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Loan Modifications & Credit – It’s All In The Code

by Linda on April 13, 2010

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Just over a year ago, the Obama Administration’s $75 billion mortgage modification program went into effect, a response to the first year of “The Great Recession,” where nearly two million Americans lost their homes through foreclosure, short sales, and deeds in lieu of foreclosure. An effort to rescue homeowners teetering on the brink of disclosure, it has reduced monthly payments for hundreds of thousands of people in the past year. But what has its impact been beyond the basics that it set out to accomplish? If you decide to take part, how would it affect your credit report?

As you might expect, mortgage lenders didn’t let the Obama modification program slide for many people without reporting their participation to the three credit reporting agencies. When a creditor sends information about you to a credit reporting agency, a note is made in your credit report with a code representing things like the amount of money you borrowed and whether you paid on time. The codes are defined by the Consumer Data Industry Association (CDIA), the trade association representing the credit bureaus, and stand for all kinds of credit issues, from relatively little things all the way to bankruptcy. When the new mortgage modification program went into effect last year, however, lenders and reporting agencies didn’t have anything that specifically pertained to the Obama Administration’s rescue plan.

It’s All In the Code

Initially, they used the code AC, one that already existed but which is normally used when someone makes a partial payment on an account, arguing that it was the closest fit. However, the AC code created more problems for people struggling to get on their financial feet. By inaccurately portraying people participating in the modification program as making only partial payments even if they were making full payments before and after entering into loan modification, the AC code’s appearance on their credit report damaged their credit. According to a U.S. Treasury Department spokeswoman quoted in a recent New York Times article, the AC code lowered individual credit scores between 30 and 100 points, depending on individual circumstances.

Responding to concerns about the AC code’s relevance to the loan modification program and its tendency to unfairly damage the credit scores of program participants, the CDIA created a new code in November to specifically address the Obama Administration’s efforts to help homeowners in danger of losing their houses. Labeled CN, the new code signifies that a loan has been modified through a federal program and, unlike the old AC code, it has no impact on FICO scores.

Retroactive Or Not?

Whether people with the old AC code applied to their participation in the loan modification program will have their credit reports modified, the AC code becoming a CN, seems up in the air right now. The New York Times reports that while the CDIA guidelines don’t specifically address such a modification, the Treasury Department claims that the AC code will eventually be dropped for people who meet the criteria for CN. In the meantime, what can you do if you are in the Administration’s loan modification program and have an unwarranted AC on your credit report as a result? Be proactive! Don’t wait for your bank to take care of it when and if they get around to it – call your lender yourself and demand that they change the AC code to a CN!

While the CN code will have no impact on your FICO score for now, how it is interpreted in the years ahead remains to be seen. The philosophy behind what effect various credit-related activities have on your FICO score is the risk factor they represent. Someone with a history of late payments is considered by the scoring system to be more likely to not pay back his debts than someone without such a history. So what happens with the CN code in the future will depend on whether the credit reporting agencies decide that there is a correlation between participation in the loan modification program and inability to repay over the months and years ahead.

In Conclusion

Of course, no matter what happens in the future, the reporting change to the CN code does not mean you’re off the hook when it comes to making your payments on time! Even though, for now, there is no penalty to your FICO score for participating in the Obama Administration’s mortgage modification program, the usual penalties for late payments still apply. So no matter what twists and turns take place in the coding of specific items on your credit report, the basics will always apply. Make your payments on time, either online or by mailing them in 7-10 days before the due date. By staying on top of your financial situation and being proactive in your relationship with your creditors, you can get yourself into a strong position for the future no matter what happens with government programs and the policies of the credit bureaus in the years ahead.

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{ 1 comment… read it below or add one }

Greg Cook April 13, 2010 at 6:54 am

Linda, this is the best article I’ve read on the subject matter. Most “experts” never mention the “code”.

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