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Credit reporting reforms for mortgage, short sales may be coming

Jun 10, 2013 Walt Wojciechowski

A lack of differentiation between short sales and foreclosures has put the spotlight on credit reporting practices. MortgageDailyNews recently reported that Senator Bill Nelson, a Florida Democrat, has called for a government investigation into how foreclosures and short sales are addressed by consumer credit bureaus.

The source stated that many reporting agencies classify both real estate transactions as being the same. According to Senator Nelson, the practice can hurt the credit scores of consumers who have managed to avoid foreclosures by achieving a short sale. In turn, it can prevent Americans from taking out loans and increase premiums.

The Washington Post noted that both short sales and foreclosures negatively impact consumer credit reports. However, short sales should not be grouped into the same category as foreclosures. This is because lenders are burdened with much more manageable expenses from a short sale. On the other hand, foreclosures can be very costly for loan providers and the source argued that this type of mortgage default should be penalized differently.

If regulations are changed, it could be a positive development for short term lenders and other loan providers. It may lead to a more accurate standard of credit reporting that properly displays a consumer's credit record.