A reverse mortgage is a unique type of loan available primarily to homeowners aged 62 or older. Instead of the borrower making payments to the lender, the lender makes payments to the borrower, using the homeowner’s equity as collateral. Reporting reverse mortgages requires special attention to detail to ensure compliance with the Fair Credit Reporting Act (FCRA) and to accurately reflect the borrower’s financial obligations.
Understanding Reverse Mortgages
In a reverse mortgage arrangement:
- The homeowner receives funds from the lender, either as a lump sum, monthly payments, or a line of credit.
- No payments are required from the borrower as long as they live in the home and meet the loan’s conditions.
- The loan balance increases over time due to accruing interest and fees.
Given these characteristics, reverse mortgages require a different reporting approach than traditional loans.
Steps for Reporting Reverse Mortgages
- Use the Correct Account Type Code:
- Reverse mortgages should be reported as a secured loan, tied to the property that serves as collateral. Use the appropriate Account Type Code to indicate that the account is a reverse mortgage.
- Reflect the Growing Balance:
- Unlike traditional loans, where the balance decreases as payments are made, the balance on a reverse mortgage increases over time due to interest and fees. Regularly update the balance to reflect this growth, ensuring that the credit report accurately represents the amount owed.
- Do Not Report Payment Delinquencies:
- Since the borrower is not required to make monthly payments, delinquencies should not be reported unless the borrower fails to meet specific obligations, such as paying property taxes or maintaining homeowners’ insurance. In such cases, report delinquencies with the appropriate codes and comments.
- Use Special Comment Codes as Needed:
- If the reverse mortgage is in a special status, such as being in foreclosure or due to noncompliance with loan terms, use Special Comment Codes to provide additional details. For example, a comment indicating “Property Tax Delinquency” or “Insurance Lapsed” may be applicable.
- Report the Loan’s Termination Accurately:
- When a reverse mortgage is terminated—due to the sale of the home, repayment of the loan, or the borrower vacating the property—update the account to reflect its closure. Use codes such as “Paid in Full” or “Closed—Account Satisfied” to indicate the resolution.
Compliance with the FCRA
The FCRA requires that all reported information be accurate, complete, and verifiable. For reverse mortgages, this involves:
- Accuracy: Ensure that the balance reflects the accrual of interest and fees over time. Avoid reporting delinquencies unless the borrower has failed to meet specific obligations under the loan terms.
- Transparency: Use Special Comment Codes to clarify unique circumstances, such as noncompliance with loan conditions.
- Consumer Rights: Consumers have the right to dispute inaccuracies in their credit reports. Clear and precise reporting of reverse mortgages helps prevent disputes and ensures that consumers’ credit profiles remain accurate.
Impact on the Consumer’s Credit Report
- Credit Score Considerations:
- Reverse mortgages do not typically impact a consumer’s credit score negatively, as no monthly payments are required. However, failure to meet loan obligations, such as property taxes, can lead to negative reporting.
- Lender Perception:
- Accurate reporting of reverse mortgages provides lenders with a clear understanding of the consumer’s financial obligations. This transparency is crucial for lenders evaluating the consumer’s overall creditworthiness.
Conclusion
Reporting reverse mortgages accurately is essential for maintaining compliance with the FCRA and ensuring that credit reports reflect the unique nature of these loans. By using the correct Account Type Codes, updating balances regularly, and including Special Comment Codes when necessary, data furnishers can provide clarity and fairness in the reporting process. Proper handling of reverse mortgages benefits consumers by ensuring their credit profiles are accurate and transparent, promoting trust in the credit reporting system.