How Should Alternatives to Foreclosure (e.g., Deed in Lieu and Short Sale) Be Reported?

When a consumer opts for an alternative to foreclosure, such as a Deed in Lieu of Foreclosure or a Short Sale, it is essential to report these transactions accurately. Proper reporting ensures compliance with the Fair Credit Reporting Act (FCRA) and provides transparency in the consumer’s credit report. These alternatives, while still negative events, often have a less severe impact on a consumer’s credit profile than a full foreclosure.

Understanding Alternatives to Foreclosure

1. Deed in Lieu of Foreclosure:
   • A Deed in Lieu of Foreclosure occurs when the borrower voluntarily transfers ownership of the property to the lender to satisfy the mortgage debt. This option helps the borrower avoid the formal foreclosure process.
2. Short Sale:
   • A Short Sale involves selling the property for less than the outstanding mortgage balance, with the lender agreeing to accept the proceeds as full or partial satisfaction of the debt.

Steps for Reporting Deed in Lieu and Short Sale

1. Use the Correct Account Status Codes:
   • For a Deed in Lieu of Foreclosure, report the account with a status such as “Voluntary Surrender” or “Deed in Lieu of Foreclosure”. This distinguishes it from a standard foreclosure and provides clarity about the resolution of the account.
   • For a Short Sale, use an Account Status such as “Settled for Less than Full Balance” to indicate that the debt was resolved but not fully paid.
2. Apply Special Comment Codes:
   • Use Special Comment Codes to provide additional details about the transaction. For example:
     • A Deed in Lieu of Foreclosure may require a comment indicating that the property was voluntarily surrendered to satisfy the debt.
     • A Short Sale may require a comment such as “Settled for Less” or similar language to clarify the nature of the transaction.
3. Update the Balance and Payment History:
   • For both options, the account balance should be updated to zero if the lender forgives the remaining debt. If a deficiency balance remains, it should be reported as a separate obligation, with clear terms and repayment details.
   • Ensure that the Payment History Profile accurately reflects the resolution, including any delinquency leading up to the alternative resolution.
4. Notify Consumer Reporting Agencies (CRAs):
   • Notify all relevant CRAs about the resolution of the account. This ensures that the account’s status is updated consistently across all credit reports.
5. Report the Date of First Delinquency (DOFD):
   • Include the Date of First Delinquency (DOFD) to ensure that the negative information is removed from the consumer’s credit report after the appropriate retention period (typically seven years).

Compliance with the FCRA

The FCRA requires that all credit information reported to CRAs be accurate, complete, and verifiable. Properly reporting alternatives to foreclosure involves:

• Accuracy: Use the correct Account Status and Special Comment Codes to describe the resolution accurately.
• Consumer Rights: Consumers have the right to dispute inaccuracies. Providing clear and precise updates helps prevent disputes and ensures that the credit report reflects the true nature of the transaction.
• Transparency: Accurately reporting these alternatives helps lenders understand the borrower’s efforts to resolve the debt, which can positively influence future lending decisions.

Impact on the Consumer’s Credit Report

1. Credit Score Considerations:
   • Both Deed in Lieu of Foreclosure and Short Sale are negative events, but they generally have a less severe impact on a consumer’s credit score compared to a full foreclosure. Proper reporting ensures that the consumer’s creditworthiness is assessed fairly based on the specific resolution.
2. Lender Perception:
   • Reporting alternatives to foreclosure accurately shows that the consumer took proactive steps to resolve their debt. This transparency can work in the consumer’s favor when seeking new credit in the future.

Conclusion

Accurately reporting alternatives to foreclosure, such as Deed in Lieu and Short Sale, is essential for compliance with FCRA guidelines and for maintaining the integrity of the credit reporting system. By using the correct Account Status Codes, Special Comment Codes, and balance updates, data furnishers can ensure that credit reports reflect the resolution of the account clearly and fairly. Proper handling of these alternatives benefits both consumers and lenders by promoting transparency and fairness in the credit reporting process.