Author: Mindy Leisure, Advantage Credit, Manager of Rescoring Services
Under the CARES ACT thousands of consumers took advantage of the mortgage loan forbearance option. During that time no late payments were supposed to be reported to the credit bureaus, as no payments were being made during that time. Unfortunately, this was not always the case.
The largest number of late payments that seem to have occurred are when consumers were transitioning out of or extending their forbearance. Under the CARES ACT a consumer could put their mortgage into forbearance for a period of six months, they could then extend the forbearance for another six months if needed. Different types of loans could have extensions on top of that, conventional loans could be extended for another three months, and FHA and VA could extend for two additional three-month periods.
The other area where late payments have been inadvertently reported is when a consumer has come out of forbearance but still cannot make their full mortgage payment. They enter into a loan modification with their lender in which the consumer is making payments that are less than the original payment agreement. Since the payment amount is less, it is sometimes picked up as a late payment when it is reported to the credit bureaus.
During a forbearance or “modification,” it is very important to constantly monitor your credit reports. Fortunately, because credit reports are now free weekly through annualcreditreport.com, this is a relatively easy thing to do. If a consumer discovers a late payment has been reported, they should immediately contact their servicer. The consumer, as well as the servicer, should have detailed information regarding the forbearance extension or modification. Once they rectify the error the consumer should get it in writing for the servicer that they are removing the late payment(s).
Why has this happened? Credit data furnishers have very specific methods of reporting to the credit bureaus, which involve very little human intervention. When payments are missed, the software may not always pick up the forbearance codes that are used so it looks like the loan was 30, 60 or 90 days late when that was not actually the case. Needless to say, this can wreak havoc on a consumer’s credit scores.
Another problem is that some borrowers were under the impression that their forbearance would automatically extend after six months. So, when the payment was not made the seventh month it showed as 30 days late. This is perpetuated by the fact that even after the forbearance has ended the servicer continues to report to the credit bureaus with the forbearance “code.” When the consumer looks at their credit report it would still have the forbearance verbiage even though the forbearance had ended. There are some borrowers who saw this verbiage on their credit report and assumed the loan really was still in forbearance and did not make the payment as they should have done.
When a borrower is entering into a forbearance or modification of any kind there are certain actions they need to take:
- Make sure all the details are clearly in writing.
- Make sure they fully understand the extension options.
- Make sure they understand the repayment options – Forbearance is not a forgiveness of the debt. Missed payments do have to be made up but not necessarily in one lump sum.
- When the forbearance is over, it is important to talk to the servicer about their reporting practices and that they will drop the forbearance code.
- Monitor their credit report consistently for any inaccurate reporting.