Up to 5 million student loan borrowers may have downgraded their credit scores after CARES law suspended student loan payments: “This is another battle to fight.

Curious and diligent to monitor his credit score, Evans began to investigate. She learned that her credit rating had dropped six points and that the reason was related to her student loans. Evans, who paid off his $ 45,000 student debt with a repayment plan that allows borrowers to make payments based on their income, was surprised to see his credit rating dropped. amended. “I did not know what he had done,” he said.

Finding out that his credit rating dropped inexplicably in the midst of a pandemic that is already creating so much uncertainty, was troubling, said Evans. The 28-year-old woman, who is currently taking refuge in temporary housing, is concerned that any defect in her credit score will affect her search for affordable housing.

“It is another pressure, it is something else to fear, it is another battle to be waged,” he said. “It’s too much.”

Finally, after sending messages on Twitter
TWTR,
+ 0.60%
Labeling the companies involved and ending up talking on the phone with his director of student loans, Great Lakes, Evans learned that his credit cut was related to the CARES Act, the $ 2.2 billion stimulus bill that allowed Borrowers student lenders suspend payments. She appears to be one of some five million borrowers whose scores have been lowered, despite congressional instructions that the pause in student loan payments should not affect borrowers’ credit scores.

The situation highlights the challenges consumers face in navigating aid programs of the pandemic era. It also highlights the complex network of businesses that dominate the personal finances of Americans, businesses that control how consumers are judged through a process that the average person does not understand well.

A credit score is a crucial measure that lenders use to assess borrowers’ eligibility for car, home, and other loans, and the price they pay for these loans, as well as for rental apartments and other major purchases. In some cases, even employers use it to assess a possible new hire. But it is based on an algorithm that is often opaque to consumers and relies on lenders to accurately report information to credit bureaus.

“The confidence that these credit reports are accurate is huge,” said Seth Frotman, executive director of the student advocacy group, the Borrower Protection Center, which has filed a class action against Great Lakes, Equifax and TransUnion.
TRU
-0.73%
Experian
EXPGY
-0.87%
and VantageScore accusing companies of illegally damaging borrowers’ credit scores. “When responsible businesses fail, and in this case fail miserably, it could affect the lives of millions of borrowers.”

One of the main plaintiffs in the trial, Cody Hounanian, who is also the director of the student debt crisis program, another borrower advocacy group, saw his score drop to 33 points when searching for ‘a house, says the lawsuit. Borrowers on social media also complained of a double-digit drop in their scores.

A consumer’s credit score is calculated based on information such as the fact that payments are made on time and other factors that lenders report in a standardized manner, usually monthly, to credit bureaus such as Experian , TransUnion and Equifax. Companies like FICO
FICO
+ 1.12%
And VantageScore absorbs this information into an algorithm to calculate a score that is supposed to predict the likelihood that a consumer will become a criminal in the relatively near future. A credit score is usually based on data from one of the credit bureaus.

It is a system that is now widely used beyond its original intentions and that consumers have almost no way to choose not to use credit, said Dalié Jiménez, professor at the University of California , Irvine Law School.

“Your data is not your data in this regard,” he said. “They share it with a third party and then a lot of people have access to it, a lot can happen and you have no control over how it goes.” Because it is so basic and has been around for a long time and everyone accepts it, people don’t think about it. “

A complex network of companies plays a role in each person’s credit score.

The comings and goings between businesses and agencies involved in this particular situation illustrate the challenges consumers face in determining if and how this important measure has been affected.

Thanks to requests from borrowers of the Great Lakes who, with its parent company Nelnet
NNI
+ 0.21%
Ben Kiser, a spokesperson said more than 40% of the government’s student loan portfolio discovered on May 11 that the company was reporting the CARES tolerance period in a way that could have negative consequences for borrowers. of the company.

The United States Department of Education ordered administrators to report unpaid payments to the credit bureaus as if borrowers owed $ 0 a month, paid it, and were up to date on their loans. Instead, Great Lakes reported that these $ 0 monthly payments had been deferred, said Kiser.

In addition to working to immediately adjust reports, the company also encouraged borrowers to contact credit reporting agencies directly, rather than using a third-party service, as Great Lakes believes the error did not affect credit notes. borrowers in these cases. according to Kiser. Equifax, Experian and TransUnion typically only need to provide customers with free credit reports once a year, which is why consumers often trust free credit reporting sites like Credit Karma. During the pandemic, consumers can access their credit reports directly from the credit bureaus every week for free.

Department of Education offers advice similar to that of the Great Lakes a Web page: “If you have noticed a negative change in your credit information displayed by a third-party credit service, such as Credit Karma, you should check your credit score with Equifax, Experian or TransUnion.”

But Credit Karma spokeswoman Emily Donohue said the company simply publishes the credit information it receives from VantageScore, a credit rating algorithm created and owned by the three credit reporting agencies.

“Credit Karma has no role in aggregating financial institutions from the data used by VantageScore, nor does it own or contribute to the VantageScore 3.0 model,” Donohue wrote in an email. “On the contrary, Credit Karma is simply a channel through which a member’s VantageScore is transmitted from offices to our members (consumers).”

VantageScore noted in a blog post earlier this month that some consumers have seen their credit ratings change “due to the unprecedented widespread use of deferral and deferral codes for consumer loans that have benefited payment relief from consumers. lenders. ”The company also noted in the blog post that it was adjusting its model to minimize the damage caused by these postponement or leniency codes.

FICO, the other major provider of credit scores, does not account for carryovers in its algorithm, so the Great Lakes carryover coding did not affect borrowers’ FICO scores.

Conclusion: Great Lakes has acknowledged its error, but considers that it has not affected the scores of borrowers held by the various credit reporting agencies. At the same time, the outside company where borrowers like Evans noticed their scores had gone down, Credit Karma, says it extracts client scores directly from VantageScore, a credit scoring algorithm that uses data from the three agencies credit assessment. Credit and is used by some lenders to assess credit worthiness.

The issue is about to be resolved, said Kiser, as the Great Lakes provided updated credit files to the four credit bureaus on May 15 and, by Thursday, three of the four credit bureaus had already processed the files, and the fourth was to be done soon.

Equifax, Experian and Transunion did not respond to requests for comment. The Consumer Data Industry Association, a group representing the three agencies, “has worked closely with the three offices to support the consumer credit reporting activities of data providers during the pandemic under the CARES Act,” said said President and Chief Executive Officer Francis Creighton. “The offices continue to work with administrators to ensure that student loans and other accommodation are properly reflected in consumer credit reports and can be set to day if necessary. “

How will missed payments ultimately affect borrowers’ credit scores?

But experience highlights the challenges of protecting borrowers in our current student loan system and also raises questions about how the quality of consumer credit will be affected by this period, said Persis Yu, director of the Borrower Assistance Project. student loans in the National Consumer of the Consumer. Center of Law.

“One thing that came out of this is that we don’t really know what the impact of all these different updates is on credit reports,” said Yu. “The scoring models are a black box.”

For Evans, the past few weeks have left her with the lingering feeling that she has little control over a marker that so many companies rely on to assess her financial health, despite being aware of all of her loan payments. . In addition to this more recent experience, Evans said he was the victim of the Equifax attack in 2017, and that his score still recovered when the lender unexpectedly closed one of his credit cards. for lack of use.

“There does not appear to be any integrity in the credit rating process,” he said. “I don’t think it accurately represents anyone’s decision-making, priorities or responsibility.”