Typically, a forbearance means that, while you are not required to make payments, interest may still continue to add up. Because of COVID-19 programs, the undesirable side effect of having interest continue to accrue has been eliminated under some programs.
Banks Using an “Automatic” Loan ForbearanceWhile most lenders will reach out to you to ask if you want to use their forbearance program, some are simply putting all of their clients on the program automatically. That can mean that they do not require payments, but it can also mean that automatic withdrawals have stopped for the time being.As a borrower, you may get a letter that says that your loan is now in forbearance and explaining what that means. In other circumstances, you may not realize that the forbearance has occurred until you pull a credit report or recognize that your automatic payments have stopped. While the forbearance may be helpful to some families in these uncertain times, it can make matters worse for others who have the ability and want to continue their normal loan obligations.
The Negative Side Effects of Unauthorized Loan ForbearanceLoan forbearance does more than simply stop your payments for a period of time—it can negatively affect your credit score. By stopping payments, you also stop the “good” credit reporting that would have otherwise taken place during that period of repayment. In some cases, the forbearance will also appear on your credit report as “deferred.” When a payment is deferred, that harms your score, as it appears that the reason the payment was deferred was due to financial problems in keeping up with your payment. If that is not the case for you or your situation, then the “deferred” reference ends up unnecessarily harming your credit score—which is particularly troublesome if you didn’t even ask for the forbearance in the first place. Ultimately, when your credit score decreases, that can hurt your chances of refinancing and getting additional loans. The inability to refinance can be a huge problem, especially when mortgage rates are so low right now. It can even go as far as decreasing your ability to rent an apartment or get a job.
Case Study: Great Lakes Causes Credit Score DropGreat Lakes is a well-known student loan servicer. When the federal government suspended payments for student loans earlier this year, Great Lakes automatically stopped all payments that were due for that period. (That forbearance period is now set to continue through the end of 2020. ) The CARES Act, at that time, required that all federal student loan servicers automatically suspend payments and interest.
Great Lakes also then began reporting those deferments to credit reporting agencies. However, instead of noting that the payments were current with $0 monthly payments, it reported that the payments were “deferred.” That type of notation can end up significantly decreasing your credit score. For one borrower, for example, her score dropped 44 points on Equifax and 60 points with Transunion, virtually overnight. She only knew about the forbearance when a credit monitoring service she used gave her an alert.
The borrower noted: “I was shocked that something that’s supposed to help someone, help all of us financially, would actually cause your credit score to drop.” Where borrowers are still seeing a hit to their FICO score, they might be able to make corrections to their account and get monetary compensation through a Consumer Protection Lawsuit.
Case Study: Wells Fargo MortgagesAt the end of July, it came to lawmakers’ attention that Wells Fargo was automatically stopping mortgage payments without their consent under a federal program that is designed to help homeowners who have been negatively impacted by COVID-19. Lawmakers questioned why Wells Fargo was taking this type of action, likely knowing the negative consequences that the forbearance program can have on FICO scores.
In a case like Troy Harlow’s, the consequences can be much more severe. Mr. Harow filed for bankruptcy protection 2017, but he made sure to pay his Wells Fargo mortgage payment on time to keep his home. However, Wells Fargo told the bankruptcy court that Mr. Harlow had requested forbearance on his Wells Fargo mortgage when he had not. In fact, Mr. Harlow continued to pay his mortgage as required throughout his bankruptcy proceeding. Wells Fargo’s action, in that case, put Mr. Harlow’s repayment plan under the bankruptcy at risk by making it look like Mr. Harlow was defrauding the bankruptcy court—a very serious consequence by any measure.