Senator on a Mission to Change the Way Short Sales Affect Credit Reporting

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Senator Bill Nelson (D-FL has asked
for an investigation and possible “crackdown” on the manner in which short
sales are impacting consumer credit files
.   Nelson said that short sales are now often
reported to the credit agencies using the same code that designates a completed
foreclosure.

In letters sent earlier this month
to Edith Ramirez, Chairwoman of the Federal Trade Commission (FTC) and Richard Cordray,
Director of the Consumer Financial Protection Bureau (CFPB) Nelson called the credit
coding practice “disturbing”
and said that there are key differences between a
short sale and a foreclosure
and both have major but different implications for
consumers’ credit ratings.

“If a short sale is reported as a
foreclosure, it could unfairly ruin short sellers’ credit scores and make it more
expensive for them to borrow,” the letters said.  “Instead of being able
to qualify for a new home loan in just two years due to a short sale, they may
have to wait up to seven years
if that short sale is reported as a
foreclosure.  This actually could delay their re-entry into the housing
market, stifling economic recovery for all homeowners.”

Nelson said that the practice is
also tainting consumers’ ability to qualify for other types of credit such as
auto loans and can affect their costs for insurance as well.  “Based on recent reviews conducted by
mortgage giants such as Fannie Mae and Freddie Mac,” he said, “the
controversial reporting practice is widely known in the industry but little has
been done to fix it.”

Short sales are becoming
increasingly common and Nelson represents a state that continues to be among
the worst in the nation for the number of homeowners who have negative equity
or who are unable to make mortgage payments and must exit – voluntarily or
otherwise – home ownership.  Some
homeowners seek short sales even while making mortgage payments in order to
avoid an eventual default.  “Many
homeowners who go through short sales are hoping for a fresh start,” Nelson
said in a news release.  “Instead, a lot of them might not even know
they’re continuing to be punished.”

Banks and credit bureaus contend the problem
lies in the standardized credit reporting
software which, they say has no
special code to report a short sale
.  Nelson said regardless of the reasons
many homeowners are being punished twice, first because of the economic
downturn and loss of value in their home, then because of incorrectly coded
credit reports.  This is occurring even
as homeowners are offered encouragement and even incentives from banks and the
government to pursue short sales.  

Nelson asked both agency heads to “vigorously and immediately enforce the
accuracy provisions in the federal credit-reporting law; and, to conduct a
complete and thorough investigation of the aforementioned credit-reporting
practices.  I also ask that you penalize responsible parties in the
mortgage- and credit-reporting industries, if they don’t fix this coding
problem within 90 days.”

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