Successful loan modifications are providing debt relief for a few lucky homeowners. However, many are discovering that there is more bad news lurking–a significant ding to their credit. In some cases consumers are seeing as much as 100 points shaved from their credit scores.

US Rep Jackie Spier (D-CA)

U.S. Rep. Jackie Spier (D-CA) doesn’t think that’s fair. Spier’s H.R. 5743, the Protecting Homeowners’ Credit History Act would protect consumers’ credit scores from negative reporting while paying their modified loan payments.

A loan modification can involve a change in the original mortgage term, interest rate, or even a reduction in principle. In all cases a modification alters the original terms of the mortgage contract.

The current practice by many lenders is to report these borrowers and their payments as delinquent or in partial repayment, causing significant damage to their credit scores.

“Homeowners shouldn’t have their credit scores damaged for doing the right thing,” said Speier. “Rather than rewarding responsible homeowners who modify their mortgage payments to keep their homes, the credit reporting system punishes them.”

According to the U.S. Department of Housing and Urban Development (HUD), many of these borrowers are struggling with their mortgage payments because of lost jobs or underemployment–currently the number one cause of mortgage delinquency.

A significant drop in their credit score could wipe out any chance they might have at a fresh start and may even place them in deeper financial peril.

Credit scores are increasingly interwoven into the very fabric of our daily lives. A poor credit score can prevent you from getting a car loan or a cell phone, cause you to pay higher rates for insurance or even prevent you from getting a better job.

With the U.S. unemployment rate already over 9 percent some would argue these practices are not helping consumers recover.

In a statement to the Chicago Tribune, The American Bankers Association argue that lenders need to know that changes have taken place to borrowers’ loans.

“To deny information on modifications being used in credit scores only harms the ability of lenders to evaluate the creditworthiness of borrowers in the future, making it harder to determine a borrower’s ability to repay any future loan,” said Joseph Pigg, vice president and senior counsel of the association.

Nearly a million Americans are struggling through the frustrating process of temporary loan modifications in hopes of receiving permanent mortgage payment relief. Unfortunately, each of these homeowners’ credit scores are taking a beating for the attempt.

This may partially explain alarming research published this month by the Fair Isaac Corp., producers of the FICO credit score. More than 25 percent of American consumers now have credit scores below 599–significantly below the long-term average of 15 percent.

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• Penalties for mortgage modifications are wrong (sfgate.com)
• More homeowners get help outside of federal program (usatoday.com)
• Modifications need not be score-wreckers (seattletimes.nwsource.com)
• Millions of Americans See Credit Scores Plummet (dailyfinance.com)