Q: I very much enjoy your articles. However the Q&A that ran recently left me a bit frustrated.
A gentleman wrote in asking why his Consumer Credit Counseling Services (CCCS) history on his credit report impeded his efforts to refinance. You sought the help and advice of Todd Mark, a spokesman for Consumer Credit Counseling Services of Greater Atlanta to help answer this question.
While at first I agreed with your “source” by the end of the article I couldn’t have disagreed with you more. While Mr. Mark seems to be very knowledgeable about CCCS, he cannot adequately answer your reader’s question – Why is having this on a credit report a problem when acquiring a home loan?
I agree with Mr. Mark that CCCS notations on credit reports do not affect a FICO score, but it does cause problems when one tries to apply for a mortgage.
When CCCS first started gaining popularity as an alternative to bankruptcy in the mid to late 90’s, lenders at first had no concerns as they had no standard to compare with those in a CCCS debt management program. “It’s not a bankruptcy, and they are working at getting out of debt” was the attitude with mortgage lenders and on Wall Street.
After a few years, lenders started to pay more attention to the default rate of those borrowers who had been enrolled in some form of debt management program at the time the loan closed. One lender told me that those people in debt management programs were 8 times more likely to default than a borrower with similar a credit rating who never enrolled in a debt management program.
Their conclusions, which I agree with, were that these debt management programs acted in a similar way to a Chapter 13 bankruptcy. Borrowers who enrolled in a debt management program were using a "third party" to manage and pay their bills. Because this situation is so similar to a Chapter 13 bankruptcy, for underwriting purposes those in a debt management program are treated as though they filed for Chapter 13 bankruptcy.
Of course there are exceptions to every rule, but in general that guideline is adopted throughout the lending industry.
A: I have to disagree with your contention that entering a debt management program is seen by mortgage lenders as being the same thing as a Chapter 13 reorganization. There is something about filing for bankruptcy protection that seems a whole lot worse than voluntarily entering a debt management program to pay off what you owe.
But then again, I’m not a lender. So I turned to Brian Jessen, a senior vice president of Harris Bank, who oversees mortgage lending for several suburban branches on Chicago’s North Shore and personally processes several hundred loan applications each year.
“A debt management program is not a Chapter 13. It may look as though the borrowers could have gone through a Chapter 13, but they were responsible enough not to do that,” explains Jessen.
“But while I don’t see a debt management program (on a credit report) as being as bad as a Chapter 13 bankruptcy, I do look at it with more scrutiny,” notes Jessen. “When we’ve had this situation, we ask for an explanation. Did the borrower start a business that did do well or was there a medical situation or a job loss that caused the individual to get behind in payment?”
Jessen said the bank recently received an application from a borrower who had worked selling commercial cleaning contracts for many years. A couple of years ago, he decided to go out on his own but the business failed and he fell into debt.
“Now he has another job with a different commercial cleaning company making as much as he did before, but now he has tremendous upside with his bonus structure,” Jessen explained, adding that the borrower’s credit went down the tubes during the 18 months he tried to launch his business. “We took his credit card debts and consolidated them. He kept his mortgage and the way we looked at it was he went back to doing what he did successfully for years and now has the potentially of making a lot more money with his bonuses.”
Jessen said if someone has refinanced or consolidated debt in order to free up cash each month, he looks to see what the borrower is doing with the extra cash. If you’ve freed up $600 per month, Jessen says he looks more favorably on borrower who put that $600 toward the balance owed or put it away in savings.
But if you’re a shopaholic and are just blowing the savings, that won’t sit well with Jessen or, he believes, many lenders.
“Lenders look at this,” he says. “They want to see if you’re lucky enough to consolidate your bills and save money that you’re smart enough to do something constructive with it.”
Which is why Todd Mark, a certified credit counselor and spokesman for Consumer Credit Counseling Services of Greater Atlanta (www.cccsinc.org) says mortgage lenders affiliated with the organization are more than willing to work with those folks who are in a debt management program.
“After a year of being in a debt management program, you’re showing lenders that your bills are being paid, on time, and that you’re a much better credit risk,” he explains. “And that’s why lenders will give those folks in a debt management program a chance to refinance at a good interest rate.”
Unfortunately, there are some bad-apple lenders who are eager to exploit your own situation for their personal gain. If you’re currently enrolled in a debt management program, Mark says you’re best off asking the organization running the program for a list of affiliate lenders.
Then, shop around for a good mortgage rate. Contact the lenders on the list as well as several national companies like Wells Fargo and Countrywide Home Loans, as well as local banks and any credit unions to which you belong.
It isn’t impossible finding a good deal on a loan if you have credit issues. But Jessen and Mark say that entering a debt management program is a much better move than filing for bankruptcy protection. While some lenders may view it negatively, those that work with debt management companies and the participants in their program will view it more positively.