Homeowners facing foreclosure on their FHA-insured loans will soon find their lenders reporting their plight to local credit bureaus so the rest of their credit can be cut off, under a new policy now being considered at the Department of Housing and Urban Development.
Such a cut-off could be "beneficial" to the department and to the lender by "decreas ing the amount of additional debt that the homeowner acquires," HUD Undersecretary Philip Abrams, said in a letter recommending the approach.
Under Abrams' plan, lenders would be "encouraged" to report mortgage defaults to credit bureaus. Department sources said that some officials had pressed to require such reports, but the softer language was settled on as a compromise.
Word of the proposal drew sparks on Capitol Hill where housing subcommittee chairman Henry B. Gonzalez (D-Tex.) said he intends to "fight this all down the line."
The Abrams plan "is a Simon Legree approach" to the economic problems of the nation's homeowners, Gonzalez said. "It is bad enough that we cannot get any kind of sympathetic interest" from the Reagan administration in providing mortgage assistance for homeowners threatened by foreclosure, he said, "without threats to see that their credit is forever expunged."
"Even the fact that HUD officials would think that way shows an antagonistic attitude to the hapless victims of economic recession and to the poor," Gonzalez added. The congressman said that if HUD leaders have made up their minds to put the proposal into action, "I'm going to try to see what we can do to stop it from a congressional level."
Abrams' letter says, "HUD servicing procedures state that mortgagees lenders should make a reasonable effort to determine the root cause of default and should work with the borrower, the HUD-approved counseling agency, and the HUD field office in correcting the default." When the efforts fail, however, and lenders "make a decision to initiate foreclosure, HUD encourages them to notify the appropriate credit bureau that a default exists. This action may help to decrease the amount of additional debt that the mortgagor acquires, which could be beneficial to both the mortgagee and HUD."
Abrams is recovering from surgery and could not be reached for comment.
A HUD spokesman said the proposal is in draft form and is "currently undergoing internal review." The letter "does not represent official departmental policy. Until all appropriate reviews, comments and opinions are evaluated, no comment would be appropriate."
The HUD proposal follows a bulletin from the Office of Management and Budget that instructs executive branch agencies and departments to report "all non-tax commercial debts and all delinquent, non-tax consumer debts to credit reporting agencies." Commercial and consumer debts "in excess of $100, arising from loans, loan guarantees, overpayments, fines, penalties or other causes."
Beginning Nov. 30, agencies were told, they must "establish procedures for using credit reports as part of the decision-making process when awarding a loan, loan guarantee, contract or grant." The bulletin was dated Sept. 21.
The OMB noted that "the government's efforts in credit management and debt collection have been hampered in the past by agencies' inability to exchange credit information with the private sector and with other federal agencies." Many of these "impediments" were removed by the Debt Collection Act of 1982, which opens the way for "the release of information on delinquent, non-tax consumer debts to private-sector credit reporting agencies."
The OMB bulletin noted that consumer debtors should be given 60-day written notice before a debt is reported, and should be permitted to "appeal the accuracy and validity of information concerning the debt."
While the draft of the HUD proposal says that lenders should be "encouraged" to notify appropriate credit reporting agencies, it does not contain any provisions for giving borrowers notice and a chance to reply before foreclosure decisions are reported to credit bureaus.
While those within the department who sought to require that lenders inform credit bureaus of impending foreclosures, were not successful, objections to encouraging lenders to report foreclosure decisions also have been overridden and the policy probably will be implemented, according to a HUD source.
Implementation of policy that merely "urges" lenders to report defaults would probably result in a summons for Abrams to appear before Gonzalez' subcommittee, said a subcommittee staff member.
"I think we would have to have hearings on that," said the staffer. "This kind of high-handed departmental effort to hurt the individual beyond the trauma of foreclosure" would likely prompt Gonzalez to "engage in a rather harsh colloquy" with Abrams.
Washington attorney Benny Kass said he objected to the timing indicated in the proposed policy, which would call for lenders to notify credit bureaus when they "make a decision to initiate foreclosure."
A lender "may ultimately not foreclose" but the mortgage-holder's credit would be ruined, Kass said. This also could block attempts of a home-owner to refinance or obtain other help. Hard-pressed home-owners faced with foreclosure during the worst months of the recession often avoided foreclosure at the last minute, he added.
Kass suggested that if HUD implements the policy, it should also urge or require lenders to disclose the fact when planned foreclosures did not take place.
No existing regulations prevent lenders from disclosing a decision to foreclose, said a spokesman for the Federal Home Loan Bank Board. He added, however, that many "savings and loans have a policy of not releasing any information concerning their customers' payments at all," including information about foreclosures.