Do you know the difference between credit rescoring and credit repair?
Apparently, some lenders don't. As a result, they are refusing to fund mortgages they otherwise would approve.
At the same time, some title companies are starting to play hardball with borrowers who have recently undertaken home improvement projects. Even if the work is relatively minor, and even if it has been completed, the companies are refusing to issue title insurance policies, effectively stopping refinancings in their tracks.
For as long as Richard Temme of Woodland Hills Mortgage in Woodland Hills, Calif., can remember, title companies would write policies on properties with recent or ongoing construction as long as the borrower agreed to indemnify the company against mechanic's liens. But lately, the Southern California mortgage broker reports, title firms have become much more cautious.
The typical indemnification holds the title company harmless from any liabilities, losses, damages, expenses or charges the company may incur because of mechanic's lien disputes between the borrower and the contractor. Borrowers also usually agree to defend any action based on a lien and do all the things necessary or appropriate to clear the lien from the title.
But in an increasing number of cases, that is not enough, says Temme. "We've seen title companies declining to issue on many more loans" than in the past, he says. As a result, "even minor home improvement projects, recent or unfinished, can hold up or kill a loan."
This may be a California phenomenon, for the laws are different in different states. But in the Golden State, contractors, subcontractors and suppliers can file liens retroactively to the day they started their work or furnished materials.
If that date of the lien is prior to the day the mortgage is closed, the lien, not the mortgage, is in the first position. As a result, some title agencies are not writing policies unless the borrower can put a much higher level of net worth behind the indemnification, says Temme. And some are not accepting any indemnification at all.
Meanwhile, otherwise good loans are being rejected by lenders that confuse rescoring with credit repair. They are not the same.
Credit repair is often a scam. In fact, attorneys at the Federal Trade Commission say they've never seen a legitimate operation that offers to erase bad credit; create a new credit identity on your behalf; or remove bankruptcies, judgments, liens or bad loans from your record. If the bad information in your file is correct, there is nothing that can be done to remove it, at least not legally.
No wonder lenders want nothing to do with applicants who have paid someone to clear accurate data from their records. If you have bad credit, after all, you are probably a bad risk.
Rescoring, on the other hand, corrects errors in your file, which may result in an increase to your all-important credit score.
Whereas credit repair firms are not legitimate, the 70-odd companies that provide rescoring are credit reporting agencies that work with the national credit repositories -- Equifax, TransUnion and Experian. As resellers of credit information contained within the three repositories, they not only provide the majority of all credit reports but also have a legal obligation to you and your creditors.
Moreover, according to Terry Clemans of the National Credit Reporting Association, rescoring is a program developed in conjunction with and processed through the big three. Indeed, each repository maintains a special rescoring department that deals directly with resellers.
When a credit file is rescored, it is checked twice for accuracy, first by the reseller and again by the national repository. It is, says Clemans, "one of the safest transactions for any creditor because everything is double-verified."
If a change is warranted -- say, a trade line was reported incorrectly, or the damaging information is not yours at all but someone's with a similar name -- the miscue is corrected at the repository level and a new credit report and credit score are issued.
If you believe data in your credit file is incorrect, you can have it removed on your own if you have the time and patience. It can take anywhere from 30 to 45 days. But if you are in a hurry, you can pay a reseller to do it for you, usually within 24 to 72 hours, says Clemans. The cost ranges from $50 to a few hundred bucks, depending on how complex the problem or problems.
Rescoring has been a popular service for seven or eight years, according to Clemans, and he thinks some lenders are so worried about bad risks that they are "confusing" credit rescoring with credit repair. He calls it a "knee-jerk reaction after all the pain" resulting from the mortgage meltdown.
"I have heard from lenders that ... are claiming they are trying to protect themselves from consumers 'gaming' the system for better rates," he says.
But as the NCRA executive sees it, lenders that object to rescoring are basically telling a consumer seeking a quick resolution of incorrect data that they can't have it corrected for that particular loan application. As a result, he wonders whether it is lenders who are gaming the system in an effort to force borrowers into higher interest rates.
Whether or not that's true, there's little would-be borrowers can do besides take their business elsewhere -- or sue the lender under the Fair Credit Reporting Act.
As far as mechanic's liens are concerned, Temme, the California mortgage broker, is telling his refinancing customers to advise the title company in writing of any construction or rehab projects on the property. Otherwise, he says, if a lien is filed, the title company may sue for the amount it has to pay the lender to pay off the lien.
And tell the title firm early. Even if the company will accept an indemnification, the process can take weeks, he says, noting that loans can be lost during that period.