First of two parts
Credit reporting agencies say automated underwriting is gradually driving them out of business.
These largely mom-and-pop operations, which mortgage lenders and brokers hire in dwindling numbers to check the accuracy of the big three credit bureaus credit reports, say it is bad enough that Desktop Underwriter, from Fannie Mae, and Loan Prospector, from Freddie Mac, sidestep manual credit checks during the loan approval process.
On top of that, they complain, Fannie is charging high fees for the right to be a credit vendor in its systems, while Freddie will do business with only five agencies across the country. (Fannie Mae spokesman Raschelle Burton said her company maintains an open forum for any credit agency that wishes to connect to Desktop Underwriter, which currently is used by 13 agencies.)
Moreover, the reports the automated systems generate are much cheaper than those of the small agencies.
Terry Clemans, executive director of the National Credit Reporting Association in Indianapolis, says hundreds of credit reporting agencies have gone out of business due to reduced competition and price-squeezing, which has been enabled by the widely used Desktop Underwriter and Loan Prospector.
Before there were automated underwriting systems, the credit reporting agencies did brisk business producing the residential mortgage credit reports (RMCRs) that lenders and brokers were required to get to qualify for a Fannie or Freddie loan. To produce these reports, the agencies verify a loan applicants employment, run a check with collection agencies, and research other public information to develop a profile of his or her finances.
When Loan Prospector and Desktop Underwriter came out about five years ago, Fannie and Freddie said they would be satisfied with what has come to be known as a three-bureau merge a credit profile prepared through an automated compilation of records pulled from Equifax Inc., Experian Inc., and Trans Union LLC. This cut into demand for RMCRs, though most lenders, instead of immediately withdrawing their business from the small agencies, used a blend of automated and manual reports.
Brad Brooks, who ran Liberty Credit Corp. of Santa Ana, Calif., with his wife for nearly 15 years, said lenders paid $60 a pop for a Residential Mortgage Credit Report when Fannie and Freddie required them.
With the advent of automated underwriting, Fannie and Freddie changed the requirements to lenders getting only a tri-merge report, which goes for roughly $16, Mr. Brooks said.
Liberty Credit went out of business this year. You cant compete price-wise with the bigger firms, Mr. Brooks said. You can only compete with service.
Said Catherine Brooks: By requiring lenders to have only a three-bureau merge, that dropped our profits down to nothing. We originally had 24 employees, and then over three years it dropped down to four, and then just me and my husband. I had to close.
When lenders do need customer service, they are not going to have as many credit reporting companies to choose from. They are going to have to deal with a few huge major conglomerates.
This year Fannie Mae was slated to pilot-test what it called a single file pull strategy, in which a lender would only need to check with one credit bureau, not all three. To the relief of the National Credit Reporting Association and the smaller agencies, Fannie announced in June that it was postponing the test until next year. Denise Rivoal, Fannie Maes senior business manager for electronic commerce, told the association that the company had not changed its position on the single-file strategy but had shifted its workload and priorities until next year.
Fannie and Freddie say there is enough room not only for RMCRs and the type of personalized work they provide, but also for the software programs that do some of this work faster and cheaper.
Credit reporting agencies are the only ones who can do service on borrowers files to investigate disparities and disputes, Freddie Mac spokeswoman Patti Boerger said. She also said many lenders prefer reports that combine the RMCRs with the small agencies credit reports.
But as they watch their industry dry up, owners of credit reporting agencies say this nod to their work is no consolation.
I have been in the business for 14 years. Ive never seen it so tough, said Don Miller, president and owner of Mortgage Credit Services Inc., Indianapolis. I dont think any sane man would get into this business anymore.
Five years ago there were 600 to 700 independent credit reporting agencies around the country and today perhaps half or a third are left, Mr. Miller said. Speed of the process is just the buzzword in the industry. Thats great for people with perfect credit they go through the automated underwriting systems with speed but half the people out there have blemishes on their credit report.
Mr. Miller says he considers himself lucky. Though Mortgage Credit Services was forced this month to close its office in Columbus, Ohio, and lay off the 15 workers there, he has been able to keep his main office open, largely because his company had what it took in money and on the nuts-and-bolts side to gain access to Desktop Underwriter and Loan Prospector.
Fannie and Freddie have very high technical requirements and restrict the number of partners to their system, Mr. Miller said. It costs a great deal for an independent CRA to muster the technological resources to deliver to Desktop Underwriter and Loan Prospector.
But now that we have made that investment and have met their requirements, Mr. Miller continued, other factors have added to the small margin that we need to remain profitable.
Even brokers have taken note of the smaller agencies troubles.
Desktop Underwriter and Loan Prospector are making it harder for the CRAs to survive, said Jim Hartgraves, a broker for Morgan Financial in Phoenix.
Next: The science of lending vs. the art of underwriting
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