Mortgage Companies

Mortgage Companies’ Reports to the Credit Bureaus

Mortgage loan companies and mortgage servicing companies sometimes send inaccurate or misleading reports to the credit reporting agencies after events such as short sales, foreclosures, and payment modification plans are put in place.

Credit Reporting after a Short Sales

A short sale is a real estate transaction in which a lender allows the home owner to sell his or her home for less than the full amount owed on the mortgage. In California, about 100,000 homes are sold in short sales each year. Under a new California law effective July 15, 2011, the selling owner of a dwelling with four or fewer units sold in a short sale does not owe the lender any deficiency balance (Civil Code Section 580e). Accordingly, after a short sale, the lender may not accurately report that the consumer owes any money on the mortgage loan.

Credit Reporting after Foreclosures

If a lender forecloses on a dwelling of four or fewer units and if the loan was to purchase the property, the lender may not seek a judgment for the deficiency balance. This has long been the law in California. Civil Code Section 580b. This law applies to both 1st and 2d mortgages.

Given that the lender cannot obtain a judgment, the question arises whether the creditor may report that any debt is owed to the credit reporting agencies. Reports to the credit bureaus must be not only accurate, but also may not be misleading. Accordingly, any report to the credit bureaus should make clear that the former home owner is not subject to a lawsuit and judgment. For example, a report that a debt of $100,000 (the deficiency balance following foreclosure) is “due and owing” is misleading because in fact the lender has no recourse to the courts to collect that amount.

Credit Reporting and Home Affordable Modification Plans

The U.S. Treasury has guidelines for its Home Affordable Modification programs (“HAMP”). Under HAMP, mortgage companies first enter into a trial period during which the home owner makes reduced mortgage payments. Under the Treasury guidelines, if the owner was current on the mortgage payments before entering into the program and if he or she makes the required reduced payments during the trial period, the lender may not report late or inadequate payments to the credit bureaus.

Once a permanent modification plan is put in place, so long as the owner makes the required mortgage payments, the lender may not send adverse reports to the credit bureaus. The lender may report that modified payments are being made under a federal government plan.

Mortgage Companies Liability under FCRA

Mortgage companies that furnish inaccurate or misleading reports to the credit bureaus cause consumers’ credit scores to be significantly lowered. Lowered credit scores may make it expensive or impossible for the consumer to buy a home. For example, the FHA may not guarantee a home loan if the buyer sold a home in a short sale and has a late payment report on his or her credit.