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.
Disaster code won't protect score
But use of the "AW" code won't necessarily protect victims' credit scores, Fair Issac's Quinn said. He said bureaus have rarely used the code in the past – and often, they don't even send it to Fair Issac for calculation – so it is not considered by the formula his firm uses to generate credit scores. In other words, a Katrina-related late credit card bill payment will weigh just as heavily on a FICO credit score as any other late payment.
A poor credit score is no afterthought to families hit hard by the hurricanes. Katrina and Rita victims returning from temporary housing will be applying for credit en masse to rebuild their homes. Low credit scores usually mean higher interest rates. A quick drop in a credit score can cost consumers $150 extra a month on a $150,000 loan, according to estimates from Fair Issac. A very low score could make some consumers completely ineligible for credit.
While some lenders still view entire credit reports before granting mortgages, and could pick out hurricane-related black marks and take them into account, lenders increasingly rely solely on credit scores to make lending decisions. That could spell serious trouble for Katrina victims, Hillebrand said.
"We have automated ourselves away from common sense," she said.
Credit scores are also used outside the lending industry –- by auto insurers, apartment owners, and even by prospective employers. It's not fair for late payments brought on by hurricane forces to impact those areas, said Lisa Donner, director of public policy at ACORN Housing, a credit counseling agency helping Louisiana evacuees in Houston and Dallas who are trying to fend off creditors.
"The fact that they can't pay bills right now … is not an indication of future credit worthiness or that they ought to be charged more for car insurance," she said.
So far, most lenders have been understanding, Hillebrand said, extending 30- to 90-day grace periods to consumers in the storm zone. But those grace periods will end soon, and with so many storm-related layoffs, it's hard to imagine most victims will be able to sustain their loan payments when they come due. While she's unaware of any consumer who has yet been hurt by hurricane-related credit score drops, the time to discuss the issue is now, she said.
"By the time credit files are polluted and scores are artificially depressed it will be too late," she said. "The hole will just be deeper for these people."
An extra free credit report
For now, the bureaus say they are trying to help consumers in other ways. Residents in hurricane-afflicted areas can get a free copy of their credit report from AnnualCreditReport.com, the Congressionally-mandated free credit report site -– even if they've already gotten a copy recently, said Rubinger. A positive pre-Katrina report could be an important asset during a difficult conversation with a lender, he said.
Hillebrand said consumers could also consider paying for a credit score now, before any late payments show up. But the scores cost around $10 each, and there's no guarantee a lender will look at a score purchased by a consumer during the loan evaluation process.
Quinn, however, hasn't given up hope for a pre-Katrina score supported by the credit industry.
"This is an unprecedented event. It's uncharted waters," he said. "Hopefully, collectively as an industry we can make some provisions for it."