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Credit Damaged By Bank During Loan Modification Process

We are hearing all kinds of complaints from borrowers about the banks' implementation of the loan modification process set-up by the Obama Administration.  We recently discussed the potential benefit to borrowers of two federal court class actions filed in Boston which allege that Bank of America and Wells Fargo failed to make temporary loan modifications permanent.  These cases will offer a welcomed and needed look "under the hood" of how banks have been processing loan modification agreements.

Another troubling aspect to the loan modification process is the affect the process has on a borrower's credit.  We have reported here that borrowers are being told by banks not to make payments while a loan modification request is pending.  But what happens to their credit during that process? 

From what I am reading, it would appear fair that if a borrow is delinquent on their payments when a loan modification request is made, the bank can continue to report that delinquency to the credit bureaus.  When the loan modification is approved, it would also appear fair that the bank would report the loan "paid as agreed" as long as the borrower pays the loan modification timely. 

What happens when the bank tells the borrower not to make payments during the loan modification process?  What is the bank reporting in that circumstance?  Is the bank, who advised the borrower not to make payments on the loan, escalating its negative reporting during the loan modification process?  From what we have seen, it appears as though the banks are escalating negative reporting to the credit bureaus even when they have told a borrower to stop making payments.  This is a fundamentally unfair practice that can cause increased damage to a borrower's credit.

Are banks timely reporting that a borrower is "paid as agreed" after making timely payments under a loan modification agreement?  Again, we are seeing that the banks are continuing to report payments as being late or delinquent even after loan modification agreements are in place.  Borrowers who enter into loan modification agreements need to request a copy of their credit reports during and after the loan modification process.