Forbearance is a temporary postponement or reduction of payments granted to a borrower facing financial hardship. It is commonly used for loans like mortgages, student loans, or auto loans. Reporting accounts accurately during forbearance is crucial for compliance with the Fair Credit Reporting Act (FCRA) and to ensure that the consumer’s credit report reflects their true financial situation.
Understanding Forbearance
Forbearance allows borrowers to pause or reduce their loan payments for a limited period, typically during times of financial difficulty. Unlike deferment, which may have different terms, forbearance usually means that interest continues to accrue on the loan during the forbearance period. Accurate reporting of accounts in forbearance helps maintain transparency and prevents misleading information from affecting the borrower’s credit score.
Steps for Reporting Accounts in Forbearance
- Use the Correct Account Status Code:
- When an account is in forbearance, it is important to use the appropriate Account Status Code in the Metro 2® Format. This helps clearly indicate that the borrower is not currently required to make payments but that the account remains active and in good standing.
- For example, use the status code indicating “Account in Forbearance” to ensure the account is accurately portrayed on the consumer’s credit report. This prevents the account from being inaccurately reported as delinquent.
- Apply Special Comment Codes:
- The use of Special Comment Codes is vital when reporting an account in forbearance. These codes provide additional details to the credit reporting agencies (CRAs) and make it clear that the forbearance is a temporary arrangement rather than a default.
- The Special Comment Code used should specifically indicate that the account is in forbearance. This ensures that the account’s status is correctly understood by anyone reviewing the credit report, including future lenders.
- Report Accurate Payment History:
- During forbearance, the Payment History Profile should accurately reflect that no payments are required. Do not report missed payments if the borrower is not required to make them during the forbearance period.
- Keeping the payment history accurate is critical to ensuring that the borrower’s credit score is not negatively impacted by the forbearance agreement. Reporting missed payments during a valid forbearance period can lead to inaccuracies and potential disputes.
- Update Balance and Interest Accrual:
- While in forbearance, the account balance and accrued interest must be accurately reported. If interest continues to accrue during the forbearance period, this should be reflected in the balance updates to ensure transparency.
- Consumers should be aware of any increase in their loan balance due to accrued interest during forbearance, and this information should be accurately conveyed in the credit report.
Compliance with the FCRA
The FCRA requires that all information reported to CRAs is accurate, complete, and up-to-date. This includes correctly reflecting the forbearance status of an account and ensuring that consumers are not unfairly penalized for using a forbearance option they are entitled to.
- Accuracy: Reporting inaccurate information, such as missed payments during a valid forbearance period, can result in significant harm to a consumer’s credit score and lead to disputes. Compliance with FCRA guidelines requires that the account’s status be reported accurately.
- Consumer Rights: Consumers have the right to dispute incorrect information on their credit reports. If an account in forbearance is reported incorrectly, such as being marked delinquent, the consumer can file a dispute. Data furnishers are then required to investigate and correct any errors promptly, usually within 30 days.
Impact on the Consumer’s Credit Report
- Credit Score Considerations:
- Properly reported forbearance should not negatively impact the consumer’s credit score. The account should be marked as “current” or “in forbearance,” rather than delinquent, which helps protect the consumer’s creditworthiness during times of financial difficulty.
- Lender Perception:
- Accurate reporting of forbearance can also influence lender perception positively. Lenders reviewing the credit report can see that the consumer took responsible steps during financial hardship, which may reflect well on their ability to manage financial obligations.
Conclusion
Reporting accounts in forbearance requires precision and a clear understanding of FCRA requirements. By using the correct Account Status Codes, Special Comment Codes, and accurately updating payment history and balances, data furnishers can ensure that consumer credit reports reflect the reality of the situation without causing unnecessary harm. Proper reporting during forbearance benefits both consumers and lenders, promoting transparency and compliance within the credit reporting system.