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What to Do When the Credit Score Sends a Mixed Message

BY BILL HULTSTRAND

Some loan decisions are crystal clear and others are a bit fuzzy. How do you and your staff decide when to turn down  a questionable loan request versus when to say yes? This real world scenario sets the record straight on how to  proceed through the haze.

Anyone can make the decision to approve an A + member with great income and low debt. But what about those applications that come in with mixed messages (i.e., decent credit score but some troubling factors)? That’s what  separates the great from the merely average decision makers. Let’s look at the following credit report to see a classic  example of the “mixed message” loan. But first, here are the basics of the application:
• Loan amount requested: $35,493 for an RV
• Income: $125,000/year
• Debt-to-income: $39.19 percent
• Loan-to-value: 75.83 percent
• Credit score: 692

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What are some things that we notice here?

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• FICO 692 with the following codes:
o Top two reasons are code 38 (serious delinquency) and code 18 (number of accounts with delinquency)
o Next two reasons are code 10 (capacity) and code 8 (too many inquiries)
• By now, your staff should have become familiar with the following guidelines:
o The fi rst two codes carry the most weight.
o The second two codes carry far less weight.
• Any codes relating to delinquency with a 692 score are great news! Why? The delinquency is becoming old, old news! Payment patterns equal 35 percent of a score’s make-up. There is no way a consumer could score this high with any delinquency that is recent.
• Code 10 can be a dangerous sign or it can simply mean the consumer has limited available revolving credit.
The credit report would penalize both these situations in essentially the same manner:
o Consumer “A” has $40,000 in limits and owes $36,000. His capacity is only 10 percent.
o Consumer “B” has $2,500 in credit limits and owes $2,250. His capacity is also only 10 percent.
o Consumer “A” most likely has a bankruptcy benefit indicator (BBI) that is much higher. Consumer “A” will absolve far more debts and strain on his budget regardless of income.

Let’s look further on in the credit report and see what we find:

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• Delinquency is from a mortgage 14 months ago.
• When was the last “hiccup” with this consumer’s credit report? The consumer has large liens from approximately 18 months ago. These liens are driving the score down.
So what would we do? We don’t ever want to immediately turn down a loan. This credit report has so many questions and holes. It needs a strong interview to proceed. The mixed message indicates we must do our due diligence. Here  are some additional thoughts for the loan interview:
• When you see a code 10, you must immediately look at the credit summary to assess how much revolving debt is  outstanding. For this consumer, his revolving debt is $2,500. His capacity is 50 percent. Are we concerned? What is  his BBI? It’s low based on just the revolving debt. The liens need exploring because they could change the landscape  tremendously. Once a code 10 is present, you need to immediately check the unsecured debt ratio to see whether the  code 10 is a real problem.
• Inquiries in the past two years are 19. This is far too high. We recommend two to three per year. Always train staff to look at whether the inquiries are “like” as well as to see how much of a problem they are.

We recommend testing your employees with this loan example (or with other “mixed message” applications you have  in your portfolio). Using the score codes to determine the direction the score is heading is vital.  The biggest  key is getting your staff to ask the right questions while conducting a thorough interview. As the late, great Paul  Harvey would say, always get “the rest of the story.”

Bill HultstrandBill Hultstrand is Director
of Business Development
for Lending Solutions
Consultants.

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