| Several provisions in the new financial regulatory | | | | including home loans, credit cards, lines of credit, and |
| reform bill have scared the three rating agencies | | | | auto loans. Admittedly, some borrowers lost their jobs, |
| (Standard & Poors, Moodys, and Fitch) to refuse | | | | others had burdensome losses on investments, and still |
| to have their ratings included in any documentation | | | | others strategically decided not to pay their debts. So |
| prepared for new issues. The new regulations leave | | | | can we conclude that someone who defaulted on their |
| the rating agencies exposed to liability if the bonds | | | | debts despite a 700+ credit score was overrated? |
| they rate do not perform as they are supposed to. | | | | Perhaps! But how did a $300,000 per year wage |
| We saw over the last few years during the financial | | | | earner with $200,000 in credit available have the same |
| crisis that these rating agencies did a very poor job of | | | | credit score as a $20,000 wage earner with $7,000 in |
| well, rating, particularly the bonds backed by | | | | credit available? (Sorry, I keep going back to pointing |
| mortgages, etc. So, they should be scared. If I weren't | | | | out the flaws in the scores.) |
| very good at what I did, I wouldn't put myself out there | | | | But I can't help it!! I had my credit report pulled and |
| either. | | | | found no less than 19 errors on my credit report. |
| The problem is that the SEC requires all new bond | | | | Those 19 errors had an impact on my credit score. I |
| issues to be rated. Why? So uninformed, unintelligent, | | | | called to ask them what my credit score would be if |
| and lazy investors wouldn't have to do their own due | | | | those errors were corrected, but they couldn't tell me. |
| diligence on the bond offerings before deciding to | | | | Admittedly, it's not always their fault. In one case, I |
| invest. That's how it was done in the good old days. | | | | made a payment on my mortgage, on time, and the |
| But that process evolved into one where investors | | | | day after the payment was due, the mortgage |
| blindly followed the rating provided by one of the big, | | | | company sent me my money back and reported the |
| bad (bad as in not good at what they do) rating | | | | payment as late! They sent me my payment back!!! Of |
| agencies. What happened? First of all, they had huge | | | | course, they reported a late payment because as of |
| conflicts of interest, getting paid by the very entities | | | | the day they sent me back my payment, they no |
| whose securities they were rating. Second, they | | | | longer had my payment, making it late. Funny, but not |
| admitted after the collapse of several highly rated | | | | so funny. I tried to call them to have them send back |
| issues, that the offerings were much more | | | | ALL of my previous mortgage payments going back 8 |
| complicated than they expected. Duh! | | | | years, but they said they couldn't do that. In this case, it |
| Now they are refusing to allow bond issuers to use | | | | was the mortgage companies fault, but the other 18 |
| their ratings in an 'official' capacity. In other words, they | | | | errors were the fault of the credit bureau. |
| will continue to rate the bonds, but 'you can't really | | | | So what are we to do when the credit rating agencies |
| quote us on that'. | | | | and the credit reporting bureaus are incompetent and |
| To some extent, the same analysis can be applied to | | | | or the rating they are providing is unreliable? In my |
| the three consumer credit reporting agencies. | | | | opinion, we need to stop relying on a score. Particularly |
| (Transunion, Experian, Equifax) They provide credit | | | | a score that cannot be explained. Whether it's a rating |
| scores indicating to banks, credit card companies, etc., | | | | on a bond offering or a credit score on a potential |
| the creditworthiness of a borrower. No one knows | | | | borrower. We need to do our own work. I remember |
| how they come up with those credit scores, and I bet | | | | my days as a mortgage broker when we had to pull a |
| if you called someone at each respective agency, | | | | borrowers credit report and evaluate it ourselves. The |
| they won't tell you. Actually, they can't tell you..because | | | | credit scores help streamline that process, but as we |
| they don't know. You can make payments on time for | | | | have already seen, the companies that are relied on to |
| years and your credit score will be 750, let's say. | | | | make things easier are horrible at what they do. I'm |
| Forget to make one payment and you're back down | | | | actually glad the agencies are refusing to allow their |
| to 550. Ah, the penalty for forgetfulness is 200 points! | | | | rating to be used for public offering documents. It may |
| Now, you have to remember to make those same | | | | have unintended consequences like slowing down the |
| payments for another 10 years before you get back | | | | bond issuance process and the amount of offerings, |
| up to 750. I'm exaggerating of course, but I've | | | | but they have too much control as it is, and investors |
| experienced this first hand. | | | | creditors rely too much on their expertise. (tongue in |
| Anyway, back to the topic at hand. During this financial | | | | cheek) We need to go back to doing our own work |
| crisis, borrowers with credit scores well above 700 ( a | | | | and coming to our own conclusions. |
| very good score) defaulted on many of their debts, | | | | |