Arguably the biggest change to impact credit reporting (and by extension credit scoring) in decades will be going into effect within just a few months. In July of 2017 the 3 major credit reporting agencies (CRAs) - Equifax, TransUnion, and Experian - have announced that they will remove a significant number of the tax liens and judgments which are currently appearing on consumer credit reports. The pending removal of these derogatory public records could potentially boost credit scores for millions of Americans.
Reasons Behind the Change
There is nothing illegal about a credit reporting agency placing a judgment or a tax lien on your credit reports as long as they comply with the law. Of course if incorrect information is reported (i.e. wrong balance, incorrect dates, a public record which is not yours) that is another story all together.
It is important to understand that the Fair Credit Reporting Act (FCRA) absolutely allows for certain types of accurate public record information to appear on credit reports. Judgments have an FCRA requirement to be removed after 7 years and paid tax liens fall under the same 7 year removal requirement. According to the FCRA unpaid tax liens never have to be removed from credit reports, making them currently one of the most difficult credit problems for a consumer to overcome. However, in July this previously massive credit reporting problem is going to simply vanish from the credit reports of many American consumers.
As already mentioned, there is no FCRA requirement to remove public records such as tax liens or judgments from credit reports unless they have been reporting longer than is legally allowed. What then would prompt such a massive change in credit reporting procedure by Equifax, TransUnion, and Experian? The answer is regulatory concerns.
According to a statement released by the Consumer Data Industry Association (the trade organization of the credit reporting agencies), interim president Eric Ellman attributes the changes in credit reporting procedures as being part of the National Consumer Assistance Plan (NCAP). The NCAP was created after the 2016 settlement between the CRAs and 31 different state attorneys general. (Initially the settlement was reached between the CRAs and the New York Attorney General. You can read more about that first settlement here.)
Per Ellman, as a result of the NCAP the credit reporting agencies " have developed enhanced public record data standards for the collection and timely updating of civil judgments and tax liens." These new standards include a requirement for "a minimum of consumer personal identifying information (PII)" such as a consumer's name, address, social security number and/or date of birth to be verified in order to include public record information on a consumer's credit reports. Additionally, a minimum frequency of courthouse visits (specifically at least every 90 days) to update public record information is required under the NCAP. Most of the tax liens and judgments currently appearing on consumer credit reports do not meet these standards set forth in the NCAP and, as a result, will be removed from credit reports altogether in a few short months.
What the Change Means for Consumers and Lenders
FICO credit scores, the chief credit score brand currently used by most lenders, are designed to consider public records such as tax liens and judgments whenever a consumer's credit scores are calculated. When the aforementioned public records are present a consumer's credit scores are normally impacted negatively. As a result, when the CRAs remove a public record (or multiple public records) from a consumer's credit reports the consumer's credit scores are almost certain to move upward, perhaps significantly. Translation: up to 12 million Americans could potentially see an immediate increase in their credit scores this summer when the majority of tax liens and judgments are removed from credit reports.
“up to 12 million Americans could potentially see an immediate increase in their credit scores this summer when the majority of tax liens and judgments are removed from credit reports.”
Lenders are understandably troubled regarding the pending change in credit reporting procedures when it comes to public records. After all, lenders rely heavily upon both credit reports and credit scores to predict the risk of doing business with new applicants. Removing tax liens and judgments from credit reports will lead to credit score increases for many consumers, making it more difficult for lenders to accurately evaluate the credit risk of new prospective customers.
Many consumers, on the other hand, are thrilled by the prospect of the upcoming change which could lead to higher credit scores. Of course it is important for these consumers to remember that the removal of a tax lien or judgment from a consumer's credit reports does not make the issue simply go away.
Consumers applying for a mortgage, for example, will probably not be off the hook when it comes to unresolved tax liens and judgments. Although a tax lien or judgment may no longer be appearing on the applicant's credit reports that does not mean that the items will not show up when the lender performs a public records search of its own. Lender requirements to pay outstanding judgments or tax liens (or at least enter into an acceptable payment plan) are not going to change because the public records may be removed from the credit reports. The removal of these items from credit reports could certainly help to bring about a credit score improvement, but that does not mean a legitimate judgment or tax lien would no longer be owed.
Michelle Black is an author and leading credit expert with a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.
