Loan Modifications Are Hurting Credit Scores
by Tim Manni
The latest thorn in the side of President Obama’s loan modification program is that some participating borrowers could see their credit scores plummet:
Banks, including Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp., report the loan modifications to credit bureaus. The adjustments can lower credit scores because of the way the FICO formula, the most widely used by U.S. lenders, works.
“There should be clear disclosures so consumers understand this is a major hit on the credit score,” said Evan Hendricks, Washington-based author of “Credit Scores & Credit Reports.” “There’s no sugar-coating the reality of the negative impact.”
Borrowers might decide against participating when they learn what the program can do to their credit scores, said Jack Guttentag, founder of the Web site mtgprofessor.com and professor of finance emeritus at the University of Pennsylvania’s Wharton School. That could limit the number of modifications and result in more foreclosures, Guttentag said.
But the experts say it mainly depends on your lending institution. The Consumer Data Industry Association (CDIA), which represents the credit bureaus, has guidelines for how lenders should report loan mods. According to the CDIA, borrowers who are in the trial period of their modification should be reported as current, not delinquent. However, the way each private lending institution reports the new terms of the loan workout is different. FICO hasn’t decided whether or not to investigate if penalizing borrowers for loan workouts is legitimate.
Financial expert Gerri Detweiler says that, while a loan mod can hurt your credit score, it won’t impact it as much as a foreclosure, which can stay on your credit report for seven years, and could cut your credit score by 200 points.
Whether modifying through the government’s program or through a private lender, be sure to ask how the modification will impact your credit score.
