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YOUR MORTGAGE : Service Keeps Eye on Borrower Credit Health

March 20, 1994|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON — You can call it Guardian Angel. Or see it as Big Brother. Either way, it will allow your home mortgage lender to do something it's never done before: To monitor your ongoing personal financial status during the course of your mortgage, scanning for early warning signs in your credit performance that could help avoid late mortgage payments--or a costly foreclosure--down the road.

What's going on here? It's called "credi-track," and it's a sophisticated new electronic service being offered to major lenders nationwide. It enables mortgage firms to tap into existing borrowers' credit files at periodic intervals to make sure that nothing has changed dramatically for the worse since the loan was first approved.

Under the traditional lender-borrower relationship, by contrast, the lender checks credit, income and debt-ratio levels just once--at the loan application stage. After that, you're off the screen. That is, unless you miss monthly payments--at which point you may be up to your neck in financial hot water.

To illustrate, say you're a first-time home buyer. A year after you got your mortgage, your financial world starts slowly unraveling. Your spouse is laid off by his or her employer, cutting family income by 40%. Your child racks up monstrous--and uninsured--dental bills. Your monthly outstanding charge-account balances mushroom, and you eventually begin to miss mandatory monthly payments. You keep mailing in your largest and most important bill--the mortgage on your home--but your financial squeeze is making even that nearly impossible.

If you're like most borrowers, you never contact your mortgage lender about your personal financial problems. You don't want to let on that you're no longer the sterling credit risk that you were back at the application stage. Instead, you slide toward the edge, miss a couple of mortgage payments, and you're suddenly on the icy downhill slope to foreclosure proceedings.

That wouldn't necessarily happen to you if you were on the new tracking system, say its promoters. Your lender probably would have been in touch with you long before you stopped paying the mortgage. The credit-monitoring system could have spotted the sudden surges in credit card and installment account balances. It might have picked up your spouse's employment change.

With those facts in hand, the lender could then have contacted you to discuss possible remedies. Among the options: temporary or permanent recasting of your mortgage terms to reduce your monthly payment; stretching out the length of the loan; professional credit counseling sessions to help you work through your entire financial situation.

Sound attractive? Or a little scary? Or perhaps both? The system's developer, Bill Effinger of La Jolla-based Credit Technologies Inc., concedes that "to some people it might seem a little Big Brotherish at first." But the reality is that under the federal Fair Credit Reporting Act mortgage lenders already have access to existing borrowers' commercially maintained credit bureau files.

But checking up on borrowers on a regular basis is impractical, given the vast numbers of loan accounts in a typical lender's portfolio. Nor has there been a commercially available system that hones in on periodic changes in individual borrowers' "credit scores"--indexes of credit-worthiness that rise and fall over time.

The new credit-tracking system is directly on-line with the three major credit repositories--TRW, Equifax and TransUnion, according to Effinger. It uses sets of "alert triggers" during portfolio "scans" to identify possible problems with borrowers. Among the triggers that prompt what he calls a "closer look":

--Four or more recent credit bureau inquiries--a sign that the borrower is actively and abruptly in the market for additional credit or a major purchase.

--A 25% or higher increase in total household debt from the last scan, or from the date the loan went on the lender's books.

--Two or more late payments on non-mortgage installment debts.

--Changes in employment status that could have a negative effect on credit-worthiness.

The system scans samples of a loan portfolio using criteria set by the lender. For example, it might credit-check 50% of all borrowers classified as C's--borderline acceptable risks at the application stage. Just 10% of top-quality A borrowers and 20% of B borrowers might be selected for scans.

By simply spotting one or more foreclosure-prone borrowers a month, says Effinger, participating lenders can more than pay for the costs of the credit-monitoring system--roughly $69 per loan for three scans over an 18-month period.

But are electronic credit barometers as good for consumers as Effinger claims they are for lenders? Stephen Brobeck, executive director of the Washington-based Consumer Federation of America, calls the program "possibly very helpful" for home buyers who run into financial trouble. But he says he's "worried about the gray area this gets into as far as privacy." Brobeck would like lenders to survey their customers' attitudes about financial data privacy before signing up for the program, and would prefer it be "offered as an option" to borrowers who expressly agree to it.

But an expert in central city, lower-income mortgage lending, consultant Bernice Sanders Smoot of Washington, has no reservations about credit-tracking. She calls it "just what we've needed" to persuade reluctant bankers that they can minimize risks--and help their customers--by monitoring home buyers' finances.

Distributed by the Washington Post Writers Group.

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