Next storm for Katrina victims: Bad credit score

Bob Sullivan Technology correspondent • Profile • E-mail

A second storm surge may soon start slamming into Gulf coast residents hit by hurricanes Katrina and Rita. Mounting unpaid bills will lead to a surge of black marks on victims' credit reports, say consumer advocates, sinking their credit scores. And now, they say, efforts to convince the nation’s credit bureaus to develop new systems to account for victims’ temporary bill-paying troubles have hit a major snag.

Consumers who can’t make their house payments any more – even if that house has been completely swept away by the storm – may face the ultimate penalty in America’s credit-driven society: A credit score so low they won’t qualify for the loans they need to start rebuilding.

Consumer groups, anticipating the coming surge of late payments and account defaults, have asked credit bureaus to help. The consumer groups proposed that the bureaus take a pre-Katrina credit score snapshot of all residents in the affected areas.  Later, when victims apply for loans, the pre-Katrina score could be used to identify whether victims were good credit risks before the storm.

“A person who was a good lending choice on Aug. 25 is probably going be a good lending choice now,” said Gail Hillebrand, senior attorney for Consumers Union.

The proposal has the support of Fair Issac, the firm that generates the formula used to compute credit scores, called FICO scores. 

“Having knowledge of the old credit score could be used to help (lenders) make a more informed decision,” said Tom Quinn VP of global scoring. “Was this person really late because they were late or because their mailbox was under water for three weeks?”

But on Thursday, consumer groups revealed that the nation’s three bureaus – Experian, Trans Union, and Equifax – have declined to participate in the plan.

Bureaus spike second score idea
Don Girard, a spokesman for Experian, said regulatory issues would make creating and storing a so-called “second score” impractical.

“We looked at the proposal and came up with serious concerns,” he said. “It is not as simple as (consumer advocates) make it sound.”

A second score likely wouldn’t comply with parts of the Fair and Accurate Credit Transaction Act, the firm indicated in a letter sent to Consumers Union.

Equifax’s David Rubinger said the presence of a second score could create confusion both for lenders and consumers. Also, credit bureaus and lenders sometimes use alternate scoring systems, he said, so a snapshot FICO score would be of little use to those lenders.

As an alternative, bureau representatives said they’ve instructed lenders, who supply the bureaus with payment history data, to be lenient with consumers. They’ve also asked lenders to include a special code on Katrina-related overdue payment and default entries – called a “disaster recovery code,” according to Rubinger. A late payment entry will appear with the designation “AW” on consumers' credit reports.

Lenders who look at credit reports will take into account Katrina-related defaults, he said.

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