Having your Credit Run

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As of July 1, 2005, mortgage providers have to have explicit written authorization to run credit.

I am not certain of the political forces that made this bill, and it is still not clear to me whether this extends to non-mortgage credit providers. If it does, this is probably one of the niftiest consumer protection things to come down the pike in a long time. On the other hand, if it's limited to mortgage providers, then it's a stab at making life difficult for Internet brokerages, which may do business at a remove of thousands of miles.

An Internet broker employee is talking on the phone with a client, not physically in the client's presence. They can be some of the cheapest and best loan providers out there, if they are so minded (as I keep saying, a far more important concern is how low a provider is willing to go, not how low they can go. Internet brokerages can also be consummate ripoff artists). It becomes a real hardship on their business if they can't run credit without explicit written permission, whereas it's not a major issue with a more traditional brokerage or direct lender.

Recent changes in the business mean that this is becoming less important. Nobody is locking loans any longer before they have a loan commitment (i.e. basic underwriting approval with enumerated conditions for actually funding the loan). I still can't run your credit until I get a signed form that says you give me permission. No big deal if I'm sitting right there. A real pain if I'm in California and the client is in Florida. I'm not even certain facsimile permission (no original signature) is acceptable, as it's not something that enters into my current business. This means a delay potentially of days while the form gets back to the lender. So life for an ethical Internet broker suddenly gets a lot more difficult, while life for the crooks becomes no harder.

On the other hand, if the requirement for written permission extends to all providers of credit, then it becomes worth the game. Mind you, an adult should be aware of what's going to happen if they give a social security number to a car dealer, furniture store, or anyone else. I've never heard of anyone using it just for liar's poker ("Oooh, this is a good one - four 8s!"). If you give a merchant your social, then they are going to run your credit. Treat it as a mathematical certainty, because it might as well be.

Each time somebody runs credit, it's an inquiry - a ding on your credit. Inquiry dings are progressively damaging. They cause your score to go down, each and every time you have an inquiry, and the more inquiries you have, the more each new inquiry drives it down. There used to be a game among mortgage providers until the new rules a few years ago - see if they could be the last ones to run your credit before it went under a threshold score, and some would run it multiple times if they could. Anybody running after that would be at a disadvantage, because you no longer qualified for a given credit score's pricing level.

The exception to "a ding for every inquiry" is mortgage credit. With the new rules that every consumer should get down on their knees and give thanks to the National Association of Mortgage Brokers for getting through Congress, consumers are now actually permitted to shop around for mortgage rates without getting dinged every time their credit is run - provided they run credit under a business code that say's "inquiry for mortgage." (So if you are mortgage shopping at a bank or credit union, be sure they run your credit under their mortgage inquiry code, and not a general inquiry code). All of the times it is run within fourteen days by mortgage providers count as exactly one inquiry. This gives consumers the ability to shop as much or more for a mortgage as they would for, say, a toaster oven, without being penalized.

But if the new rules apply to non-mortgage credit grantors also, this is a good thing. Here's why: Every time I start a loan, I have a set spiel that I go through. "Don't change anything, credit-wise, even if you think it will help. Don't buy anything. Don't charge anything on your credit cards. Make your normal payments - no more, no less, unless you ask me first. And don't allow anybody except mortgage providers to run your credit for any reason. Don't even let them have your social. Because they will run your credit, I guarantee it."

On every home loan, one of the last things that will happen before your loan is recorded in official records at the county will be that the lender will run your credit again to make certain nothing has changed. And if anything has changed, you will very likely lose the loan (and the house if it's a purchase). Even if the escrow company has the money or it's actually been disbursed, the lender will pull it back, as they can do that until the deed is recorded. So there is a real need for prospective borrowers to understand that until the final documents are recorded with the county, they shouldn't so much as breathe differently.

For a certain personality type, being told she can't shop for curtains and furniture and paint for her new house is nothing short of torture, and so I've learned to be very explicit. "It's okay to look, to talk to the nice salesfolk, and to get an idea of what you want. But don't actually buy anything. Tell the nice salesman who says he just 'wants to get a head start on your order' that your mortgage loan officer said that you're right on the line, and anybody else runs your credit and drives you under the line the first consequence to the furniture or paint or drapery salesperson will be no order, because they're likely to cost you the loan.

So while you have a home loan pending, tell the nice salespersons that you're really protecting them by not giving him your social, because if they run your credit and cost you the loan you'll have to tell your uncle Bruno the mobster about it. And we all know what happens then.

Back in the real world, things are not usually quite that bleak. But it's surprising how often people end up with higher rates and higher payments and worse loans because they didn't understand this one point. Suppose your monthly payment is $50 higher than you thought it would be, in addition to what you spent on the new stuff that caused money to go into that salesman's pocket. Doesn't that make you feel all Warm And Tingly towards that salesman? Didn't think so. And a certain percentage of the time, this new monthly payment you now have because you Bought Something means you Do Not Qualify for the loan. So: No loan. No house (if it's a purchase). No lower payment (if it's a refinance). No cash out of your equity (if that's what you were trying to do). And so now you've got this stuff, and no house to put it in. Now you've got to tap the vacation or retirement account to pay for it because you're not getting a refinance on reasonable terms. Not to mention all the times these people run credit and hurt people's credit scores without real permission when there's no mortgage loan in the offing. So I can put up with one segment of my industry have a slightly higher bar to jump over if that's the carrot.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on November 29, 2019 7:00 AM.

Second Trust Deeds and Loan Subordination was the previous entry in this blog.

RESPA Forbids Steering - Even "Just For Prequalification" is the next entry in this blog.

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