Credit is hurt by Sallie Mae barring student-loan records

Nation's Housing

October 05, 2003|By KENNETH HARNEY

COULD YOUR outstanding debt to Sallie Mae - the largest provider of student loans in the country - cause you to pay more on your home mortgage?

Could that be the case even if your payment history with Sallie Mae has been perfect for years?

The answer to both questions is a surprising yes.

Though the company has not informed its 7 million-plus customers, Sallie Mae confirms that it has stopped reporting borrower loan repayments to two of the three giant national credit repositories. Nonreporting of on-time payment histories, in turn, can lower Sallie Mae borrowers' credit scores - sometimes by enough to render them ineligible for the best-available home loan rate quotes.

Take the case of first-time homebuyer Eric Borgeson. A 31-year-old architect in Eagle-Vail, Colo., Borgeson recently applied for a $237,000 mortgage to buy a new house. His loan officer, Chris Neuswanger of Macro Financial Group, ordered a preliminary credit check and found that Borgeson qualified for the lowest-available rate from national mortgage lenders. Included in Borgeson's credit files at Equifax, Experian and Trans Union were years of on-time student loan payments to SLM Corp. of Reston, Va., better known as Sallie Mae.

But when Neuswanger formally submitted Borgeson's application to mortgage giant Fannie Mae - necessitating another round of credit "pulls" from the three national repositories - Borgeson's perfect student loan histories had mysteriously disappeared from two of his files. Only Equifax now had his Sallie Mae data. As a direct result, Borgeson's credit scores at Trans Union and Experian plunged by 40 points and the "risk-based" mortgage rate he now qualified for jumped by nearly 1 1/2 percentage points.

The higher-rate mortgage will cost Borgeson nearly $200 a month more in interest payments, he estimates.

What happened here? Why did Borgeson's Experian and Trans Union credit files suddenly contain no information about his perfect credit history with Sallie Mae, while his Equifax credit file had it all intact?

Neuswanger dug for clues and discovered Sallie Mae's decision to withhold borrowers' account information from Trans Union and Experian, while providing it to Equifax and a smaller credit bureau called Innovis Data Solutions.

Sallie Mae spokeswoman Martha Holler confirmed the policy change in an interview with me last month. The reason, she said: The firm is unhappy with "the selling of [Sallie Mae] customer information to third parties" by the other two repositories.

In other words, marketers of competing financial products were able to access Sallie Mae customer credit data - just as banks, mortgage lenders and insurance companies do routinely on one another's accounts - and target financial offers to them by mail or phone.

But such a policy of nonreporting could be having costly side effects. Borgeson's mortgage experience could be duplicated by thousands of others.

"This is outrageous," said Brad Scriber, housing coordinator for the Consumer Federation of America. Scriber directed a national study of credit system problems last year, including the negative effects of nonreporting of customer data by credit-card companies, banks and other lenders.

Student loan customers "often only have relatively brief credit information in their files," said Scriber, and "withholding what may be one of their best records documenting responsible credit behavior could be very harmful" to their ability to buy a first home.

Fair, Isaac & Co., developer of the FICO credit scoring software used by most mortgage lenders, confirmed that younger consumers - whose credit histories may have only a few trade lines - could be "disproportionately" hurt by nonreporting of on-time payments.

Spokesman Craig Watts said Fair Isaac advocates "full and accurate reporting of all [accounts] to all three national credit bureaus."

The usual purpose of nonreporting, say critics of the practice, is to help a creditor keep their best-paying customers' records out of the reach of competitors. A credit-card bank, for example, can ask a credit repository for a rival bank's customer names and addresses who have FICO scores above some specified level - say 700. If key pieces of positive payment data have been withheld on those borrowers, however, they could carry lower scores, thereby putting them out of the raiding marketers' view.

Congress is considering legislation that would revamp the credit-reporting system, including proposals to require or encourage full reporting. Federal banking regulators have urged lenders to report fully on every customer but have no legal sanctions to use against those who fail to comply.

Sallie Mae spokeswoman Holler said the company "would be happy to have individual discussions with individual credit bureaus" over how to keep borrowers' account information from competing marketers.

Meanwhile, though, Eric Borgeson is paying $200 a month extra for his home mortgage. And unknown numbers of other homebuyers with student loans could find themselves in the same fix.

Ken Harney's e-mail address is kharney@winstarmail.com.

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