A loan assumption occurs when a new borrower takes over responsibility for an existing loan from the original borrower. Properly reporting loan assumptions is essential for maintaining compliance with the Fair Credit Reporting Act (FCRA) and ensuring that both the original and new borrowers’ credit reports accurately reflect the transaction.
Understanding Loan Assumptions
There are two primary types of loan assumptions:
- Full Assumption:
- The new borrower assumes complete responsibility for the loan.
- The original borrower is released from liability, and the loan is reported under the new borrower’s credit profile.
- Simple Assumption:
- The new borrower agrees to make payments on the loan, but the original borrower remains legally responsible.
- Both the original and new borrowers may have the loan reported on their credit profiles.
Steps for Reporting Loan Assumptions
- Close the Original Borrower’s Tradeline (Full Assumption Only):
- If the assumption is a full assumption, update the original borrower’s account to reflect that the loan has been assumed and is no longer their responsibility.
- Use an Account Status such as “Closed – Account Transferred” to indicate that the loan is now under a different borrower’s name.
- The payment history up to the assumption date should remain on the original borrower’s report.
- Open a New Tradeline for the Assumed Loan:
- The new borrower’s credit report should reflect the assumed loan as a new tradeline with the correct loan balance, payment terms, and open date.
- The Date Opened should reflect the assumption date rather than the original loan’s start date.
- Use Special Comment Codes for Simple Assumptions:
- If the loan assumption is a simple assumption, where both the original and new borrower remain responsible, update the loan’s reporting to reflect this status.
- Use a Special Comment Code such as “Account Assigned to Another Party” to clarify that multiple borrowers share responsibility.
- Ensure Accuracy in Payment Reporting:
- If the original borrower is still liable for the debt (simple assumption), their credit report should continue reflecting on-time payments, late payments, or delinquencies.
- If the original borrower is released (full assumption), all further payments should be reported solely under the new borrower’s credit profile.
- Notify Consumer Reporting Agencies (CRAs):
- Submit the assumption update to all relevant CRAs to ensure consistent reporting across all major credit bureaus.
- Failure to update this information properly can lead to credit disputes and errors that may impact both borrowers.
Compliance with the FCRA
The FCRA requires that credit reporting be:
- Accurate: Ensure that loan assumptions are reflected correctly, distinguishing between full and simple assumptions.
- Complete: Include details about the assumption, such as the date of transfer and whether the original borrower remains responsible.
- Timely: Submit assumption updates promptly to prevent reporting discrepancies.
Impact on the Consumer’s Credit Report
- Credit Score Considerations:
- A full assumption removes the loan from the original borrower’s credit report, which may impact their credit mix and length of credit history.
- For the new borrower, the assumed loan is treated like any other new loan, affecting their debt-to-income ratio and credit age.
- Transparency for Lenders:
- Properly reported loan assumptions help lenders evaluate both the original and new borrowers fairly. Lenders need clear information on who is liable for the loan.
Conclusion
Reporting loan assumptions correctly is critical for ensuring compliance with the FCRA and maintaining the integrity of consumer credit reports. By accurately closing or transferring the loan, using appropriate Special Comment Codes, and notifying CRAs, data furnishers can ensure that both original and new borrowers’ credit histories reflect the transaction fairly. Proper handling of these accounts benefits consumers and lenders by promoting transparency and trust in the credit reporting system.