When a borrower and creditor agree to settle an account for less than the full amount owed, it’s crucial that the account is reported accurately and clearly. The Fair Credit Reporting Act (FCRA) requires data furnishers to ensure that all reported information is complete, truthful, and not misleading—especially for accounts that reflect modified repayment outcomes such as settlements.
What Does “Settled for Less” Mean?
A settlement typically occurs when:
- The borrower cannot repay the full balance
- The lender agrees to accept a reduced payment as full satisfaction of the debt
- The remaining balance is forgiven and not pursued
Although the consumer no longer owes the balance, the account is not considered “paid in full”, which must be reflected in credit reporting.
How to Report a Settled Account in Metro 2® Format
1. Set the Account Status to Charged-Off or Paid
Depending on how the account was handled:
- If charged off prior to settlement, use:
- Account Status = 93 – Charged off
- If settled before reaching charge-off status, you may use:
- Account Status = 13 – Paid or closed account/zero balance
Ensure that the Balance Amount = $0 and Scheduled Monthly Payment = $0, as the debt is no longer active.
2. Use a Special Comment Code to Reflect Settlement
To indicate the account was not paid in full, apply:
- Special Comment Code “AU – Account paid for less than full balance”
This alerts credit bureaus and lenders that the consumer did not fulfill the original terms of the agreement.
3. Update the Payment History and DOFD
- Do not remove historical delinquency
- Ensure the Date of First Delinquency (DOFD) remains unchanged if the account was previously delinquent
- Leave the Payment History Profile intact to show accurate repayment behavior
FCRA Compliance Requirements
The FCRA mandates that all information furnished:
- Be complete and not misleading
- Reflect the actual status and resolution of the account
- Be updated promptly if previously reported incorrectly
Failing to include the “AU” code or inaccurately marking the account as “paid in full” may be considered deceptive under the FCRA.
Impact on the Consumer’s Credit Report
- Prevents Confusion or Misleading Information
Clearly showing that the account was settled for less ensures transparency for future lenders. - May Affect Credit Score
Though better than a charge-off with unpaid balance, a settlement can still impact credit scores negatively compared to full payment. - Protects Consumer from Further Collection
Reporting a zero balance and settled status confirms the debt is no longer collectible.
Conclusion
Settlements are an important form of debt resolution, but they must be clearly and accurately reported. By setting the correct Account Status, applying the “AU” special comment code, and maintaining transparency in the payment history, furnishers meet both the technical and legal standards set by the Metro 2® format and the FCRA. This benefits consumers, lenders, and the integrity of the credit reporting system as a whole.