By Robert L. Cain
All of a sudden some people seem to have better credit. That came about because they weren’t paying their bills and so may not really have earned it. A Market Watch report from February 17, 2021, said that “While millions of Americans were laid off or furloughed from their jobs, lost their employer-based health insurance and skipped debt payments, their credit scores rose to record levels.” They got “accommodation” from creditors.
According to Experian, the average FICO score was 703 in January of 2020, but by October, it had gone up to 711. That’s all the result of a provision in the CARES Act that games the credit reporting system. You remember the CARES Act with the $1200 per person stimulus money and other provisions that, it turns out, resulted in credit scores rising. What happens is that when laid off people can’t pay their car loans, utility bills, credit cards, or whatever, they can ask the lender for forbearance.
Because of the forbearance (also called accommodation), lenders must report the debtors as current or “paid as agreed,” even though they may not pay a dime for six months or a year. How does that work?
It has to do with the way FICO and Vantage scores are calculated. Payment history accounts for 35 percent of a FICO score.
Thus if payment history shows all debts current or paid as agreed for several months, up goes the FICO score. MyFICO.com lists the criteria they use to calculate payment history.
- Payment information on credit cards, retail accounts, installment loans, mortgages and other types of accounts
- How overdue delinquent payments are today or may have become in the past
- The amount of money still owed on delinquent accounts or collection items
- The number of past due items on a credit report
- Adverse public records (e.g., bankruptcies)
- The amount of time that’s passed since delinquencies, adverse public records or collection items were introduced
- The number of accounts that are being paid as agreed
The Consumer Finance Protection Board (CFPB) explains the three possible results when a borrower receives accommodation from lenders. One, if the account is current and the borrower makes the agreed upon partial payments, skips a payment or whatever else is agreed, the lender reports the borrower as current.
Two, if the account is already delinquent when the borrower makes the agreement, then the creditor cannot report the borrower as more delinquent. So, for example, if the borrower is 60 days late at the time of forbearance, that’s what the lender must report as long as the forbearance lasts.
Three, if the account is already delinquent and the borrower brings the account current, the lender must report the debt as current. That seems to fly in the face of the second point of the FICO score calculation, “How overdue delinquent payments are today or may have become in the past.” Will the past due record not show or does the payment history reflect a paid-up delinquent debt?
How does that help or hinder landlords and business owners looking to rent or hire? Pay no attention to the FICO or Vantage score and instead look at individual debts and “special comments” by the lender and “permanent comments” by the debtor. That gives an idea of what to expect after the pandemic is over. The CFPB says that the special comments will say that “the account was affected by a national emergency as a result of the pandemic.” That note is temporary and stays on the credit report only until 120 days after the national emergency is over and then disappears entirely, never to be seen again. A borrower, absent a comment by the lender, may make a “permanent comment” stating that he or she has “been negatively affected by the pandemic.” That remains on the credit report forever. The CFPB points out that “a prospective landlord, employer, or lender may take [that] into account.” Ya think?
Forbearance may seem like a good deal for borrowers, but not when we look at the ultimate result once the “national emergency” is over. It lasts only 120 days after the national emergency ends. The terms the creditor and debtor agreed to in the forbearance determines how the parties set up accommodation. If the borrower made the deal that the forborn balance is added to the end of the loan, it extends the original payoff date. So, if a borrower had a car loan of $600 a month and the lender added the missed payments onto the end of the loan, it would change little as far as concerns a landlord or business owner, just giving the borrower longer to pay it off.
On the other hand, if the agreement says the forborn payments total is due and payable 120 days after the pandemic is officially over, that is a concern. Depending on how many accounts were “accommodated,” that could amount to thousands of dollars So that $600 a month car payment, if the forbearance ended after six months would be a $3600 debt due and payable immediately, which could result in no rent paid or the vehicle being repossessed, the borrower unable to get to work, and a wage garnishment.
Why would someone agree to a forbearance on those terms? It could be they don’t understand what will happen, they know what will happen but never do the math, or they are so relieved to get the debt “accommodated” that they will agree to something that onerous and worry about the consequences later.
Thus, when a landlord or business owner looks at a credit report, the telling information will be in the body of the report not the FICO or Vantage score. Look for a “special comment” by the lender or a “permanent comment” by the applicant. Then ask what the terms are. Is the past due balance due and payable in full 120 days after the pandemic is declared over or is it added to the end of the loan? It’s possible that your applicant may not even know. If that’s the case, it may make a landlord or business owner think twice about renting to or hiring the applicant.
Eventually, the pandemic will go away and those people with mysteriously risen FICO scores will see their scores fall rapidly, possibly even below where they were in January 2020, and their ability to pay evaporate.