by John T. Bauer, First American CREDCO

John T. Bauer is First American CREDCO’s executive vice president of business development, sales and marketing for the company’s mortgage business unit.

Without question, the issue of loan modifications is top of mind among servicers and consumers alike, especially since the March 4, 2009 announcement from the U.S. Department of Treasury regarding the new Home Affordable Modification Program.

The new Treasury Guidelines have servicers moving faster than ever to mobilize resources, scan and evaluate loan portfolios, and take proactive measures with their customers to salvage distressed mortgages. For troubled homeowners, the new Program is inspiring hope by offering the prospect of helping them get into affordable, long-term mortgages.

But considering the multiple variables that are factored in to loan modifications, such as interest rate reductions, amortization term extensions and even principle forbearance, the Program is also raising some key questions. Mainly, “What impact, if any, does a loan modification have on credit scores?”

Loan Modifications: Nothing New
It’s important to be reminded that loan modifications are not a new phenomenon. What is new is that you’ll likely see a significant increase in the volume of loan modifications, and the appearance of short sales and distressed refinances appearing on consumer credit report files, as a result of the new federal guidelines.

The Consumer Data Industry Association (CDIA, the trade organization of the credit reporting industry) provides reporting guidelines for loan modifications that, to date, haven’t changed. Essentially, whatever changes are made as a result of a loan modification, such as loan amount, interest rate, term of loan or monthly payment, will appear – as they do now – on a credit report.

CDIA Guidelines for Updating Credit Reports after a Loan Modification:
If the original Mortgage Account Number and Date Opened are retained, then modify the amounts and terms as per the renegotiated agreement. The fields that may be changed on a credit report in the wake of a loan modification include:

• Original Loan Amount
• Terms Duration
• Terms Frequency
• Scheduled Monthly Payment Amount
• Current Balance

Derogatory Information: Still the Culprit
One of the known variables that can impact credit scores – and will continue to in the foreseeable future – is delinquent payments. Derogatory information has an impact on consumer credit scores and, based on current CDIA guidelines, must be reported.

Other historical factors in loan modifications that can impact credit scores are changes in limits and loan amounts, balances, accounts being closed and new trades being opened. These activities are not necessarily negative or positive, as it depends on the overall credit profile.

Loan Modifications & Credit Scores: Looking Ahead
The Administration’s guidelines do not specifically reference credit scores as a determining factor for qualifying a loan modification. And, to date, there is no known special comment field or status code specific to loan modifications on credit reports.

However, because changes to a consumer’s mortgage payments, term or principal will be noted on a credit report, these items could be factored in to the calculation of their credit score. Whether or not a loan modification affects a credit score depends on the overall composition of the consumer’s credit profile as well as how the new loan modification credit obligation is reported. Bottom line, the credit score could remain unchanged, increase or decrease depending on the consumer’s unique circumstances. 

“The impact of a loan modification on a credit score depends on the overall composition of the consumer’s credit profile as well as how the new loan modification credit obligation is reported. The credit score could remain unchanged, increase or decrease.”

First American CREDCO will continue to monitor and report any significant changes to this policy or updates on the federal loan modification program that may impact your business and your customers.

First American CREDCO does not provide legal advice; therefore, this information is not intended, or should be perceived, as offering legal counsel to our customers.