You’ll also be able to see at the bottom of the report credit inquiries. Who else requested this person’s credit, when did they request it and how many other organizations have requested credit. If it comes up and you’ve got 20 inquiries, meaning everybody’s checking credit, then you might want to understand why this person is going everywhere.
Are they getting denied for this loan from everyone and so each time they change their application a little until they find a lender that can lend to them? Or why are they, you know, applying at so many places.
You’ll also see that sometimes there are errors in credit reports. We’ve had borrowers who’ve come in and there were things on their credit reports that weren’t theirs at all. If a borrower says, you know, this isn’t my mortgage or I didn’t borrower on this or collection the borrower can dispute that.
And we help borrowers write those letters to the credit bureau to dispute items on their credit report. Or if they maybe have a collection and they’ve paid it off and they have proof of that we help them write to the credit bureaus to get those items marked as paid.
But have the borrowers document. If they say there’s an error or even if they just have lates in their credit history. It’s important, I think, to have them document for you what happened so that you can use that to help you make decision as to whether you want to lend to this borrower or not.
Any questions about credit reports? We’re going to go on to the red flags on them but...
(Leslie): This is (Leslie) in South Carolina. I had a question on the credit report. I know that the letter like R1 is, you know, a revolving account and the I1s are installment loans and all. How do you know when you’re looking at the credit report if they’re a signer, cosigner or guarantor? Does it say that?
Cheryl Fatnassi: There should be -- I’m not looking at the credit report right now -- there’s three different bureaus. But there should be a little code over there and it should have probably a C or a G and some of them do a 1 and a 2. And if you contact your credit bureau, local credit bureau, they can actually give you a book that will give you all the codes so that you can decipher the credit report.
But each one of them are a little different but just the report we look at usually right under the borrower’s name ours has C or an S or a G. I know one of the other reports has a 1 and a 2 and a 3. And so it will have one of those little codes.
(Leslie): Oh okay. I don’t know, our bank just pulls the Equifax.
Cheryl Fatnassi: Okay.
(Leslie): I’ll just have to ask them, they’re pretty good about questions. And I never thought about looking to see if they were a signer, cosigner or guarantor.
Cheryl Fatnassi: And have them give you that because it’ll actually...
Cheryl Fatnassi: Tell you how to read the whole credit report and it’s a wealth of information.
(Leslie): Yeah, maybe it’s the IJA codes, individual joint...
Cheryl Fatnassi: Yeah.
(Leslie): The IJA.
Cheryl Fatnassi: Yeah, that’s probably on that report.
(Leslie): Okay, good. That’s what I need, thanks.
Cheryl Fatnassi: The next one is credit report red flags. And I’ve kind of touched on a few of these but these are areas where you want to question and clarify things that come up in their credit report. So the address that they gave you on the application or the addresses don’t match the addresses in the credit report.
That you definitely need to sort out what happened because you have either a borrower who is misleading you about where they live or that’s not who they are. The amount of new debt that they have. If you see a person who just took out a whole bunch of credit cards and they’re all at their limits and it’s only been 90 days then you want to understand what’s happening that they’re borrowing all this money in such a short period of time.
If all of their credit cards are at the limit then that tells you that this is a borrower who is tapped out on their credit and you want to understand what does that mean in terms of their ability to pay you back.
Late payments, late payments are something that, you know, in today’s economy you’re going to see many people will have lates. But what you really want to try to understand is why were they late and is this something that has been solved to the problem or is it something that has continued as a problem.
And if it’s a particular event that happened like I mentioned earlier it may be that you had a serious medical event and the person was out of work for 90 days. Well listen to when they said that happened and if I tell you that I was out of work for 90 days in January, February, March of this year but my delinquency was all in 2008 then that really doesn’t match up to that event.
And so you really want to make sure that the story matches and you want to make sure that you understand who you’re dealing with. If you have no credit history and this is a borrower who is older it would be unusual. Now if for some reason there’s 70s and 80s they may have come from generation that didn’t borrow and that might not be unusual.
But I’m saying somebody who’s not a teenager. If you got somebody at 40, 50, 60 years old and they have no credit history that would be very unusual. And you’d want to try to understand why this person had never borrowed. And you would use alternate credit references for them to verify their information.
If you have a lot of debt for a very young borrower, somebody who just turned 18 and they have three credit cards and a car loan and four other things, that should be a concern to you. That such a young person has such a large amount of debt in a very short period of time.
A person who has charge-offs and other unpaid debt, again you want them to give you explanations of why they didn’t pay those bills. Sometimes it’s, you know, they had a dispute with a family member and they’re not going to pay it because of that. They wanted the other person to pay it and in the divorce it was - you know, that’s a choice they make but at least you have an understanding why they didn’t pay that particular item.
But always refer them to one of the HUD counseling sites or if you have other counseling agencies to try to resolve and clean up their credit. It never hurts them to do that. Generally the counseling is free.
Woman: (Unintelligible) decipher the report, can we?
Cheryl Fatnassi: I’m sorry, I’m not sure if somebody’s asking a question or...
(Leslie): Oh, can you hear me? This is (Leslie) in South Carolina. I’m sorry, I thought I was on mute.
Cheryl Fatnassi: That’s okay. Okay, but you didn’t have a question so we’ll go on.
(Leslie): I do have a question.
Cheryl Fatnassi: Okay, go ahead.
(Leslie): Okay, our credit union pulls the report for us so legally what can we ask the application about the report and how much information can we actually give them?
Do we - you know, because I’ve had people say well what are my scores and I say well, we didn’t pull the report if you want to call the bank they can give those to you because I don’t know if I can tell them what their score is because we don’t pull them. And as far as, you know, asking them all of these in-depth questions can we do that?
I mean, I usually do but I’ve always wondered if it’s right.
Cheryl Fatnassi: It depends on what your agreement is with the borrower and the lender. So if you have the borrower when they apply for a loan sign a discloser that authorizes the bank to share information with you on this for - in order to help them get this loan through your independent fund or through whatever the name of your program is then you can certainly talk with the borrower about the credit history.
You can’t disclose to borrowers information about their scores and all of that because you did not pull that credit report but they can do that. But if there are things in the credit report and the bank has authorized you to release that and the borrower has authorized to help you with their transaction it would be a form very similar and we can send you out a sample of the disclosure would look like.
We use it with our counseling staff. And it authorizes them to look at the credit and to help the borrower with things relating to getting a particular loan. And so under that situation you could ask them - you can always ask them questions about their late payment history and things like that.
You know, have you had lates and what’s the explanation of those. But it’s much better if you get a disclosure from them so that you have - the bank can share the information with you. In theory the bank is not really supposed to share the information with you at all unless they’ve been given a release by the borrower.
(Leslie): We do have the authorization. It’s attached to every - it’s part of every loan application so we do have the borrower’s signature that the bank can share the credit report. I’ve just never given out scores because at some point in time in my life I was told that if you don’t pull it you can’t give the score. So I’ve never done that but I just wanted to make sure that we can ask about any question.
Cheryl Fatnassi: You can ask - if you’re giving out information on the credit report you become a credit reporting agency. And you’re not that - and so that’s why you can’t give out the scores or say well I saw this and this because then you’re reporting third-hand what that credit was.
Man: Ask if the question is unrelated to the credit report.
(Leslie): We can ask the question but ask it unrelated to the credit report?
Cheryl Fatnassi: Okay, let’s say that you have - the bank says to you this borrower had lates and we’re not going to be able to make a loan to them because of information in their credit report. You could say to the borrower my understanding is you’re not eligible for this loan because your credit report shows lates.
And, you know, we can - they can get a copy of their credit report because they’ve been denied for the loan. If, and what you can do is say what would be helpful is, you know, depends on your bank and what they’re willing to do. But we would ask to get a letter of explanation for those lates to try to determine if it’s something that was incorrect, if it’s a situation that’s gone by that’s been addressed or if it’s something that is a logical explanation and would make the loan to the borrower anyways.
So if your institution is strictly going by credit scores and saying well it’s below a 680, they don’t get the loan then you probably aren’t going to be asking a lot of information because if they’re not interested in the borrower’s credit history on a score-base they’re not going to make the loan anyways. But if you’re working with a lender who is willing to make exceptions when you have borrowers that have unique situations, that’s where you want to get those explanations. And you certainly want to clean up (unintelligible) credit reports.
Cheryl Fatnassi: And because we’re the lender and we run the program it’s a little bit different for us.
On affordability on the next slide up this is where you’re going to determine whether this borrower can afford to buy this particular item and make the monthly payments. So one of the most important ratios you’re going to hear is the debt to income ratio.
And what this ratio is is the calculation that says how much do they have for their monthly payment on either their rent or their mortgage, plus how much do they have for monthly payments on loans and credit cards. And typically it doesn’t include utility payments, food, taxes, gifts, clothing, medical, all the things you see listed there. It’s usually just those payments essentially on loans.
So a typical lender will usually make loans where the borrower’s debt to income ratio, meaning the total amount of debt divided into monthly income, is less than 40%. Some are more conservative and will only use 30% - 38% of their income.
So as an example if I made $1000 a month, 38% would be $380 a month, 40% would be $400 a month. Some lenders will use higher ratios, meaning allowing a borrower to borrower more if they have a higher income or if they have money set aside in savings, which we talked about earlier as reserved. They might say well this particular borrower, you know, they make $10,000 a month and so therefore, you know, 38% of their income still leaves them quite a bit of income to be able to pay other kinds of expenses.
And so they may say well they have a lot in savings, they have a fairly high income, so we’re willing to stretch to 42% and some may even go a little higher than that. So you want to know what the lender you work with, what their maximum amount is that they will lend to and are there situations where they’d be willing to lend a little bit more.
The next part is valuating the collateral. And this is where you’re really going to come up with, you know, how much is this car or wheel chair or whatever the item is worth. Typically use the purchase and sales agreement. If it’s a used car or a used vehicle you would use the blue book value or the NADA book value. And you can look these up on the Internet. Your lender is looking them up on the Internet to see the value of those.
And it will be impacted by the condition of the car or the condition of the item that’s being financed. And also it will be based on how easy it is for this lender to access it and sell it if your borrower doesn’t pay. So when they’re looking at the collateral, many of the programs you have today they’re going to probably price your loans differently if it’s a car than if it’s a wheel chair or dentures or something that’s a little bit less easy to access themselves.
They’re also going to look at the down payment from the borrower and how much has the borrower put down on this particular item. Are they financing 100% of the cost of the car? Are they financing 100% of the cost of the hearing aide or is the borrower making some sort of down payment as part of that, which basically guarantees you that the borrower has more of a vested in paying the loan off because they put something - some of their own money into it.
And this is usually what we call the loan to value ratio. So it’s basically taking how much are they going to borrow and the example I’m showing here they’re borrowing $5000. And what is the value of the item that they’re financing. In this case it’s a car worth $10,000. So that would be 50% loan to value.
And so if a borrower has, you know, even a little bit higher risk credit with a good down payment on a car many lenders would take a good look at this and be willing to do it.
So next up after we evaluate the collateral, if I can turn it to the right slide here, are - I’m just going to kind of recap the whole steps that we went through. You completed the application now with the borrower. You’ve reviewed the application for completeness. You’ve checked their credit history and made sure that the information that they stated on their application is correct.
You’ve verified the value of the car or the item that they’re buying. You’ve calculated their debt to income ratios to see what the ability and affordability of this item is. You’ve gotten explanations from the borrower for any items you have in question and you or the lender has informed the borrower of the decision and any options that are available to them.
And it’s always good if there’s another program that they could take advantage of. If there’s a HUD counselor they could go to that would help them clean up their credit so that they could be eligible. If there’s a process where they can dispute items on their credit report to clean up. It’s good to tell the borrower what those options are so that they have choices that they can make.
Basically you’re done at that point. The borrower’s going to close their loan if they’ve been approved and go from there. So if - I think if we go to the sample applications there should be a Word document, you can start to see some of the kinds of things that would be red flags. You want to bring that document up next.
And it’s called identifying red flags and what I’ve basically done is taken out of applications three different loans. And if you go down the column for each one you should start to see some things that would cause you to ask questions.
Borrower number 1, phone number 1, has come in and said your programs are going to be for this but they need to pay bills. And so you kind of have in your head that you expect this borrower to have bills that they owe and you’d expect to see there may be some payments or lates or things in their credit history, they were behind in bills. That would be a pattern you might expect.
And they’re asking to borrow $10,000. So as you look down that based on what we just talked about, can anybody see what might be red flags that you might want to ask questions about?
Woman: They live in Vermont and they work in Arizona.
Cheryl Fatnassi: They live in Vermont and they’re working in Arizona.
Woman: Their address is a P.O. Box.
Cheryl Fatnassi: Their address is a P.O. Box, exactly. You’re not going to find them there.
Woman: They’ve moved around a lot.
Cheryl Fatnassi: They’ve moved around a lot.
Man: Yet they say they’ve been at their job for three years.
Cheryl Fatnassi: Yeah.
Man: But they’ve only been there for one month (unintelligible).
Cheryl Fatnassi: Okay. And if we go down near the bottom you’ll see that they are - they show on their credit report that they have some unpaid collections from 2008 and early 2009. And their explanation for their lates was a divorce in 2007. So I think you identified a couple things you would definitely want to clarify with this person.
Ten thousand dollars to pay a lot of bills. They said that they have no other monthly debt so with their income and a $300 a month housing expense I think you’d want to understand why do they have all of that debt, where’s their current money going. And again, like you just mentioned, they wrote a P.O. Box, you want to know where they really live and they’re living in one state and they’re working quite far away from their work. It would be hard to commute everyday.
Okay let’s go to borrower number 2.
(Patty): Cheryl, I have - this is (Patty) in Wisconsin. I have one question or comment. For a divorce what I only learned from being a director is that often times people, you know, they go to a court for - to get a divorce. The judge says okay, you’re responsible for all the credit card debt and you’re responsible for the home equity loan or whatever, but then what I found is that really the banks and creditors could care less.
And I don’t know if it’s only for us in Wisconsin, we’re a community property state, or if it’s everywhere. Because...
Cheryl Fatnassi: That’s everywhere. Basically the divorce decree is an agreement between a husband and wife, former husband and wife, and the court. It has nothing to do with the bank or the creditor.
And when many people get into difficulties they go to the court and they agree that I’m going to give up the house to my husband, he’s going to make the payments on that and that’s delightful and I sign a quit claim of my house over to my husband and I walk away. And then the bank calls me up and says you’re late on the mortgage, we want the payment.
The court order means I can go after my husband for failure to pay but the bank can still go after me because I signed a note with them and that judge declaring it a divorce decree has no bearing on the bank’s ability to collect. So now I no longer own the house and I have to make payments on it and it’s going to be in my credit report. And that happens very, very commonly.
So yeah, that’s in every state.
(Patty): Yeah, okay because then it would make sense. I mean I’ve dealt with a lot of people where the unpaid collections really are like a year after the divorce but it was because of, you know, they had an agreement. The other spouse was - the ex-spouse was paying and suddenly they weren’t and now the creditors are coming after them and then it’s like oh, okay, well I was divorced two years ago but now is when I’m having problems because it’s come back and it wasn’t even my debt anymore even though it really was, so.
Cheryl Fatnassi: That’s right. And that would be a good explanation. You would still want to work with that borrower to have them go back to the court and to put a dispute letter in their credit report. But that would be a logical explanation for why they would have those late at a different time.
Cheryl Fatnassi: Let’s look at loan number 2. And this is a borrower who wants to modify a vehicle and there - it’s going to be a 2009 Honda and they’re going to modify it and they need $5000.
Man: They put a P.O. Box on the application. Oh no, that’s on a credit report.
Cheryl Fatnassi: Okay, so we don’t necessarily know that their address on their credit report matches to their address so we’d want to get clarification for that. Something showing that P.O. Box, we can match them up.
Man: Their debt to income is getting at the outer limits.
Cheryl Fatnassi: Okay so their debt to income is a little high. So this person is pretty solid for the most part. They’ve got a pretty good credit score. They don’t jump around from job to job. Although one thing you’ll notice is they were ten years at their prior job and now they’re 12 months self-employed as a private nurse out of their home.
So most of their information is pretty strong, the down payment on this care, so there’s a lot that they’re putting into it. They’ve been at their address for awhile. You just want to make sure that you get their tax returns. And because they’ve done it less than two years you want to make sure that this person’s going to have enough ongoing income shown in their tax returns to be able to make these payments.
And if they’ve been doing it 12 months you may not have a tax return to show what their income’s going to be. So they look generally strong but again you just want to be sure that their income’s going to continue and that you can see how they’re doing. But they’re not working for a medical center now, now they’re on their own.
Okay, now we have loan number 3. And loan number 3 is someone who wants to buy hearing aides and they need $3500.
Woman: Is this person old enough to get a loan?
Cheryl Fatnassi: This person is not 18 yet, that’s correct. So this is a person who is not old enough to get a loan, what else?
Woman: The dates of employment don’t match up at all.
Cheryl Fatnassi: Okay. So we have a very young person who is getting probably one of their first loans that look like they just got a credit card and they’re not 18 years old yet. So this might be one where you’d want to see if there’s someone else with an established credit history that could co-sign with them.
You definitely would need to wait till they’re 18 for this person to sign on this loan which, you know, is only a few months from now. But if - they certainly couldn’t do a loan by themselves because it wouldn’t be a legal contract.
So that’s kind of the general - I mean, there’s a lot to lending but I think you have the framework of it. And a lot of it is just reasonable. It’s really looking at borrowers and trying to understand when you look at what I call the front side of the application for us it’s the basic description of the borrower, their employment, their addresses.
And we will look at the back which is their income - which is their assets and liabilities. I really form a picture when I look at the front of the application, what I think this borrower’s credit history should look like. And then I expect to see that and if I don’t expect to see that then that’s when I start asking myself questions. I’m looking for logical explanations of things that don’t match up.