As published in Scotsman Guide's Residential Edition, October 2011.
The improper re-aging of debt can significantly — and negatively — impact borrowers’ ability to secure a mortgage. Loan originators should know how to help clients detect and fight malpractice.
When a consumer defaults on a debt and is reported to a credit-reporting agency, the default generally remains on the consumer’s credit file for seven years and 180 days as permitted by the Fair Credit Reporting Act (FCRA). Note that the Federal Trade Commission mandates that the date of original delinquency be the date the first payment was missed.
The practice of determining the commencement date is known as aging. When the commencement date is changed, it’s considered to be re-aged.
Playing by the rules set in the FCRA, creditors that intend to file a tradeline — a record of a borrower’s credit history, including account status and activity — with a credit-reporting agency must do so within 90 days of a default.
Following a borrower’s default, creditors often transfer the loan from their accounts-receivable ledger. This is called a charge-off. The process, however, doesn’t keep the creditor or someone acting in their stead from attempting to collect the owed amount.
Mutual agreements between debtors and creditors before a charge-off can help avoid inaccurate re-aging of an account. For example, a creditor might agree to let a borrower skip payments during a personal and temporary financial crisis. In such circumstances, the creditor might still report the account as being in default but agree not to turn it over to collections or to a debt-buyer. The creditor also could agree not to re-age the default when payments resume.
When unpaid accounts are charged off, however, the act of removing the account from the creditor’s books often leads to a new tradeline being filed on the consumer’s credit report. Many times, the collection agencies re-age the information illegally and cause the commencement date of default to appear more recent. When this isn’t discovered or dealt with, affected consumers suffer from negative credit reports for longer than allowed under the FCRA.
The most-common perpetrators of such abuse are collection agencies, also known as debt-buying companies. Things turn especially ugly when past-due debt obligations are sold repeatedly. These sales do not give anyone the right to improperly place new negative tradelines on consumers’ credit files.
Another practice whereby debt-buyers can assert incredible leverage over consumers occurs when the debt-buyer holds back on placing a tradeline until its data-mining efforts indicate the debtor is attempting to buy a home.
Debt-buyers learn about these attempts by purchasing lists of people who have applied for mortgages and comparing them to their own internal lists of debtors. After homebuying activity is detected, these unscrupulous debt-buyers often place what amounts to illegal tradelines in an effort to force the debtors to pay.
Under these circumstances, mortgage lenders often will require the previous debt to be paid in full or deleted before advancing funds. To make matters worse, the new negative tradeline also will result in a lowered FICO score for the prospective homebuyer. At this point, the potential buyers face the challenge of paying the debt-buyer and negotiating their home loan with damaged credit.
Loan originators can help their clients avoid such disaster by advising them to monitor their credit report and know what comprises illegal re-aging. If they discover improper re-aging, buyers should prove the date of original delinquency and request the removal of any tradelines related to the debt after that point.
By helping your clients fight illegal re-aging, you can keep them on the path to homeownership.
Elizabeth Karwowski founded Get Credit Healthy Inc.,
a consumer-advocacy organization, to help individuals improve their credit health. She has FICO and Fair Credit Reporting Act certifications. Get Credit Healthy has been featured on NBC and Fox News and has helped hundreds of people restore their credit. In 2010, Karwowski began volunteering as a counselor with S.C.O.R.E., a nonprofit resource partner with the U.S. Small Business Administration. Reach her at (877) 850-3444, ext. 1, or firstname.lastname@example.org.