INTERPRETING AND UNDERSTANDING
CREDIT REPORTS
Patrick Brachmann, FALU, FLMI
Senior Underwriting Consultant
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.
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
© 2014 Munich American Reassurance Company. All Rights Reserved.
3
Examples of the ‘Big 3’

TransUnion Example

Equifax Example
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
Experian Example
4
What’s in a number?
© 2014 Munich American Reassurance Company. All Rights Reserved.
Credit Scores
Equifax
Trans
Union
• Uses FICO based score/ Beacon Score
• Range from 280-850/ Higher scores are better
• Uses FICO based score/Empirica
• Range from 300-850/Higher scores are better
• Uses FICO based score/ Experian-FICO Risk Model
Experian • 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.
Credit report items of significance
What important items can underwriters
glean from credit reports?
 Verification of personal information
(SS#, addresses, OFAC, etc.)
 Any collections in PI’s history
 Tax liens (Federal and State)
 Civil judgments
 Charge offs
 Bankruptcies
 Foreclosures
 A case you are ‘on the fence’ – the
final piece to make your decision?
© 2014 Munich American Reassurance Company. All Rights Reserved.
TransUnion’s Credit Report – A closer look
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TransUnion Credit Report (cont.)
© 2014 Munich American Reassurance Company. All Rights Reserved.
Equifax Credit Report – A closer look
© 2014 Munich American Reassurance Company. All Rights Reserved.
Equifax Credit Report (cont.)
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Experian Credit Report
© 2014 Munich American Reassurance Company. All Rights Reserved.
12
Consolidated Code Guide Sheet

Standard codes for all
credit agencies

ECOA = Equal Credit
Opportunity Act

Codes that differ by
reporting agency
© 2014 Munich American Reassurance Company. All Rights Reserved.

Payment codes also differ
by reporting agency
13
Credit report summary
Example of credit report summary
THE APPLICANT HAS BEEN ON FILE SINCE 09/1994 WITH 7 ACCOUNTS:
BK OF AMER
Opened:01/2011
Bal:0
PastDue: 0
CS:R1
GECRB/LINT
Opened:10/2007
Bal:0
PastDue: 0
CS:R1
VERICREST
Opened:04/2012
Bal:406895
PastDue: 0
CS:I1
CHASE
Opened:11/1994
Bal:0
PastDue: 0
CS:R1
BK OF AMER
Opened:09/2009
Bal:0
PastDue: 0
CS:R1
AMEX
Opened:05/2004
Bal:136
PastDue: 0
CS:R1
FLAGSTARBK
Opened:05/2012
Bal:377389
PastDue: 0
CS: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
© 2014 Munich American Reassurance Company. All Rights Reserved.
14
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.
Electronic Inspection Reports
Obtained in place of traditional inspection
reports
No need for client contact
Database 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.
Bankruptcies
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Types of Bankruptcies seen most often in underwriting
Chapter 7
• Personal
• Liquidation
Chapter 11
• Business
• Reorganization/Restructuring
Chapter 12
• Farmers & Fisherman
Chapter 13
• Personal
• Wage earner plan
© 2014 Munich American Reassurance Company. All Rights Reserved.
18
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
© 2014 Munich American Reassurance Company. All Rights Reserved.
19
Chapter 13 Bankruptcy(personal)
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.
20
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.
Chapter 12 Bankruptcy (specialized business)
Designed for family farmers or fisherman with
regular income
Allows them to repay all or part of their debt
Repayment 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.
Underwriting Considerations
Cause of Bankruptcy?
Job Loss?
Illness?
Prior History
Previous
Bankruptcy?
Business
Failure?
Poor
Judgment?
Credit
History
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Insurance History
Lapse History?
Churning Coverage?
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.
Case Studies
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Case Study #1
© 2014 Munich American Reassurance Company. All Rights Reserved.

$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
Case Study

8 of 13 accounts currently past due


4 of the 8 past due accounts were
rated I9/R9 (charged off) for total of
$170K
Mortgages $359K past due(> 120
days) and $156K past due( > 120
days) Over $500K past due!!!

Admitted suit against for $300K &
disposition unknown
4 accounts rated 5 (more than 120
days past due)

Concerning for anti-selection- where
is the money going?? Need to “follow
the money”

© 2014 Munich American Reassurance Company. All Rights Reserved.
Case Study #2
© 2014 Munich American Reassurance Company. All Rights Reserved.

42 yr old

Face amount $5,000,000
10 yr term

$750,000 of insurance
inforce

VP of sales – current
position 5 yrs

Income $185,000 & NW
$2,500,000

Insp. notes loss of
$10,000 annually from
rentals

Home= Zillow est. of
$461,000, bought in 2008
for $557,000
28
Case Study
 No significant medical
concerns
 Agent states
‘underwater’ on rentals,
trying to sell them
 Many mortgages on
report – explanation
seem plausible?
© 2014 Munich American Reassurance Company. All Rights Reserved.
29
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?
© 2014 Munich American Reassurance Company. All Rights Reserved.
Case Study (cont.)
Discovered there were two bankruptcies in the past
1st 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
 1st 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
© 2014 Munich American Reassurance Company. All Rights Reserved.
31
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 antiselection
© 2014 Munich American Reassurance Company. All Rights Reserved.
THANK YOU FOR ATTENDING THE
PRESENTATION!