Your personal credit score and your business credit score are two separate scores. But changes to your personal credit score could affect your business, too. In determining whether to approve a loan for a business, lenders can consider both personal and business scores, especially if your business is on the smaller side or is relatively new.
But what happens if the pandemic has hampered your ability to make payments, thereby threatening to lower your personal credit score?
In March, Congress passed a measure to protect consumer credit. Under Section 4021 of the CARES Act, if consumers need a temporary postponement on their mortgages or other types of accommodations due to COVID-19, the modification should not result in a negative mark on a consumer’s credit.
In accordance with Congress’ measure, the Consumer Financial Protection Bureau (“Bureau”) recently issued guidance to clarify how lenders should proceed under Section 4021 of the CARES Act. This post summarizes the Bureau’s June 16 guidance to inform small business owners about what lenders and credit reporting agencies must do under the CARES Act.
Who must receive accommodations?
An accommodation is a form of relief granted to a consumer unable, or struggling, to make payments due to the pandemic. Accommodations are provided by lenders and include agreements to: defer payments, make partial payments, postpone delinquent amounts, or modify contracts.
If you are facing financial strain due to the pandemic, you are entitled to an accommodation from your lender only if you have a federally backed mortgage loan or if you have a federally held student loan. For mortgage loans, you can receive a temporary postponement of mortgage payments. For student loans, principal and interest payments are automatically suspended through the end of September.
For all other types of loans, lenders are not required by law to provide accommodations, but the Bureau has encouraged lenders to work out solutions with borrowers who are struggling to make payments due to the pandemic.
If I receive an accommodation, will it hurt my credit score?
The Bureau has clarified that the under the CARES Act lenders must err on the side of protecting consumers’ credit. Therefore, if a lender provides a consumer with an accommodation, what it reports to a consumer credit reporting agency depends on the status of the account before the accommodation.
For example, if your credit account was current before the accommodation, during the accommodation the furnisher must continue to report the credit account as current. And if the credit account was delinquent before the accommodation, during the accommodation the furnisher cannot advance the delinquent status. What that means is if, at the time of the accommodation, the furnisher was reporting the consumer as 30 days overdue, during the accommodation the furnisher may not report the account as 60 days overdue.
On the other hand, if during the accommodation, the consumer’s credit account changes from delinquent to current, the furnisher must report the credit account as current.
The bottom line is that a lender cannot demote your account as delinquent if was not previously delinquent.
How does my lender report the accommodation?
When your lender reports an accommodation, the Bureau has clarified that the lender must report an account as current or delinquent. Lenders cannot substitute this information with special comment codes such as a natural disaster label. Special comment codes do not provide consumer reporting agencies with the information required by the CARES Act.
What other consumer credit protections exist?
If you have a dispute with your lender and/or consumer credit reporting agency, the agency must investigate disputes within 30 days of receiving the consumer’s dispute. The Bureau expects that furnishers and consumer reporting agencies will make “good faith efforts” to investigate disputes as quickly as possible. The Bureau will evaluate the efforts and circumstances of each furnisher and credit reporting agency on an individual basis.
Ideally, you should maintain a clear separation between your business and personal finances. But if you are personally experiencing financial difficulties due to the pandemic, the Bureau has clarified that in certain cases, consumers’ credit scores will be protected.