6 potential pitfalls for servicers in credit reporting

March 25, 2022 9:39 AM

The temporary guidance around credit reporting in the pandemic era is proving tricky to navigate in the transition back to more normal distressed-servicing operations.

The CARES Act, which was written quickly to respond to the pandemic and didn’t address all practical considerations, generally called upon servicers to not report loans with an accommodation for pandemic-related hardships in such a way that harmed borrower credit reports. That’s currently in effect until 120 days after the end of the presidentially declared national emergency.

As large groups of borrowers leave forbearance, servicers have to determine when and how to get back to recording delinquencies more routinely again.

That’s easier said than done, especially given the compliance sensitivities with regulators like the Consumer Financial Protection Bureau.

Consumer complaint numbers the bureau ranks by category show “credit reporting is one of the highest,” Marissa Yaker, managing attorney, regulatory affairs, at the Padgett Law Group, noted during a discussion at the Mortgage Bankers Association’s servicing conference last month.

The number rose notably last fall, at the same time that payment suspensions began to expire in earnest, CFPB records show. Complaints about credit reporting rose from just under 24,000 to 37,114 between October and January, before falling slightly to 36,640 in the past month.

While the CFPB has focused primarily on difficulties getting credit bureaus to fix mistakes, there are implications for mortgage companies, too, given that the bureau has separately warned multiple times that it’ll be watching their post-forbearance compliance closely.
The number of mortgage complaints, while lower than those involving credit reports, followed a similar upward trajectory after October. Complaints about home loans rose from 1,868 in November to 2,213 before stabilizing. Servicers also should note that while debt collection complaints initially fell last fall, they rose more recently, increasing to 5,418 from 4,947 between December and February.

Given the scrutiny that CARES Act-related credit reporting is likely to receive, housing finance companies may want to be particularly careful when it comes to the following six areas.

Changing guidance and non-regulatory standards

The shifting conditions of mortgage servicing can be evidenced in the the Consumer Financial Protection Bureau’s changing information resources about them. The CFPB originally had answers to 10 frequently asked questions about pandemic-related credit reporting, but deleted four of them as no longer relevant, and issued a new FAQ with six answers last month, according to Yaker.

The Consumer Data Industry Association, a credit bureau trade group, has some standards for reference, but servicers should keep in mind that it’s not a regulatory body, said John Ulzheimer, a professional courtroom witness who previously worked in the credit reporting industry. He has worked for plaintiffs, defendants, business and consumer clients.

“Ultimately the furnisher is liable for what they report, so they have to make their best decision and they can’t just blame it on the CDIA…you have to be able to defend it,” Ulzheimer said.

The broad definition of accommodations

Pandemic-related accommodations aren’t limited to forbearance. Workouts like modifications and partial payments are specifically considered examples of accommodations, according to the CFPB’s revised FAQ.

In fact, an accommodation can be “assistance or relief that is granted voluntarily or pursuant to a statutory or regulatory requirement.” That could encompass a wide range of programs, including those set up by the states to allocate money from the Homeowner Assistance Fund.

“Even the most minor flexibility could be viewed as an accommodation…during the covered period,” Ulzheimer said.

Inadvertently hurting credit with a comment code

The Consumer Financial Protection Bureau’s FAQ specifically states that special comment codes don’t fulfill credit reporting requirements for borrowers with pandemic-related accommodations.

Some mortgage companies nevertheless do use those that aren’t supposed to hurt credit while reporting the borrower with an accommodation current as the CARES Act demands, because in addition to fulfilling CARES Act requirements, data furnishers are supposed to be accurate.

The problem is not all comment codes are credit neutral, and in combination with other factors, they could potentially hurt a credit score.

For example, while codes for modifications like CN (for government mortgages) and CO (designating private loans) alone aren’t score negatives, the AC code for partial payments could have a negative impact, according to FICO, the industry’s main score provider.

“Some of the special comment codes are seen by credit scoring systems as being negative. Some of the special comment codes are not seen as being negative, like the AW disaster code,” said Ulzheimer.

The nuances involved in pre-pandemic delinquencies

Delinquencies from before an accommodation are tricky, because the CARES Act didn’t erase them from the credit reports of borrowers with coronavirus hardships — it froze them.

“For example, if at the time of the accommodation the furnisher was reporting the consumer as 30 days past due, during the accommodation, the furnisher may not report the account as 60 days past due,” the bureau stated in its FAQ.

Technically, when accommodations end and normal reporting resumes, remaining late payments from before the pandemic could still be in play, unless the seven years after which delinquencies fall off credit reports have passed or they’ve been resolved by a modification.

“If you're 60 days delinquent going into pandemic-related accommodation, and then you miss the 30 days coming out, you're 90 days late,” said Matthew Tully, executive vice president and chief of staff at servicing technology provider Sagent.

But when borrowers roll off forbearance and into a modification, if the loss mitigation measure resolves the borrower’s debt, the servicer has to be sure the frozen, pre-pandemic delinquency doesn’t pop up again in the consumer’s record.

“If during the accommodation the consumer brings the credit obligation or account current, the furnisher must report the credit obligation or account as current,” the FAQ stated.

Some servicers might think twice before resurfacing a past delinquency, particularly while the disaster declaration is still in place, Ulzheimer said.

Processing large numbers of data field updates

A lot of fields need to be changed as workouts proceed en masse. A completed modification on a loan that’s long been in forbearance, for example, often creates a need to update fields for a new payment amount, a longer term, and new affirmative update of the account balance.

“It’s almost like onboarding a new loan,” said Ulzheimer. “It's like you're starting the credit reporting over again at that point, accepting payments, applying them to a balance, reporting [them] as being on time.”

Reconciling multiple records

Mortgage companies generally have had at least two sets of loan performance records, their normal one and the one they need for CARES Act credit reporting. Mass forbearance exits and workouts mean they have to reconcile a lot of them in a short period of time.

Servicers can cope with the discrepancies between more normal mortgage performance records and CARES Act credit reporting requirements by using technology to cross-reference different tracks, said Tully, who works with clients to automate servicing operations.

“You have the actual accounting of the delinquency that we didn't want to change and then we worked with our clients to build a parallel accounting system on top of that for the credit reporting, taking into account the accommodation period,” Tully said. A third set of data processing criteria took into account foreclosure rules that have been in transition, he noted.