Confessions of a Subprime Lender

Author:Richard Bitner
Language: eng
Format: epub
Publisher: Wiley
Published: 2010-05-10T16:00:00+00:00

Why Is This an Issue?

When a credit score drops, it means one of three things:

1. The borrower was recently late on a payment.

2. He has used more of his total available credit by running up his credit cards.

3. He has applied for new credit.

When any or all of these happen, the borrower becomes a greater credit risk, which causes his score to deteriorate.

Most investors considered credit reports to be valid for 60 days. This meant a loan had two months to close from the date the credit report was issued, otherwise a new report had to be ordered. Some investors were more aggressive. Credit reports issued through Assetwise, RFC’s AU system, were valid for 120 days. Although it provided lenders with a great selling tool, this may have been the single worst risk policy implemented in the history of RFC. The 60-day time limit has a purpose. High-risk borrowers are less responsible than prime borrowers when it comes to managing their credit. Allowing them 120 days between the time credit is ordered and a loan is closed is long enough to have every account go to collection, file for bankruptcy, get divorced, and have time to spare.

This credit policy created a Catch-22. With RFC, when a broker’s credit report being used through Assetwise was more than 60 days old, we usually pulled credit again to be certain nothing drastic had happened to the borrower. When the credit score dropped significantly, it left us with two choices: decline the loan and upset the broker by not standing behind the AU system, or close a mortgage for a borrower who no longer qualified. To save face with our customer and remain competitive, we usually chose the latter.

For all the benefits AU technology brought to subprime lending, one thing is clear—automation helped lenders close loans that should have been declined. Eight years ago the issue of falling credit scores was a common occurrence in subprime lending. Until automation became a standard part of the business, 10 to 15 percent of loans that brokers submitted to underwriting were turned down for this reason. Getting an AU approval for loans that should have been denied didn’t make the borrowers creditworthy—it meant technology had found a way to circumvent the issue.

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