Lenders must learn from pandemic-related credit reporting issues

Register now

The United States is now six months into its battle with the coronavirus pandemic, an unprecedented situation that has fundamentally changed everything we once knew about life in the 21st century.

The road has been unquestionably bumpy, yet we will learn from the mistakes because we now have experience facing problems that have never arisen, or even been thought of.

And when something of this magnitude happens again, we will most assuredly be much better prepared to handle anything that comes our way as a result.

This saving-grace outlook applies perfectly to the credit unions and other financial institutions that have had to deal with a new problem that only came about because of the coronavirus pandemic.

That issue is the unexpected surge in the number of credit reporting issues due to the vast implementation of pandemic forbearance agreements made between lenders and borrowers.

When the virus began seriously attacking the U.S. in mid-March, stay-at-home orders and social distancing guidelines forced businesses to shut down or operate with limited capacity, which in turn led to mass layoffs, which in turn led to a pandemic recession that we still face today.

As finances tightened for the vast majority of American consumers, credit unions, banks, and other lenders demonstrated an understanding of the economic outlook by being unusually willing to extend pandemic forbearance agreements where no monthly payments were (or still aren’t) required for things like a mortgage or student loan debt.

And if pandemic forbearance couldn’t be granted entirely, mortgage lenders, student loan lenders and any other type of lending institution were still flexible by reducing the monthly minimum payment that was required from borrowers.

The pandemic forbearance periods or reduced monthly minimum payment agreements made by credit unions and banks were sympathetic and extremely generous moves made at the height of the coronavirus pandemic, and they should be applauded.

However, new research from financial services company LendEDU has shown that the pandemic-induced decision made by financial institutions has led to a significant surge in the number of consumers who are dealing with incorrect negative credit marks for reasons like missed or insufficient payments.

In late July, LendEDU published a report that involved the analysis of consumer finance complaints that are lodged with the Consumer Financial Protection Bureau.

LendEDU’s report found there’s been a massive 84% year-over-year increase in the number of grievances that are pertaining to “credit reporting, credit repair services or other personal consumer reports.” From March 13, 2019, to July 17, 2019, only 47,859 of these complaints were filed, but 87,956 were filed between the same dates in 2020.

Adem Selita, founder of The Debt Relief Company, was quoted in the LendEDU report as saying the following: “We have had numerous clients with erroneous markings on their credit report and negatively impacted credit scores due to the pandemic and the relief programs set in place by many banking institutions. I would say this is most likely occurring with about 20% to 25% of all credit reports we’ve viewed in the month of June.”

Another LendEDU study surveyed 1,000 American homeowners that have a mortgage. Almost a third of respondents have agreed to something like a pandemic forbearance or reduced monthly minimum payment agreement, and 54% of this group from the LendEDU poll have subsequently seen their credit score take a hit due to a missed or insufficient payment despite the agreement they had in place with their mortgage lender.

Clearly, this uptick in the number of incorrect negative credit marks is a major issue that has arisen due to both the coronavirus pandemic and the unusually high number of pandemic forbearance agreements or requests that have flooded the system for both lenders and credit bureaus.

Credit unions, banks and other lenders couldn’t have been expected to handle this because there was not enough time nor was there a precedent to use as preparation.

So, how do they handle it the next time something like this happens?

First, communications must be improved between borrowers, lenders like credit unions, and credit bureaus, but specifically between the last two. It seems that the biggest issue is credit bureaus are not getting the message from lenders that the latter has agreed to temporary forbearance with a borrower. As a result, the borrowers are seeing their credit scores take a dive for missed or late payments that weren’t really so.

Lenders should relay the temporary agreement status to credit bureaus quickly, clearly and succinctly, who in turn should then confirm with the borrower that they know of the agreement.

Second, technological infrastructure should be improved and enhanced so that credit unions, banks, and other lenders, in addition to credit bureaus, can efficiently handle the sudden influx of borrowers requesting pandemic forbearance or other similar agreements.

If the backlog of requests can be handled with more ease on the tech side to keep pace with the human side of these agreements, then lenders and credit bureaus can confirm these agreements more quickly and before negative credit marks happen.

Third and finally, financial institutions like credit unions should have an emergency system in place that allows them to provide very low-interest financing options to the borrowers they made temporary forbearance agreements with and who saw their credit scores get dinged as a result.

A damaged credit score can be the difference between getting approved or denied for something like a personal loan, but if the damaged credit score is not the borrower’s fault in the first place then they shouldn’t be punished for it. This is especially true if a consumer needs quick financing to cover bills and make ends meet, or if they can’t afford a high-interest loan.

By providing a low-interest financing option in instances like this, lenders can partially make up for the harm that was done to borrowers who thought they’d be fine with their temporary forbearance agreement only to see a crushed credit score.

For reprint and licensing requests for this article, click here.
Credit reporting Mortgages Student loans Consumer lending Credit scores