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

Senator Bill Nelson (D-FL has askedrnfor an investigation and possible “crackdown” on the manner in which shortrnsales are impacting consumer credit files.   Nelson said that short sales are now oftenrnreported to the credit agencies using the same code that designates a completedrnforeclosure. </p

In letters sent earlier this monthrnto Edith Ramirez, Chairwoman of the Federal Trade Commission (FTC) and Richard Cordray,rnDirector of the Consumer Financial Protection Bureau (CFPB) Nelson called the creditrncoding practice “disturbing” and said that there are key differences between arnshort sale and a foreclosure and both have major but different implications forrnconsumers’ credit ratings.</p

“If a short sale is reported as arnforeclosure, it could unfairly ruin short sellers’ credit scores and make it morernexpensive for them to borrow,” the letters said.  “Instead of being ablernto qualify for a new home loan in just two years due to a short sale, they mayrnhave to wait up to seven years if that short sale is reported as arnforeclosure.  This actually could delay their re-entry into the housingrnmarket, stifling economic recovery for all homeowners.”</p

Nelson said that the practice isrnalso tainting consumers’ ability to qualify for other types of credit such asrnauto loans and can affect their costs for insurance as well.  “Based on recent reviews conducted byrnmortgage giants such as Fannie Mae and Freddie Mac,” he said, “therncontroversial reporting practice is widely known in the industry but little hasrnbeen done to fix it.”</p

Short sales are becomingrnincreasingly common and Nelson represents a state that continues to be amongrnthe worst in the nation for the number of homeowners who have negative equityrnor who are unable to make mortgage payments and must exit – voluntarily orrnotherwise – home ownership.  Somernhomeowners seek short sales even while making mortgage payments in order tornavoid an eventual default.  “Manyrnhomeowners who go through short sales are hoping for a fresh start,” Nelsonrnsaid in a news release.  “Instead, a lot of them might not even knowrnthey’re continuing to be punished.”</p<pBanks and credit bureaus contend the problemrnlies in the standardized credit reporting software which, they say has nornspecial code to report a short sale.  Nelson said regardless of the reasonsrnmany homeowners are being punished twice, first because of the economicrndownturn and loss of value in their home, then because of incorrectly codedrncredit reports.  This is occurring evenrnas homeowners are offered encouragement and even incentives from banks and therngovernment to pursue short sales.  <br /<br /Nelson asked both agency heads to "vigorously and immediately enforce thernaccuracy provisions in the federal credit-reporting law; and, to conduct arncomplete and thorough investigation of the aforementioned credit-reportingrnpractices.  I also ask that you penalize responsible parties in thernmortgage- and credit-reporting industries, if they don’t fix this codingrnproblem within 90 days.”

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