When an account is transferred from one lender to another—often due to the sale of a loan or a change in servicing—it is crucial that both lenders report the change accurately to maintain compliance with the Fair Credit Reporting Act (FCRA). Properly reporting transferred accounts ensures that the consumer’s credit history remains accurate and reflects the true status of their financial obligations.
Understanding Account Transfers
An account transfer occurs when one lender sells or transfers the servicing rights of a loan to another lender. This is common in the mortgage industry but can also happen with other types of loans, such as auto loans or credit card accounts. Accurate reporting of these transfers prevents duplicate tradelines and ensures that the consumer’s credit report reflects the current holder of the debt.
Steps for Reporting Transferred Accounts
- The Original Lender’s Responsibility:
- The original lender must update the account to indicate that it has been transferred and is no longer active. The account status should be marked as “Closed—Account Transferred”, with a zero balance if the account has been sold.
- It is essential that the original lender’s tradeline remains on the consumer’s credit report to reflect the complete payment history up to the point of transfer. This ensures that the consumer’s past payment activity remains part of their credit history, which can be beneficial for credit scoring.
- The New Lender’s Responsibility:
- The new lender, now holding the transferred account, must add a new tradeline to the consumer’s credit report. This tradeline should accurately reflect the current status of the account, including the balance, payment terms, and Account Type.
- The new lender must ensure that the Date Opened field reflects the date they took over the account, not the original date when the account was opened with the previous lender. This helps differentiate the new tradeline from the old one, preventing confusion and ensuring clarity.
- Ensure Accuracy and Avoid Duplicate Reporting:
- Both lenders must coordinate to avoid duplicate reporting of the account. The original lender should no longer update the account with new activity, while the new lender should provide ongoing updates. This helps ensure that the consumer’s credit report accurately reflects only one active version of the account.
- If both tradelines are reported as active, this could inflate the consumer’s debt profile and negatively affect their credit score. Proper coordination between the two lenders is essential to prevent these issues.
- Use Correct Special Comment Codes:
- The use of Special Comment Codes is important to indicate that the account has been transferred. This helps CRAs and potential creditors understand the status of the account and recognize that the original lender is no longer handling it.
- For example, the original lender should use a code such as “Transferred to another lender” to clarify the status of the closed account.
Compliance with the FCRA
The FCRA requires that all reported information be accurate, complete, and up-to-date. Both the original and the new lender must ensure that the transition is reported accurately:
- Accuracy: The account transfer must be reported accurately by both the original and new lenders. Any discrepancies could lead to errors in the consumer’s credit report, which may result in disputes or credit denials.
- Consumer Rights: If the consumer notices any discrepancies, such as duplicate accounts or incorrect balances, they have the right to dispute the information. Both the original and new lenders must investigate and correct any inaccuracies within 30 days.
Impact on the Consumer’s Credit Report
- Payment History:
- Proper reporting of an account transfer ensures that the consumer’s payment history is preserved. The original lender’s tradeline remains on the credit report, providing a full picture of the borrower’s past payment behavior, which is valuable for credit scoring purposes.
- Avoiding Credit Score Issues:
- Incorrectly reported account transfers can lead to duplicate tradelines, which may falsely inflate the consumer’s debt-to-income ratio. This can result in lower credit scores and make it difficult for the consumer to obtain new credit. Accurate reporting helps prevent these negative impacts.
Conclusion
Reporting transferred accounts requires careful coordination between the original and new lenders to ensure compliance with the FCRA. By accurately closing and updating the original tradeline, and creating a new tradeline with current information, lenders can protect the integrity of the consumer’s credit report. Proper reporting helps ensure that consumers are not unfairly penalized and that lenders have an accurate picture of their financial history.