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INTERPRETING AND UNDERSTANDING CREDIT REPORTS Patrick Brachmann, FALU, FLMI Senior Underwriting Consultant.

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Presentation on theme: "INTERPRETING AND UNDERSTANDING CREDIT REPORTS Patrick Brachmann, FALU, FLMI Senior Underwriting Consultant."— Presentation transcript:

1 INTERPRETING AND UNDERSTANDING CREDIT REPORTS Patrick Brachmann, FALU, FLMI Senior Underwriting Consultant

2 The next 45 minutes or so, we will… Learn to interpret and understand credit reports Provide a review of a unique financial underwriting tool Review the main types of bankruptcies seen in underwriting Discuss how credit reports are used in financial underwriting Review case studies on real underwriting scenarios © 2014 Munich American Reassurance Company. All Rights Reserved.

3 The “Big Three” reporting agencies  TransUnion & Equifax seen the most in underwriting  All three reporting agencies provide a credit score  Credit scores are used by lenders to determine creditworthiness  The credit score given by each agency is derived differently  TransUnion & Equifax seen the most in underwriting  All three reporting agencies provide a credit score  Credit scores are used by lenders to determine creditworthiness  The credit score given by each agency is derived differently 3 © 2014 Munich American Reassurance Company. All Rights Reserved.

4 Examples of the ‘Big 3’  TransUnion Example  Equifax Example  Experian Example 4 © 2014 Munich American Reassurance Company. All Rights Reserved.

5 What’s in a number? © 2014 Munich American Reassurance Company. All Rights Reserved.

6 Credit Scores Equifax Uses FICO based score/ Beacon Score Range from 280-850/ Higher scores are better Trans Union Uses FICO based score/Empirica Range from 300-850/Higher scores are better Experian Uses FICO based score/ Experian-FICO Risk Model Range from 330-830/Higher scores are better Vantage Score Developed by the 3 major credit bureaus to provide more consistency Range from 300-850/Higher scores are better Considered to be the best of the credit scoring models © 2014 Munich American Reassurance Company. All Rights Reserved.

7 Credit report items of significance What important items can underwriters glean from credit reports? © 2014 Munich American Reassurance Company. All Rights Reserved.

8 TransUnion’s Credit Report – A closer look © 2014 Munich American Reassurance Company. All Rights Reserved.

9 TransUnion Credit Report (cont.) © 2014 Munich American Reassurance Company. All Rights Reserved.

10 Equifax Credit Report – A closer look © 2014 Munich American Reassurance Company. All Rights Reserved.

11 Equifax Credit Report (cont.) © 2014 Munich American Reassurance Company. All Rights Reserved.

12 Experian Credit Report 12 © 2014 Munich American Reassurance Company. All Rights Reserved.

13 Consolidated Code Guide Sheet  Standard codes for all credit agencies  ECOA = Equal Credit Opportunity Act  Standard codes for all credit agencies  ECOA = Equal Credit Opportunity Act  Codes that differ by reporting agency  Payment codes also differ by reporting agency 13 © 2014 Munich American Reassurance Company. All Rights Reserved.

14 Credit report summary Example of credit report summary THE APPLICANT HAS BEEN ON FILE SINCE 09/1994 WITH 7 ACCOUNTS: BK OF AMEROpened:01/2011 Bal:0PastDue: 0CS:R1 GECRB/LINTOpened:10/2007 Bal:0PastDue: 0CS:R1 VERICRESTOpened:04/2012 Bal:406895PastDue: 0CS:I1 CHASEOpened:11/1994 Bal:0PastDue: 0CS:R1 BK OF AMEROpened:09/2009 Bal:0PastDue: 0CS:R1 AMEXOpened:05/2004 Bal:136PastDue: 0CS:R1 FLAGSTARBKOpened:05/2012 Bal:377389PastDue: 0CS:I1 5 PAYS THAT SHOW 30 DAYS LATE 3 PAYS THAT SHOW 60 DAYS LATE 2 PAYS THAT SHOW 90 DAYS LATE 11 CLOSED NO PUBLIC RECORDS SHOWN *SUM-09/94-02/14,PR/OI-NO,FB-NO, ACCTS:8,HC$300-780K, 7-ONES 14 © 2014 Munich American Reassurance Company. All Rights Reserved.

15 Credit report UW checklist Look for active/recent past due accounts – past late payments are not concerning if accounts are now paid as agreed Check for major credit problems (BK, foreclosures, liens, judgments, collections) Check balances on open accounts – compare to monthly income and net worth Review recent credit inquiries Check for credit score (if listed) © 2014 Munich American Reassurance Company. All Rights Reserved.

16 Electronic Inspection Reports Obtained in place of traditional inspection reports No need for client contactDatabase search of public records Verification of properties owned, criminal records/credit report /bankruptcy search,etc Internet search may be able to verify employment and financial information © 2014 Munich American Reassurance Company. All Rights Reserved.

17 Bankruptcies © 2014 Munich American Reassurance Company. All Rights Reserved.

18 Types of Bankruptcies seen most often in underwriting Personal Liquidation Chapter 7 Business Reorganization/Restructuring Chapter 11 Farmers & Fisherman Chapter 12 Personal Wage earner plan Chapter 13 18 © 2014 Munich American Reassurance Company. All Rights Reserved.

19 Chapter 7 Bankruptcy (personal) Mainly for individuals and means test must be met “Liquidation” bankruptcy since some of the individual’s assets are sold to pay off unsecured debt Able to keep certain exempt property Non exempt property is liquidated to pay some creditors Typically discharged in 3 to 6 months 19 © 2014 Munich American Reassurance Company. All Rights Reserved.

20 Chapter 13 Bankruptcy(personal) 20 Allows individuals with regular income to develop a plan to repay some or all of their debt. No Means test is required Keep home, car, and other valuable assets (i.e. no liquidation of assets) Stops foreclosure, repossession, debt lawsuits Debts repaid over a 3-5 year period( Wage Earner Plan) May not incur new debt without consulting trustee © 2014 Munich American Reassurance Company. All Rights Reserved.

21 Chapter 11 Bankruptcy (Business) Usually filed by corporations or partnerships Referred as a “reorganization” bankruptcy Allows the business to continue on and pay off creditors over time Allows business to restructure their debt and keep possession of their assets Business operates under the supervision of the court © 2014 Munich American Reassurance Company. All Rights Reserved.

22 Chapter 12 Bankruptcy (specialized business) Designed for family farmers or fisherman with regular income Allows them to repay all or part of their debtRepayment plan of 3 to 5 years May not incur new debt without consulting trustee More streamlined and less expensive than Chapter 11 or 13 © 2014 Munich American Reassurance Company. All Rights Reserved.

23 Underwriting Considerations Cause of Bankruptcy? Job Loss? Illness? Business Failure? Poor Judgment? Prior History Previous Bankruptcy? Credit History Insurance History Lapse History?Churning Coverage? © 2014 Munich American Reassurance Company. All Rights Reserved.

24 Takeaways for underwriting bankruptcies and poor credit histories History of multiple bankruptcies need to be underwritten with caution Caution is advised with history of alcohol, drug, or psych impairments Normally need bankruptcy to be discharged before offering insurance coverage May consider individuals for coverage who are currently in Chapter 13 in best case scenarios Need to have re-established their credit before considering for coverage Not all bankruptcy cases and poor credit histories require adverse action © 2014 Munich American Reassurance Company. All Rights Reserved.

25 Case Studies © 2014 Munich American Reassurance Company. All Rights Reserved.

26 Case Study #1  $10,000,000 applied for in 2012  40 y/o male  Admits inc. $3,000,000, NW $20,000,000  100% owner of company w/ 3 employees  FMV of biz $18,000,000  2009 1040 AGI of $1,600,000, but no 2010 or 2011 tax returns  No taxable interest or dividends reported  No significant medical concerns  $10,000,000 applied for in 2012  40 y/o male  Admits inc. $3,000,000, NW $20,000,000  100% owner of company w/ 3 employees  FMV of biz $18,000,000  2009 1040 AGI of $1,600,000, but no 2010 or 2011 tax returns  No taxable interest or dividends reported  No significant medical concerns © 2014 Munich American Reassurance Company. All Rights Reserved.

27 Case Study © 2014 Munich American Reassurance Company. All Rights Reserved.

28 Case Study #2 28 © 2014 Munich American Reassurance Company. All Rights Reserved.

29 Case Study 29 © 2014 Munich American Reassurance Company. All Rights Reserved.

30 Case Study #3  59 y/o applicant  $400,000 20 year term  No coverage inforce  Children are beneficiaries  Admits to past bankruptcy on app  What is need for coverage?  59 y/o applicant  $400,000 20 year term  No coverage inforce  Children are beneficiaries  Admits to past bankruptcy on app  What is need for coverage? 59 y/o applicant $400,000 20 year term No coverage inforce Children are beneficiaries Admits to past bankruptcy on app What is need for coverage © 2014 Munich American Reassurance Company. All Rights Reserved.

31 Case Study (cont.)  Discovered there were two bankruptcies in the past  1 st was chapter 7, discharged 17 years ago  Most recent chapter 13  plausible explanation for both?  Stable career with long tenure with current company and good earnings  Discovered there were two bankruptcies in the past  1 st was chapter 7, discharged 17 years ago  Most recent chapter 13  plausible explanation for both?  Stable career with long tenure with current company and good earnings Discovered there were two bankruptcies in the past 1 st was chapter 7, discharged 17 years ago Most recent chapter 13 plausible explanation for both? Stable career with long tenure with current company and good earnings 31 © 2014 Munich American Reassurance Company. All Rights Reserved.

32 Summary Not all cases with bankruptcies or past due accounts require adverse action Don’t just ‘skim’ credit reports - closely evaluate for clues Be careful when there is a history of alcohol/drug abuse and/or psych impairments Credit reports are only one tool in financial UW Credit reports may be helpful in detecting anti- selection © 2014 Munich American Reassurance Company. All Rights Reserved.

33 THANK YOU FOR ATTENDING THE PRESENTATION!


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