How Should Mortgage Loan Modifications Be Reported?

A mortgage loan modification is an agreement between a lender and borrower to change the terms of a mortgage, often to make payments more manageable for the borrower. Properly reporting loan modifications is critical for compliance with the Fair Credit Reporting Act (FCRA) and for providing transparency in the consumer’s credit report.

Understanding Mortgage Loan Modifications

Loan modifications can involve changes such as:

• Extending the loan term.
• Reducing the interest rate.
• Changing the payment structure to include reduced monthly payments.

Unlike refinancing, a loan modification adjusts the terms of the existing loan rather than creating a new loan.

Steps for Reporting Loan Modifications

1. Update the Account Status:
   • When a loan modification occurs, update the Account Status to reflect the modification. Use a status such as “Loan Modified” to indicate the change.
   • If the modification resolves a delinquency, update the account status to show the current status as “Paid as Agreed” or “Current” if applicable.
2. Adjust the Terms and Balance:
   • Report any changes to the loan’s terms, such as:
     • A new payment amount or frequency.
     • A revised balance due to capitalized interest or fees.
   • Clearly reflect the updated loan balance and repayment terms in the account details.
3. Use Special Comment Codes:
   • Include appropriate Special Comment Codes to provide context about the loan modification. For example:
     • A code indicating “Loan Terms Modified” helps clarify the changes to future lenders.
   • This ensures transparency and provides insight into the consumer’s financial situation.
4. Preserve the Payment History:
   • Retain the account’s Payment History Profile to reflect payments made before and after the modification. This history is important for providing a complete view of the consumer’s financial behavior.
5. Include the Date of First Delinquency (DOFD):
   • If the loan was delinquent prior to the modification, ensure that the Date of First Delinquency (DOFD) is accurately reported. This date determines how long negative information remains on the credit report, typically seven years.
6. Notify Consumer Reporting Agencies (CRAs):
   • Update all relevant CRAs with the new loan terms and account status. Consistent reporting across all agencies ensures accuracy and prevents discrepancies.

Compliance with the FCRA

The FCRA requires that credit information be:

• Accurate: Ensure that the modified terms and updated account status are correctly reported.
• Complete: Provide all necessary details about the loan modification, including changes to the balance, payment schedule, and status.
• Timely: Report updates promptly to ensure that the consumer’s credit report reflects the most current information.

Impact on the Consumer’s Credit Report

1. Credit Score Considerations:
   • A loan modification can have varying effects on a consumer’s credit score. If the modification resolves a delinquency, it can positively impact the score by bringing the account to a current status.
   • Accurate reporting ensures that the credit score reflects the true financial state of the borrower.
2. Transparency for Lenders:
   • Properly reported loan modifications provide future lenders with clear information about the borrower’s efforts to manage their financial obligations. This can improve the consumer’s chances of securing new credit.

Conclusion

Reporting mortgage loan modifications accurately is essential for compliance with the FCRA and for ensuring the integrity of consumer credit reports. By updating account statuses, preserving payment histories, and using Special Comment Codes, data furnishers can provide a complete and transparent view of the loan modification. Proper handling of these accounts benefits both consumers and lenders by promoting trust and fairness in the credit reporting system.