Mortgage Modifications Linked to Credit Reporting System, Causing Financial Harm to Homeowners

Jamie and Nick Jasper were easily enrolled in the federal mortgage modification program over the phone in January, but they didn't want it. Despite continuing to make their full mortgage payment, their credit score dropped 150 points because Bank of America reported them as making partial payments. The couple discovered this spring that the bank had signed them up after a single phone conversation with a representative. Bank of America attributed the mistake to a coding error and is working to resolve the issue and correct the credit report. This incident highlights the complicated credit reporting system and the potential long-term financial harm for unsuspecting homeowners.

Key Takeaways:

• Mortgage modifications can lead to credit score drops of over 100 points due to the widely used code, AC, which signifies a partial payment.
• This code can cause significant financial harm to homeowners, making it more expensive to borrow money or refinance an existing mortgage.
• Homeowners are not always informed that their credit score may be affected by signing up for a mortgage modification, and lenders are not required to provide sample notices warning of this potential impact.
• The Treasury Department is working with the credit reporting industry to develop new codes that more accurately reflect the status of an individual mortgage.
• Last year, a new code, CN, was created to indicate a mortgage permanently modified under a government plan, but it does not currently impact a credit score.
• The Fair Isaac Corp. has indicated that it won't make any adjustments to its FICO credit score formula for at least a year.

Statistics:

• The Jaspers' credit score dropped 150 points due to the incorrect reporting by Bank of America.
• Mortgage modifications can cause credit score drops of over 100 points due to the code, AC.
• The Treasury Department has issued sample notices that lenders can give to homeowners stating that "your credit score may be affected by accepting a trial period offer or modification."
• The FICO credit score formula won't be adjusted for at least a year.

Sources:

• Bank of America spokeswoman Jumana Bauwens
• Norm Magnuson, spokesman for the Consumer Data Industry Association
• California Democratic Congresswoman Jackie Speier's Protecting Homeowners' Credit History Act
• U.S. Treasury Department spokeswoman
• Fair Isaac Corp. spokesman Craig Watts
• Jamie and Nick Jasper