A loan modification occurs when the creditor and borrower agree to alter the original terms of the loan, often due to financial hardship or a restructuring program. Common modifications include lowering the interest rate, extending the repayment term, or reducing the monthly payment. Because these changes impact the consumer’s repayment obligations, they must be reported with care to remain compliant with the FCRA and accurately reflect the new agreement.
Why Loan Modification Reporting Matters
Loan modifications are designed to help consumers avoid delinquency, foreclosure, or charge-off. If reported incorrectly, they may:
- Misrepresent the borrower’s financial standing
- Cause unnecessary credit score damage
- Lead to disputes under the FCRA
Steps for Reporting Modified Loans
1. Continue Reporting the Original Tradeline
Do not open a new account unless required by internal policy. Instead, update the existing tradeline to reflect the modification:
- Keep the original Date Opened
- Retain all historical payment history
- Report the new repayment terms moving forward
2. Update Terms and Scheduled Monthly Payment
Adjust the following fields to reflect the modified loan:
- Terms Duration (e.g., extended repayment schedule)
- Scheduled Monthly Payment Amount (reduced or adjusted)
- Balance Amount (if principal reduction was granted)
3. Apply the Correct Special Comment Code
Metro 2® requires a Special Comment Code to indicate modification:
- “CN – Loan modified under a federal government plan”
- “CO – Loan modified, not under a government plan”
This distinguishes modified loans from standard loans and ensures lenders understand the change.
4. Preserve the Date of First Delinquency (DOFD)
If the account was delinquent prior to modification, retain the DOFD for accurate credit aging. Do not reset the delinquency timeline.
FCRA Compliance Requirements
The FCRA requires furnishers to:
- Report accurate and complete information, including any new terms
- Avoid misrepresenting the loan as new when it is a modified obligation
- Update reports promptly as part of the regular reporting cycle
Failure to update correctly can be viewed as inaccurate or misleading reporting, exposing furnishers to legal risks.
Impact on the Consumer’s Credit Report
- Transparency in Loan Terms
Lenders reviewing the report will see that the account is modified, not a new obligation. - Preservation of Credit History
Consumers retain their original account history, including positive payment history prior to modification. - Fair Treatment During Hardship
Consumers are not penalized for seeking relief, provided the modification is properly coded.
Conclusion
Loan modifications must be reported as adjustments to the existing tradeline, with updated terms, balances, and scheduled payments. By applying the correct Special Comment Codes and preserving historical data, furnishers ensure compliance with the FCRA while giving consumers the benefit of accurate, transparent reporting during financial hardship.