater the likelihood of the consumer becoming severely delinquent.
What is the Equifax risk score
predicts the likelihood of a serious delinquency (90 days past due or worse) within 12 months and is scored in a range of 300-900. The lower the score, the greater the likelihood of the consumer becoming severely delinquent.
5 main factors contributing to credit score
Payment history = 35% Amounts owed = 30% Lendth of credit history = 15% New credit = 10% types of credit used = 10%
What are other factors influencing credit scores
the number of recent credit inquiries (Remember, while it is true that the number of credit inquiries can lower one’s credit score, inquiries from lenders do not typically have a major impact.) the individual’s employment situation fines from court judgments tax liens foreclosures bankruptcy
Credit rating 300-499
Very poor credit
credit rating of 500-574
poor credit
Credit rating of 575-649
Average credit
Credit rating of 650-749
Good Credit
Credit rating of 750-900
Very good credit
what are validation odds
are the statistical percentage of the general population within a particular BEACON credit score range who will likely go 90 or more days past due within the next 24 months on one or more credit card or loan accounts.
possible reason for no credit scores
no recent credit experience (such as a stay-at-home mother who has been out of the workforce for a number of years)
a young adult, with too little credit experience to score
no credit because of past credit problems that no longer show on the bureau (for example, a bankruptcy)
new to the country, with no credit history in Canada
out of the country for an extended period of time without credit cards or loans
simply never applied for any type of credit
What is generally the required down payment with no credit score
15% and must be own money, no gifts
what do you need to consider if applicant has no credit score
- why that person has no credit score
- what proof of credit history you can provide to the lender for that situation
Possible proof for new to canada
- two year employment contract and acceptable credit or bank references from country of origin
For individuals whom deal exclusively with credit unions
two year banking history from the credit union
documents require for individuals with past credit issues who has started anew
- some form of credit history from financial institutions or a creditor that does not report on bureau
- two year history from financial institution, such as bank statements or passbook pages,
- two year history of proof of repayment experiance, such as rent payments, utility bills, cell phone payments
ways to build or rebuild credit
- take out RRSP loan. most banks will give small loan without pulling a credit report becuase they own the asset while the loan is being paid
- suggest applicant secure a credit card. some credit card companies will provide a limit to whatever amount of money a client deposits with them. referred to as prepaid credit card.
Legal Identity Changes
ensure to pull credit for both names.
what does inquiries part of the credit display
The inquiries part of a credit report shows how many inquiries the credit agency has received from other institutions about the individual. Approximately 10% of a BEACON credit score is based on “new” credit and is gathered from the inquiries section of the credit report.
Therefore, the frequency with which credit grantors ask for an individual’s credit report can affect the credit score, particularly if there are many inquiries over a short period of time.
what is a hard credit check
Inquiries made with regard to loan or credit applications are calculated in credit scoring models and do affect the credit score. Inquiries that affect the credit score are known as “hard” inquiries or “hard pulls.”
what is a soft credit check
Inquiries by companies to which the individual has not applied may also appear on the credit report. These are called “soft” or “silent” inquiries, and they occur when businesses or institutions want to check someone’s credit before they offer special goods and/or services (such as a pre-approved credit card offer), or for employment purposes, or reasons other than application for credit or financing. Soft inquiries do not affect the credit score.
what is theh delay on a credit pull
30 days
why is employment history important on bureau
indicates one aspect of level of stability as well as amount and reliability of the applicants income stream
Employment codes on Credit history
ES - Employment subject (current)
EF - Employment former (former position)
E2 - Employment second former
EC - Employment co-subject (employment of co-subject like spouse) (if in quebec this would not be displayed)
what is a public record
Public records include bankruptcies, judgments, foreclosures, liens, and collections. As these are an indication of past trouble or issues fulfilling debt obligations, public records items generally reflect badly on the individual’s management of credit. If there are several public records listed in the summary, you know at a glance that this person has been, at least at one time, a poor lending risk.
what is foreign credit bureau info
This information lets you know whether the person has any recorded credit history outside of the country.
what is a trade line
These may be credit cards, loans, lines of credit, etc.
Public records negative impact on credit.
Ideally, the public records part of an individual’s credit report should be blank. Items that may appear in this section (with the exception of secured loans) are a negative reflection of past credit management and indicate that the applicant has had serious credit problems.
Public records remain on the credit report for six to 10 years, depending on the item. If there are public records listed, the more recent the item, the more negative impact it will have on the individual’s credit rating.
What docs needed for bankruptcy
- assess the reasons for the bankruptcy and ongoing effects and grab docs for that
- copy of final discharge and list of creditors as proof of discharge for the lender.
(lenders normally will not give a second chance if already bankrupt with them)
How long does it normally take to re-establish credit after bankruptcy discharge
12 to 24 months
strategies to re-establish credit after bankruptcy
Make regular deposits to a savings account over a period of time.
Establish a relationship with the bank or institution housing the savings account, and apply for a small loan or line of credit backed by the savings account. Then pay the loan back promptly.
Obtain a low-limit credit card, use it regularly for small purchases, and pay the balances off on time. (Remind the applicant that many inquiries in a short period of time will affect his or her credit score, so when seeking a low-limit credit card, do not apply for many cards at the same time.)
what is an alternative to bankruptcy
Consumer proposal arrangement
Only availble to people who are deemed insolvent. (someone who cannot pay debts as they come due or does not have sufficient assets to pay debts)
Way better than bankruptcy. Shows willingness to repay debts
what are collections
are overdue debts that have gone to a third-party collection agency. Collection records have a significantly negative impact on a lender’s impression of the borrower’s willingness to fulfill debt obligations.
Collections can be either unpaid or paid. Lenders may completely reject applications with unpaid collections showing on the credit report.
what is a secured loan
one that is backed (secured) by an individual’s personal property as collateral and which has been registered with the provincial government in accordance with the Personal Securities Act. Secured loans may be chattel mortgages, registered loans, or registered liens.
Although a secured loan is registered as a public record, is it damaging to credit?
No
Info on secured loans
If an individual took out a secured loan in Ontario (which is a province that reports secured loans), the item will appear on his or her credit report.
If an individual takes out a secured loan in Alberta, however, the item will not appear on his or her credit report because Alberta does not report secured loans to the credit reporting agencies.
If your applicant has moved from a reporting province in the past six years, any secured loan(s) will show up on his or her credit report even though the credit reporting agency shows the applicant’s current address in Alberta.
what are judgements
is a credit-related court order that instructs the credit holder to pay monies owing to a creditor.
If there is a judgment on the credit report, it means that the credit holder has been sued by the creditor, and the courts have ruled in the creditor’s favour. This means that the credit holder is ordered to pay a certain amount within a certain time frame.
Once this is done, the judgment has been “satisfied” and is no longer active. A judgment status may also be reported as “unsatisfied” or “disposition unknown” if the credit holder has not yet fulfilled the conditions of the court order.
In Alberta, judgments remain on the credit report for six years from the date the judgment was filed.
Trade Lines
Open credit accounts (such as credit cards, lines of credit, car loans, and home mortgages) are referred to as trade lines or lines of trade. Trade lines have a significant impact on credit scores and are an important indicator of risk or stability to a lender.
The trade information part of a credit report shows an applicant’s purchase and repayment behaviour with credit cards, loans, and other kinds of borrowing. Trade information is reported by credit grantors such as credit card companies, auto finance companies, and retail outlets that have their own credit cards.
what are lender priorities for trade line activity
Lenders look at the number and type of open trade lines as well as the length of time that each account has been open. Lenders also look for current activity and consistency in the payment history for each account.
In general, lenders prefer that an applicant has three to five active trade lines that have been open for at least two years. These trade lines should have credit limits of at least $1,000 to $1,500, with no exceeding the credit limits and consistent, on-time payments. This provides plenty of data by which to assess the person’s credit activity and repayment behaviour.
some trade lines lenders may be cautious about
- thin credit: only two trade lines or fewer that have been reporting for less than two years.
- trade lines for applicants that exceed credit limits
- keeping trade lines close to max
Trade line letter allocations
O - Open – those where the cardholder can draw credit as needed up to a certain limit with the total balance payable in full within a specified time frame, usually 30 days or 90 days
( American Express, furnace oil delivery accounts)
R - Revolving (open-end) – such as a typical credit card, where the cardholder can draw credit on the card up to a certain limit and then make regular payments of portions of the outstanding balance. Over time, the cardholder pays down the outstanding balance. At the same time, s/he can continue to make draws, adding to the outstanding balance. The amount owing to the credit card company is constantly in flux relative to the purchase and repayment activity of the cardholder.
(Credit cards, retail store credit cards)
I - Installment – those with a fixed number of equal payments, typical of car loans and conditional sales contracts. Borrowers make regularly scheduled payments of a fixed amount until the loan is paid off.
(Car loans, personal loans)
C - Lines of credit – similar to revolving credit accounts where the balance fluctuates as the account holder makes purchases on the line of credit and repays existing balances on the account.
(personal or HELOC, student loans)
M - Mortgage – Mortgages are also a type of credit and are structured similarly to installment accounts
Number codes for trade lines
0
EITHER too new to rate; approved but not used
OR must be paid in full in 30 days
1
Pays within 30 days, not more than one payment past due
2
Takes more than 30 days to pay but not more than 60 days
Not more than two payments past due
3
Takes more than 60 days to pay but not more than 90 days
Not more than three payments past due
4
Takes more than 90 days to pay but not more than 120 days
Not more than four payments past due
5
Takes more than 120 days to pay but not yet rated “9”
6
N/A – this rating does not exist
7
Making regular payments under a consolidation order1 or similar arrangement
8
Repossession2 (voluntary or involuntary)
9
Debt has been placed for collection or has been written off, OR
Client has moved with no forwarded address (skip), OR
Client has made consumer debt repayment proposal, OR
Client has declared bankruptcy
Other trade line symbols
1 A consolidation order is a court-ordered repayment schedule that combines the debts of an individual who is filing (or has filed) for bankruptcy.
2Repossession occurs when loan repayments have ceased or become significantly delinquent; the lender retrieves (repossesses) the item for which the loan was made.
You can add notes or statements to your credit report. have to call the credit union directly.
- can be used for such things as identity fraud or injuries that prevented work from an otherwise spotless history
if a credit holder has added a fraud alert on their credit report, lender must do the following
Contact the credit holder directly before granting credit.
Contact the credit holder using only the information provided in the consumer narrative. NOTE: This also means that the credit holder must notify the credit reporting agency if his or her contact information changes.
what are other resources to help protect against or begin recovery from identity theft
Everyone on the Filogix Expert network has access to idefence identity protection products for themselves and for applicants. Some idefence products and services are free; others are not.
Refer to the D+H website for further information.
Identity theft fact and resource sheets – Office of the Privacy Commissioner of Canada website
Consumer Measures Committee Identity Theft Resources – Government of Canada website
Royal Canadian Mounted Police Identity Theft and Identity Fraud Resources – RCMP website
Identity verification checklift credit reports
Name – Match the name on the credit report to the mortgage application and other supporting documentation. Double-check against government-issued photo ID.
Aliases – Note any listed aliases (AKAs). Ensure that nicknames or other names the applicant uses are explained and noted on the report and/or in the mortgage application. Check for credit reports under the alias names.
Address – Verify current address and length of time at current address. If the applicant has moved in the last few years, pull the credit report using the previous address as well.
Birth date – Compare the birth date to other supporting documentation. This will help to confirm that you have the credit report for the correct person, especially if s/he has a common name.
Marital status – If the applicant claims to be single but the bureau shows a spouse, are alimony or child support payments being made?
SIN – (If applicable.) If the SIN has been recently issued or there is an additional user of a SIN, investigate further. Remember: Applicants are not required to provide their SINs.
Inquiry verification checklift credit report
Review the current inquiries. Be wary if there are many new inquiries. Request an explanation from the applicant and document the explanation in the mortgage loan application file or on the credit report.
Employment info verification credit report
Ensure that the information in the credit report is consistent with the applicant’s stated employment.
Public records verification checklist
Review thoroughly because items in this section are a negative reflection of past credit usage.
Trade info verification
Review the status of existing trade lines and the length of time reporting.
Ensure credit limits are shown for each.
Review new trade lines. Be wary of too large a number of new trade lines.
Credit, debt, and liabilities checklist
Ensure that credit cards, loans, and assets in the credit report are consistent with what is stated in the mortgage application.
Assess whether the credit report is reasonable for the age and occupation of the applicant.
Is the length of time the report has been established reasonable for the age of the applicant?
Does the amount of credit established make sense? Be wary of low “high credit” data and small loan payments when the declared income is high.
Does the credit history feasibly reflect income, employment, and/or lifestyle?
Debts and liabilities – Ensure that all applicable debts (credit cards, loans, etc.) are included in your mathematical calculations, such as debt service ratios. Ask questions about liabilities that appear on the credit report that are not declared in the loan application.
Inconsistencies verification
Request explanation(s) from the applicant and document the explanation(s) in the mortgage loan application file or on the credit report. If you have concerns about the applicant’s credit report, you may want to refer the file to your broker before proceeding.
Questions to help analyze credit history
Does the credit report information match the information provided in the application?
What is the credit score and why is the score what it is?
How much credit history data is provided on the report?
Where does the applicant obtain his or her credit?
If the applicant has dealings with finance companies or other non-mainstream lenders that typically charge higher rates of interest, why are these types of lenders being used? Is s/he having trouble qualifying elsewhere?
Does the applicant have outstanding credit and/or credit history at numerous institutions?
Are credit card balances paid off, maintained, or increasing? If balances are increasing, why? Is the person purchasing more or repaying less?
Are balances near or over the credit limits?
Are accounts paid on time or frequently late? If late, how late?
If there have been delinquencies, why have they occurred? When did they occur? Does the timeline match with periods of unemployment or other periods of difficulty?
How was credit handled before and after a problem such as unemployment, unexpected expenses, and so on?
How many credit facilities does the person have and how many are in use? The more credit an applicant has available, the higher the potential for problems.
what are the 5 Cs of credit
Character Credit Capacity Capital Collateral
Character
Among the five components of credit analysis, character and credit are related. An evaluation of character considers the question of whether or not the applicant has a willingness to repay debts and looks at his or her attitudes towards money and credit (for example, credit seeker, saver, spender, investor, etc.). Some indicators that might be evaluated in looking at aspects of character include age, education, occupation, work experience, and current residence. People who demonstrate a high degree of stability tend to be “good payers.”
Credit
Looking at the applicant’s credit status (that is, credit report and credit score) shows how s/he has managed money and credit in the past. What appears in the credit report (that is, past repayment behaviour) is evidence of the applicant’s character and attitude towards money and credit. People who have been good payers in the past tend to be good payers in general. Therefore, looking at credit history helps you to make judgments about character.
Capacity
Another component of credit analysis is capacity, which refers to an applicant’s ability to repay his or her debts. An evaluation of capacity considers age, employment status, income level, job stability and prospects, debt load, assets versus liabilities, etc. Capacity looks at what money comes “in” and what money goes “out,” and the relationship between the two.
Capital
Among the five components of credit analysis, capital and collateral are also related. Both look at the question of what happens if the applicant can’t (or won’t) pay, which is of great concern to lenders. Capital is the amount of money (cash or invested) that an applicant possesses.
Collateral
Collateral is property or assets that could be sold for cash. Obviously, there is overlap between the two. To a lender, capital and collateral represent forms of security against a loan or a degree of assurance that there is a possibility to recoup losses in the case of borrower default. The main form of collateral for a lender is the property for which the applicant is seeking a mortgage.
Lenders 3 priorities and the 5 Cs
Lenders care first and foremost about an applicant’s stability and reliability because a person possessing these traits will likely be inclined to make regular debt payments. In terms of the five “Cs,” this relates to character and credit.
Secondly, lenders care about the actual ability of an applicant to make payments or the ratio between his or her income and debt obligations. In terms of the five “Cs,” this relates to capacity.
Lastly, lenders care about how they might be able to recover their money in the event that the borrower defaults. In terms of the five “Cs,” this relates to capital and collateral.
Other questions to answer with the 5 Cs
nature of referral source – How did the applicant find his or her way to you? Was it by referral? If yes, was the referral source someone you know and trust? If not, does it affect your opinion of the applicant?
for purchase transactions, the emotional cause for the purchase – Why does the applicant want to purchase a property? Is it because of a divorce or separation? Is it part of a plan to earn rental or investment income? Is it because the person needs to downsize? If yes, is it for financial reasons or advancing age? Does the emotional reason for purchase affect your opinion of the applicant?
