Effect of HAMP Mortgage Modifications on Credit Reports and Credit Scores
August 12, 2009
Recently our office has received many questions about the proper credit reporting of HAMP-modified mortgages.
This post discusses (1) how they are being reported, (2) how they should be reported, (3) what you can do to get your HAMP-modified mortgage reported correctly, and (4) possible effects even the “correct” reporting might have on your credit score.
How HAMP-modified loans are being reported now
Many servicers are reporting the modified mortgages to the credit bureaus as a “rolling 30-day late” while the modification is in its trial period.
(The “trial period” is generally a three month period during which the homeowner must make all payments on time under a proposed modification plan. If the homeowner does so, he or she will be offered a modification under HAMP.)
Homeowners are deemed “delinquent” during the trial period because the modified payment amount is less than the original mortgage payment amount, but the homeowner is not yet officially in the modification program.
So, the credit reporting system interprets this as the homeowner’s making a partial mortgage payment each month. Consequently, a new 30-day late is reported each month during the trial period.
Some servicers have told homeowners they are required by the Treasury Department to report the modified mortgages this way.  Other servicers have told homeowners Treasury instructed them to report the mortgages as “late” in order to weed out people who could afford to pay the original amount of their mortgage.
How HAMP-modified loans SHOULD be reported during the trial period
But, borrowers who are current on their mortgage when they enter into the trial modification period should NOT be reported as late, according to servicer guidelines for Fannie Mae, Freddie Mac, as well as other loans (“non-GSE loans”) being modified by HAMP-participating servicers.
Homeowners who were delinquent when they entered the modification trial period, however, will continue to be reported as delinquent during the trial period. See below for more detail.
Information to forward to your servicer if it’s reporting incorrectly
If your loan is owned or guaranteed by Fannie Mae, see page 12 of Fannie Mae Servicing Guide Announcement 09-05R for information about credit reporting for HAMP-modified Fannie Mae loans. It says:
ÂIf a borrower is current when they enter the Trial Period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the last business day of each Trial Period month at the modified amount during the Trial Period. If a borrower is delinquent when they enter the Trial Period, the servicer should continue to report in such a manner that accurately reflects the borrowerÂs delinquency and workout status following usual and customary reporting standards. In both cases the servicer should report the modification when it becomes final.Â
ÂBorrowers who are current when they enter into the Trial Period and make payments by the 30th day of each month, report as current, but on a modified payment. Borrowers who are delinquent when they enter into the Trial Period or do not make payments by the 30th of each month, report according to borrowerÂs delinquency and workout status. Notify when borrowers have completed the modification.Â
If your loan is NOT owned or guaranteed by Fannie Mae or Freddie Mac, see page 22 of “HAMP Servicer Supplemental Directive 09-01″ for information about credit reporting guidelines for modified non-GSE loans. It specifies the following:
“The servicer should continue to report a Âfull-file status report to the four major credit repositories for each loan under the HAMP … on the basis of the following: (i) for borrowers who are current when they enter the trial period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the 30th day of each trial period month at the modified amount during the trial period, as well as report the modification when completed, and (ii) for borrowers who are delinquent when they enter the trial period, the servicer should continue to report in such a manner that accurately reflects the borrowerÂs delinquency and workout status following usual and customary reporting standards, as well as report the modification when completed. More detailed guidance on these reporting requirements will be published by the CDIA.”
What does this mean for homeowners who are thinking about applying for a modification?
To help minimize damage to your credit report and score, you should apply and try to get into a trial period while you are still current on your mortgage.
You do not have to be behind on your mortgage to apply for a HAMP modification.
What does this mean for homeowners who have recently applied for a modification?
Verify that your lender or servicer understands how it should be reporting your modified loan. Do this before starting your modification program, if possible.
Several homeowners have told our office they had to send a copy of the relevant HAMP credit reporting guidelines to the servicers, who were apparently unaware the guidelines existed.
Remember, you can review all the HAMP and HARP mortgage servicer guidelines at this link.
Will the reporting of “current, but on a modified amount” hurt my credit?
It is impossible to say for sure because FICO does not publish its scoring model.
But, “current, but on modified amount” might ding your score a little. This reporting is telling the credit bureau you are currently paying as agreed, but less than the original amount you contracted to pay.
The FICO scoring model may not give you full credit for paying as agreed. But, this will not be nearly as damaging as rolling 30-day lates.
What if my modification is not through HAMP?
The credit reporting guidelines above apply only to HAMP-modified loans. If you have arranged a non-HAMP modification with your lender or you have modified your loan through another mortgage relief program, these credit reporting guidelines will not apply.
Be sure to negotiate the credit reporting with your serivcer as part of your overall modification package. Even if the servicer insists on reporting your loan negatively, at least you can make an informed decision as to whether a particular modification package will work for you.
New NCLC Report “Automated Injustice” Discusses Credit Bureaus’ Failure to Investigate Consumer Disputes
January 27, 2009
The National Consumer Law Center (NCLC) has published a new report revealing industry-wide problems with how credit bureaus handle consumer disputes.
The findings of the report are unlikely to surprise any consumer who has tried to dispute an error on his or her credit report.
Bureau representatives have repeatedly told our office that a dispute only requires them to compare the information they report to the information the creditor provided. If the information matches, the investigation is deemed complete. But, courts have repeatedly rejected this interpretation of bureaus’ investigation duties under the Fair Credit Reporting Act (FCRA.)
And, in the course of handling consumer disputes, our office has never seen a single example of a bureau actually forwarding a consumer’s dispute letter and supporting documentation to a creditor / subscriber for investigation. Yet, this is one of the tasks bureaus are charged with under the Fair Credit Reporting Act. The NCLC report discusses this industry failure as well.
Automated Injustice: How a Mechanized Dispute System Frustrates Consumers Seeking to Fix Errors in Their Credit Reports, Jan. 27, 2009
Will Paying a Collection Account Improve my Credit Score?
January 11, 2009
How do collection accounts affect my credit report and credit score?
The company with whom you originally had an account is called an “original creditor.”
Once the original creditor gives up on trying to collect on an account, it will charge off the account and may assign or sell the account to a debt collector.
Once the account has been sold or transferred to a debt collector, there may be two entries on your credit report.
One entry will be from the original creditor. It will usually show that the account has been “charged off.”
The debt collector may make a separate entry on your credit report. Both of these entries can harm your credit report and your credit score.
Will paying the debt collector improve my credit score?
Simply paying a debt collector may not help your credit score.
This is partly because of the double reporting problem described above, and partly because of the scoring model that is used to calculate your credit score.
Even if you pay a debt collector, the original creditor’s negative item will still appear on your credit report.
And, a debt collector may not delete its entry on your credit report after you pay. It may simply notify the credit bureaus to report the account as a “paid collection.”
But, the credit scoring models are designed to penalize consumers for any collection account appearing on their credit report– even if the account is a “paid collection.”
But, there may be other reasons to pay a collection account.
Even though paying the collection account may not help your credit score, there may be other reasons to pay and / or settle the account.
Avoid a debt collection lawsuit. These days, more creditors and debt collectors are suing consumers to collect on old debt.
You plan to make a large purchase. Most mortgage companies and some car financing companies will require you to pay any collection accounts before they will give you a loan.
You are looking for a job or applying for a security clearance. Many employers do a credit check before offering applicants a job. Many employers will see unpaid collection accounts as a red flag. And, it would be very difficult to get any kind or security clearance if you have outstanding collection accounts on your credit report.
Negotiate Improved Credit Reporting.
For the reasons discussed above, it is very important to negotiate the best possible credit reporting when paying any accounts.
Many times (though not always), the best possible outcome is a deletion of the debt collector’s entry (also called a “tradeline”) from your credit report.
But, be sure to negotiate improved credit reporting before making payment. After you have paid off the account, the creditor or debt collector has no incentive to change its reporting of the tradeline.
And, as always, get everything in writing.
How to Dispute Items on a Credit Report
October 25, 2008
Many consumers have inaccurate entries or items on their credit reports. But, it can sometimes be difficult to determine who is responsible for the error.
Companies you have accounts with often report your payment history to the credit bureaus. When they report this information, they are called “subscribers.”
The credit bureaus gather information from all of your creditors and put together your credit report. Bureaus then sell your credit report to creditors who order it. Consumers can also order copies of their own credit reports.
Sometimes subscribers report inaccurate information to the bureaus. But, sometimes credit bureaus make errors when they gather, store, and / or re-report the information.
Consequently, it is very important to dispute inaccurate items on your credit report with BOTH THE CREDITOR AND THE CREDIT BUREAUS.
There is another reason for doing so: many consumer protections are triggered by routing your dispute through the bureaus.
Once a consumer has alerted the bureaus to investigate an inaccurate item, the creditor and the credit bureaus are held to a standard of using “reasonable procedures” in investigating and correcting any disputed information.
This standard can become important if a consumer later needs to take legal action to force and uncooperative party to correct an inaccurate item.
When disputing an item on your credit report, first write a letter to the creditor describing your dispute.
Then, write a letter to each bureau explaining your dispute. THIS STEP IS CRITICAL.
Once the bureau receives your dispute, it is supposed to contact the creditor to (1) notify the creditor of your dispute and (2) attempt to verify the dispute information.
If you have previously notified the creditor of your dispute, the creditor in theory should investigate the dispute before verifying any information to the bureaus. Unfortunately, this rarely happens in practice.
But, documenting a creditor’s failure to investigate before verifying an inaccurate item to the bureaus can be very important if the consumer needs to take further legal action to get the inaccurate item corrected.
For sample dispute letters, click here.
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