How Does A Loan Modification Affect the Borrower’s Credit?

Lenders use special codes to report consumer account information to the credit bureaus. When the loan modification program was announced, lenders used an existing code, called AC, to signal that their clients were participating in a loan modification program. The problem for those borrowers, was the fact that the AC code indicates that the consumer has only made a partial payment, or has entered into a settlement agreement, paying less than the amount due.  Why would lenders use this code? Because there is no code for a loan modification, and the AC code is the closest fit.

Here’s the good news, a new code was developed in November 2009.  It is called a CN code, and it will indicate a loan modified under a federal government plan — which should eventually have no impact on credit scores.

Here’s the temporary bad news — for the time being, the FICO scoring model does not consider the new CN code.  Before a change of this magnitude can be made to the FICO model, FICO must concludes that the code in a credit file is accurately predictive of the consumer’s behavior.  That means testing, case studies and research, which will hopefully be completed by year end.

Note:  The new CN code will not eliminate late pays that were made during the loan modification process.  So Borrowers who pay late will still see a significant drop to their credit scores.  And, regarding consumers who have already been reported under the AC code, at the moment, there is no retroactive guidelines, however, most experts believe that there will be soon. 

Bottom line, if you are a homeowner who is in the process of a loan modification now, or a homeowner who has already gone through the loan modification process, you should ask your lender to report the account under the CN code now, that way the new code takes affect, your scores should go up immediately.

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