Forbearance becomes a ‘Scarlet Letter’ on credit reports

A 'comments section' workaround consumers aren’t being told about

Mortgages in forbearance as a result of COVID-19 have to be reported as “current” on credit reports.

That’s the law, as laid out in Section 4021 of the CARES Act passed by Congress at the end of March. It says servicers “shall report the credit obligation or account as current.”

But, it turns out there’s a workaround that can make it difficult for people with mortgages in forbearance to get another home loan after the COVID-19 crisis is over – for as long as a year after the forbearance period ends. That can impact their ability to refinance or buy a home when times are better.

The CARES Act doesn’t mention the comments section of credit reports, and that’s where forbearance notations are going.

Any reference to forbearance on a credit report, including in the comments section, can be a “scarlet letter” for an applicant hoping to get a new mortgage, said David Stevens, the former head of the Mortgage Bankers Association who is now CEO of Mountain Lake Consulting.

“I think the intent of lawmakers is that forbearance would not harm your credit, when in fact that label may do just that,” Stevens said. “I don’t believe consumers are aware they have this scarlet letter being reported on their mortgage.”

The way credit bureaus such as Experian, Transunion, Equifax are reporting forbearance does show the mortgages as current, according to documents reviewed by HousingWire. In the section that lists how many times a mortgage had late payments, broken out by 30 days to 59 days, 60 days to 89 days, and “90+” days, the documents show all zeros.

That means: No late payments. The loan is, technically, current. The credit bureaus are following the letter of the law.

What some lawmakers may have overlooked, when passing the CARES Act, is that pesky comments section.

“Account in forbearance, payment deferred,” it reads for loans that have suspended payments due to the economic fallout of the COVID-19 pandemic, according to the documents reviewed by HousingWire.

In one case, it’s on the credit report of a borrower who wasn’t in forbearance. He called his servicer in March to get information. He never asked for or agreed to a forbearance. Like millions of Americans, he was worried. He had questions.

In the end, the borrower didn’t lose his job. When he went online to make his April mortgage payment, his loan was marked as being in forbearance. He called his servicer, who fixed his status and provided him with a letter stating what happened. The servicer said it would send letters to the three main credit bureaus asking them to remove the forbearance notation from the comments section.

When he recently applied to refinance his loan, feeling more secure in his job and hoping to lock in the lowest mortgage rates ever recorded, the lender told him he couldn’t get approval because his credit report said his mortgage was in forbearance. The documentation was provided to HousingWire anonymously.

Almost 4 million U.S. mortgages are in forbearance, MBA said in a report on Monday. That’s 7.91% of home loans, and the number likely will increase, said MBA Chief Economist Mike Fratantoni.

“It will not be surprising if the forbearance numbers continue to rise,” Fratantoni said. “The dreadful April jobs report showed a decline of more than 20 million jobs, and a spike in the unemployment rate to the highest level since the Great Depression.”

The U.S. unemployment rate jumped to a record high of 14.7% in April, more than tripling from March, the Labor Department said on Friday. States were forced to close businesses to try to stem the spread of COVID-19 and avoid overwhelming hospitals.

In some cases, people who asked for forbearance without understanding the full implications and later changed their minds before ever missing a payment now are having problems refinancing or getting a purchase loan, said Ian McDonald, a branch manager for Fairway Independent Mortgage in Hutchinson, Minnesota.

McDonald said he has one mortgage applicant who was laid off, got a forbearance for his mortgage in April, then got his job back.

The borrower called his servicer to cancel the forbearance before he ever missed a payment, McDonald said. But, now he has the word “forbearance” on his credit report and can’t get a mortgage.

“We’re working on it, trying to get the word forbearance off his credit report,” McDonald said.

Two loan officers who asked to remain anonymous told HousingWire their understanding of Fannie Mae and Freddie Mac rules is: A notation of “forbearance” in the comments section of a credit report means a borrower can’t get a new mortgage for 12 months.

That’s because most forbearance scenarios don’t meet the requirements of the Selling Guide section B3-5.3-03, a section titled “Previous Mortgage Payment History,” said one source, who also asked to remain anonymous. In addition, forbearance implies an impediment to their finances that impacts their ability to repay, he said.

The problem with that explanation is: Neither guideline references forbearance. They only refer to the necessity of an existing mortgage being current, which according to the CARES Act is how mortgages in forbearance because of COVID-19 should be recorded.

Fannie Mae, Freddie Mac and their watchdog, the Federal Housing Finance Agency, declined to comment or did not return emails seeking comment.

“If forbearance is being reported to the credit bureaus, this absolutely needs to be disclosed to the borrower – that means it could be affecting their ability to get a mortgage in the future,” said Keith Gumbinger, a vice president at HSH Associates.

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