Credit bureaus
Credit bureaus are responsible for issuing the credit bureau reports of individual borrowers in order to help lenders make important lending decisions based on the credit performance of the borrower.
Credit bureaus:
Credit bureau (as it is widely called in United States) is also known as the credit reference agency in countries like United Kingdom and this bureau is responsible for providing lenders the credit information regarding the individual borrowers. This information is used by the lenders in evaluating the credit worthiness of the prospective borrowers that represents their ability in paying back the loan ad making the periodic payments and thus make decision regarding the acceptance or rejection of loan application and the interest rates to be charged if the loan application is approved. The risk associated with lending to different borrowers varies and thus the price charged by the lender to each borrower is also discriminated with respect to her credit standing or the credit rating provided by one or all of the three credit bureaus.
Need for credit bureaus:
The mortgage lending entities have developed detailed guidelines and procedures to facilitate the underwriters issue mortgages after evaluation on those guidelines, but the experience and judgment of the underwriters remain paramount in the decisions they make. Thus, the mortgage lending institution may have to face the negative side of the subjective assessment done by the underwriters and loan officers, who have a very different perspective of credit risk. Thus, the loan and mortgage lending institutions cannot be sure about the fact that the underwriters and loan officers are complying with the requirements of the institutions. So, in order to help the lending institutions mitigate this risk and the associated uncertainty, credit scoring models are developed by the credit bureaus and the credit bureau report is prepared in accordance with those models. The benefits of having these credit scoring models include increased speed of processing loan applications, accuracy in the processed data and consistent mortgage evaluation process that helps in cost reduction at all levels.
When it comes to explaining the credit scoring, it appears to be a process that utilizes the available information and particulars of loan performance of the individuals in order to generate a number that will represent the future performance of new loans and mortgages.
How credit bureaus prepare credit reports:
Credit bureau reporting is a process whereby the credit bureaus collect information about various borrowers from all the financial institutions with which the borrower has business relationships. The data is compiled into a report and is made available on request for the purpose of evaluating loan application and assigning the quantitative value known as credit score. Since the consumer borrowing is on the rise and more and more people are getting loans, this process of generating credit reports is becoming mechanistic whereby the 3 bureau credit score is obtained through mathematical algorithms so as to generate the possible credit relationship of every borrower. These score help explain the possibility of borrower returning the loan in the similar situations when the other borrowers defaulted and thus help the lenders make very important lending decisions. Since credit scores are calculated through a highly mechanistic process, thus a single mistake on the behalf of borrower can significantly influence the credit history and her ability to get more loans in future with an ease. Also, there has been an observation that the reports issued by the any of the credit bureau at national level or even by credit bureau Canada contains errors and omissions, thus it is highly recommended by the consumer welfare advocates to keep on reviewing your credit reports from time to time so as to keep them updated with high level of accuracy and thus avoiding the credit bureau dispute.
Credit scores required by mortgage lenders:
Mortgage lenders generally do not rely on the single credit score provided by the credit bureau reports, rather they are interested in two types of credits scores; one that is derived from the credit histories maintained by the bureau of credit and is known as the credit history score and the second is the score that considers credit history together with other factors involved in the underwriting process and thus known as the application score. The brief discussion on each of these is given as follows:
- Credit history scores represent the possible relationship between the past credit performance contained in the credit report with credit bureaus and the likelihood of poor performance on the newly issued mortgage loan. The numerical value issued by the credit bureau is representative of historic performance of the loan that can either be good or bad, and has replaced to the great extent the subjective evaluation of the credit performance. There exist 3 credit bureau at the national level which are responsible for assigning these credit history scores. The names of these credit bureaus are Equifax, TRW and Trans union and the three bureau credit report of borrowers are easily available.
- Application scores are relevant in the context of every loan application in order to determine which mortgage loan applications can be accepted without any ambiguity under the guidelines established for underwriting. The way the application score is used in credit assessment differs from lender to lender, for example, loan lenders use these scores to select applications for underwriting, insurance companies use these scores for selecting applications for insurance, institutions operating in secondary market use them to make decisions regarding loan purchase etc.
There also exists the Experian credit bureau and free credit bureau that issue free credit bureau report. Also, the credit bureau dispute is a very interesting and current topic that needs to be studied in detail. There is a lot of information available on the internet that talk about the models and procedures used by the credit bureaus to generate credit report. Those who are interested can access the information to get to know about interesting facts.