Good behavior goes unrewarded
when lenders use hush-hush policies
Fourth in a five-part series: Halloween Horrors
By Michael D. Larson • Bankrate.com

The Money Store says it wants to help damaged-credit customers get "Back on Track" by taking out one of the equity loans it offers under that brand name.

Trouble is, the First Union Corp. division hasn't been reporting the payment performance of those borrowers to the major credit bureaus. That means nobody in the 39 states the subprime unit serves has been led back to the conventional lending world. And not a single one will be until the Charlotte, N.C.-based bank changes its policy this November.

A dirty trick? Consumer advocates think so, and it isn't the only one lurking out there in the mortgage and home equity industry. From lenders who deny customers access to their own credit scores to snafus that arise when companies frantically shuffle mortgages among each other, these Halloween horrors make borrowers' lives positively ghoulish.

"The industry has changed tremendously over the past five years and even more so over the past couple years," says Jeanne Ciammaichella, housing manager at the Consumer Credit Counseling Service of Northeast Ohio in Cleveland. "People don't understand the credit they're getting. They don't understand the implications of the credit they're getting and they don't understand how the lenders decide whether they're going to get credit.

"It's confusing for people in the industry and even more so for people who aren't."

$41 billion in loans goes unreported
Just how pervasive is the credit reporting code of silence? Research done by Bankrate.com shows that three of the top 10 so-called subprime lenders in the United States report either none or just some of their customer loans to the bureaus on a monthly basis. These companies, which make mortgages and home equity loans to borrowers with blemished credit, have a combined share of about 17 percent of the subprime market. Their loans, in turn, have a combined value of about $41.1 billion. (See table.)

Because of the widespread nature of the problem, both government regulators and consumer groups have attacked subprime lenders, accusing them of shirking in their duties to the detriment of their customers.

Consider that most borrowers who end up at the subprime doorstep don't want to be there. They either missed a few bills, accumulated too much debt or committed some other financial sin. But today, it's much easier to crawl out of that category by re-establishing credit. People can do so by starting out with secured credit cards or subprime mortgages, paying them on time for several months then refinancing with regular lenders who are now willing to give them the time of day.

But if the companies that issue those high-rate loans and credit cards don't report to the credit bureaus that borrower payments are coming in on time, those regular lenders have no way of knowing there are customers out there ready to graduate to their products. Subprime lenders say they're just trying to keep from having their customers poached, but the net result is that consumers end up being frozen out of the mainstream and paying more money than they should.

Who doesn't report
In addition to the Money Store, which industry publisher Thomson Corp. estimated to be the fourth-largest subprime lender in terms of number of loans serviced as of June 30, sixth-largest Green Tree Financial Corp. is an offender. The company has been part of Conseco Inc., a Carmel, Ind.-based insurer, since it was acquired in June 1998.

"They've said if other people reported it, they'd report it," says Matthew Lee, executive director of Inner City Press. The Bronx-based consumer advocacy group monitors banking and lending practices. "But they really didn't seem to have any answer as to how it doesn't injure consumers not to have their positive payments reported."

Company spokesman Jim Rosensteele counters that Conseco reports on the loan performance of roughly 80 percent of its borrowers. But because the company offers secured credit cards and manufactured home loans in addition to equity-based loans, it's unclear whose loans are reported and whose aren't, and Rosensteele wouldn't elaborate. He also wouldn't say how long the majority-reporting policy has been in place or whether the company will ever provide updates on all of its borrowers.

"Reporting to the credit bureaus is not required," he says. "Second, many companies, including many of our competitors, make no reports."

Regardless, Lee says the harm to consumers is obvious.

"People who think they're rebuilding their credit history by taking a subprime loan with them are sadly mistaken."

Credit-score secrecy
Of course, one of the places that solid loan performance would show up in is borrower credit scores. But how much help is a year's worth of on-time payments? Where can somebody get concrete information about how scores are computed? Do consumers have any right to their score? The answers, respectively, are "Who Knows?" "Nowhere" and "No," even though credit scores are more important than credit reports in the home lending industry today.

Why? Companies use computerized underwriting systems when deciding whether they will make loans. Those systems look at a borrower's credit history, analyze the credit cards, auto loans and other obligations contained therein, then spit out a number based on mathematical formulas the systems-makers won't share. If the number's high enough, congratulations, you're well on your way to a new home. If not, you'd better start browsing through those "For Rent" ads again.

Some experts think credit scoring may be discriminatory, too, though industry officials strongly deny those charges. Consumer groups, academics and others continue to study the issue.

Escrow snafu
Robert Wise knows mortgage companies sell home loans among themselves, sometimes many times. But the 41-year old telecommunications equipment tester was never really comfortable with the idea, and now he's downright angry. The original lender sold the servicing of his loan to another company, which lost the address of his insurer in the transfer. Because the company didn't make the required payments out of Wise's escrow account, the company canceled his homeowner's coverage this year -- right before Hurricane Floyd decided to pay a visit.

"This sucks," Wise says. "They're out there selling and buying mortgages making money off of people ... and I'm paying a little over $800 a month to somebody who doesn't care less.

"For the kind of money I pay, you're supposed to know everything."

Fortunately, the powerful Atlantic storm left Wise, his wife and their Spring Lake, N.C., home relatively unscathed. But he still recalls watching the old oak tree in his yard blowing this way and that at midnight, knowing that if it fell, he'd be out of luck.

"The people I got my mortgage from were people I felt comfortable dealing with," Wise says. "I had a choice of who to get my mortgage from.

"But I don't like my mortgage being sold to people I don't know."

Unfortunately, there's nothing borrowers can do. Although they can expect to get "hello" letters from their new servicers and "goodbye" letters from their old ones announcing the changes and specifying new payment addresses, they have no control over whether the transfers happen in the first place.

Beware of fraud
Consumers who haven't read enough to scare them yet this Halloween should consider taking a look at the types of fraud and deception out there in the home lending industry. Doing so will give them insight into how truly shady lenders operate -- and make those who already have homes all the more thankful.