Tax Liens Are Going Away

For the second time in the last year the credit bureaus are making a major change in their credit reporting standards. Last week Experian announced that starting on April 16, 2018 all tax liens will be removed from consumer credit reports. And they will stop reporting all tax lien data going forward. Trans Union and Equifax are expected to follow suit about the same time.

As of last July the credit bureaus stopped reporting most judgments because they do not meet the Personally Identifiable Information (PII) guidelines set forth by the National Consumer Assistance Plan (NCAP). The majority of judgments do not have social security numbers attached to them and this is one of the PII requirements. As a result most judgments have fallen off credit reports and are no longer being reported. The credit bureaus have always used private vendors to gather public record information since the majority of courts do not have the ability to actually report on their own. With the volume of public record information the accuracy of using private vendors has been questioned for some time now.

Since last July Experian has been doing a review of tax liens on credit reports. Most liens do have social security numbers attached to them, but they have found some inaccuracies in the reporting of liens and have decided to stop reporting them and remove existing liens from credit reports. This decision for Trans Union also stems from several class-action lawsuits over how the bureaus handle tax liens and judgments. An Equifax spokesperson said that “after continued review of tax liens, Equifax has determined that with only a small amount of tax liens remaining on our files, all tax liens will be removed and no longer be reported.”

According to LexisNexis Risk Solutions, a provider of lien and judgment information, this will remove more than 5.5 million liens from consumer’s credit reports. For thousands of borrowers this can result in a very positive impact on their credit scores. A tax lien can drop a score 100 points or more, paid or unpaid.

While this is great for potential borrowers, it does create a “blind spot” for lenders. Some lenders feel that the boost in the credit scores a borrower can get is an “artificial” boost in the score if, in fact, they really do have a tax lien. Many lenders will not approve loans for borrowers with unpaid tax liens. Up until now they have relied on credit reports to furnish that information. Lenders will now have to find other companies that collect that information or go through public record databases themselves. Some credit reporting agencies used by lenders do offer an extra product provided by an outside vendor that does contain just public record information. Those reports cannot be updated or altered like regular credit reports, but they do contain any public record information on a consumer. Since this is a report separate from the actual credit report those liens are not factored into the credit scores as they would be if they were being reported by the bureaus.

For consumers this change can have a significant impact on their buying power. For Lenders it could be a bit of a headache and they may have to rethink how they approve loans which in large part now are based on credit scores.