NCLC Issues Paper on Foreclosure Crisis’s Effect on Credit Reporting

In addition to the 4.5 million families who lost their homes, the foreclosure crisis had another insidious and long-lasting consequence both to individual consumers and on a broader economic scale. In a new white paper issued by the National Consumer Law Center, author Chi Chi Wu explores the devastating credit reporting problems left in the wake of the Great Recession. The report explores the scope of the problem and offers a variety of policy solutions. Solving the Credit Conundrum: Helping Consumers’ Credit Records Impaired by the Foreclosure Crisis and the Great Recession.

Credit reports effect more than just a consumer’s access to credit such as mortgages, auto loans, and credit cards. They also impact employment, insurance, and rental housing. Many consumers whose homes were foreclosed upon were not irresponsible in their borrowing, but suffered as a result of predatory lending practices, the collapse of the housing market which left their homes underwater, lost jobs, and/or abusive servicing practices. Some consumers who did not suffer foreclosure experienced other credit damaging action such as short sale, deed-in-lieu of foreclosure, loan modification or chapter 13 bankruptcy. These events may significantly lower credit ratings for 7 to 10 years thereby negatively impacting the consumer’s financial recovery by hindering the ability to find employment, or requiring the consumer to pay exorbitant fees and rates for necessities like rental housing and insurance.

From a broader economic standpoint, low credit scores may prevent consumers from taking advantage of the lower interest rates in place to drive the economic recovery, creating a vicious circle of consumers unable to climb out of financial distress. The pendulum swing of lenders requiring higher credit scores further weighs down consumers with damaged credit scores.

The problems are exacerbated by erroneous or anomalous credit reporting including reporting short sales as foreclosures, inaccurately listing the entire mortgage owing, or misreporting loan modifications.

The report discusses the unfortunate and unfair association between credit reports and personal character. Where the foreclosure crisis caused many otherwise responsible borrowers to suffer financial damage, the use of such information to deny employment, insurance and credit further harms otherwise credit-worthy and responsible consumers.

The paper ends with recommendations to ameliorate the problems including: removing negative mortgage information in less than seven years; prohibiting credit reports from being considered in unrelated areas of employment, rental housing; allowing for dispensation for consumers whose financial problems were a result of special circumstances; fixing the reporting glitches that cause erroneous credit reporting; and looking to actual credit-worthiness as a basis for extending credit rather than bare credit scores.

NCLC White Paper