Locals beat feds at the rating game
December 1, 2003
Chris Neuswanger of Macro Financial Group wanted to loan him the money for a house to help keep him here.
And a decision by a government-backed student loan program to arbitrarily stop reporting student loans didn’t keep him from pursuing his American Dream, but it will make his new home cost him an additional $108,000.
Borgeson, 31, an architect, applied for a $237,000 mortgage to buy a home in Brett Ranch. His loan officer, Chris Neuswanger of Eagle County’s Macro Financial Group, ordered a credit check and found Borgeson is exactly the type of solid citizen banks are clamoring to lend money to. His sterling credit qualified him for the lowest mortgage interest rates.
It’s not an inexpensive proposition to become an architect, and in Borgeson’s credit histories at the three national credit repositories – Equifax, Experian and Trans Union – were years of on-time student loan payments to SLM Corp, of Reston, Va., better known as Sallie Mae. SLM was founded in 1972 as a government-sponsored program to handle student loans. Federal officials hope to have it fully privatized by 2006.
Sallie Mae’s silence
But unknown to Borgeson, and Sallie Mae’s seven million other customers, Sallie Mae had stopped reporting borrower information to Experian and Trans Union. Only Equifax had information about Borgeson’s student loans, and the seven million Sallie Mae customers like him.
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With Sallie Mae withholding his student loan information, Borgeson’s credit scores at Trans Union and Experian plummeted by 40 points, driving up the interest rates he’s required to pay by 1.5 percentage points. Higher interest means higher payments. Borgeson pays an additional $200 a month in mortgage interest, just because Sallie Mae shared his student loan information with Equifax, and not Experian and Trans Union.
“If you default on your loans and they’re not reporting it, it doesn’t hurt you,” said Borgeson. “If you are making your payments and they’re not reporting it, it does.”
It turns out that Sallie Mae didn’t want to give other lenders access to their customer list. According to statements from Sallie Mae, they didn’t like the way Experian and Trans Union were selling customer information to other lenders, who were then able to target those customers with financial offers for loan consolidation and other offers.
Sallie Mae has seven million customers with $80 billion in receivables in student loans, all guaranteed by the taxpayers. The government-sponsored program started as a federally chartered corporation in 1972, and expects to be fully private by 2006.
Keeping credit score
When Borgeson went shopping for a mortgage, he improved his credit rating so he could get a good score. He was such a good risk, he qualified for the lowest interest rates. When Neuswanger did his final check, a day or so later, Borgeson’s credit rating had plummeted. Sallie Mae had decided it would only list with Equifax, and not Experian and Trans Union. A credit rating is based on an average of the reports from all three credit watchers.
Because Borgeson is young and his credit history is limited, his student loans comprise much of his credit history. If his stellar payment schedule isn’t reported to two of the three credit reporting agencies, his average plunges, he is considered a high risk to loan money to, and his interest rates and payments go up.
“Over a period of 30 years, he’d be paying an additional $108,000,” said Neuswanger– that’s more than $200 a month.
“They didn’t inform anyone, including the federal government, they were doing this,” said Neuswanger. “They say they were losing customers.”
Borgeson’s tale gained some ink from some financial magazines, and eventually a couple of U.S. senators.
“The thing really took on a life of its own, and isn’t it interesting that the experiences of one individual, if taken up and reported by the press can on occasion still induce the government into changing something,” said Neuswanger.
It was enough to get the attention of Sen. Richard Durbin, D-Ill. Durbin walked to the Senate floor last week ready to introduce a bill that basically took Sallie Mae to the woodshed, ordering them to stop the practice.
In the game of legislative chicken that followed, Sallie Mae flinched first. They announced they would play nice with all three credit agencies, reporting everything to everyone.
“The credit bureaus seemed to know they had Sallie Mae where they wanted them,” said Neuswanger. “My understanding is that they did not have to negotiate very much.”
Borgeson bought his Brett Ranch home and is in the process of living happily ever after.
“As long as Sallie Mae keeps recording this as they’re supposed to, the students and graduates will keep getting credit for handling their loans responsibly,” said Borgeson.