Congress anticipated that deferring those payments might blemish a borrower’s credit report. The errors on borrowers’ credit reports come as credit scores and history are especially important as Americans in financial distress seek access to credit. So Congress required the Education Department to make sure the deferred payments were reported to credit bureaus as on-time payments.
But that didn’t happen for most federal student loan borrowers whose loans were managed by Great Lakes.
The company, because of a “coding error,” erroneously reported to the credit bureaus that borrowers’ accounts were “deferred” — a notation that appeared on credit reports and triggered a lower credit score for some individuals.
The Education Department estimated that the credit-reporting error affected about two-thirds of the 7.3 million federal student loan borrowers’ accounts assigned to Great Lakes. Both the department and Great Lakes said that they were fixing the problem and claimed that the errors resulted in little or no damage to borrowers’ credit scores.
But consumer advocates disagree, arguing that the “deferred” status could harm borrowers. State regulators and the Consumer Financial Protection Bureau are looking into the incident.
The credit-reporting mishap is the latest challenge that the Education Department has faced in trying to swiftly implement emergency student loan relief passed by Congress as part of the CARES Act.
Education Secretary Betsy DeVos was sued last month by borrowers whose wages were still being garnished to cover payments they owed on their loans — even though the CARES Act ordered a halt to the practice. Congressional Democrats have blasted the department’s inability to halt wage garnishment — which the agency says is the fault of employers who are ignoring its instructions.
Education Department spokesperson Angela Morabito said on Wednesday that the agency responded “aggressively” to fix the credit-reporting problem.
“Providing incorrect information to credit reporting bureaus is totally unacceptable, but it’s important to understand Great Lakes quickly corrected the coding issue last Friday and sent updated credit reporting files to ensure as little impact as possible from the coding error,” Morabito said.
Education Department officials and Great Lakes insisted the errors caused little harm. It is not clear the department will punish Great Lakes over the incident. Great Lakes is one of the department’s major loan servicers, earning tens of millions of dollars a year through its contract with the agency.
“We’re working with credit reporting agencies (Equifax, Experian, TransUnion, and Innovis) to ensure the accuracy of the information we reported regarding COVID-19 forbearances,” Great Lakes wrote in a statement, adding that “we do not believe our reporting has impacted actual consumer credit scores provided by those agencies.”
Ben Kiser, a spokesperson for Nelnet, which owns Great Lakes, declined to comment further, referring questions to the Education Department.
For some borrowers, the “deferred” notation on a credit report could have triggered a lower credit score calculated by VantageScore, one of the two major companies that provides credit scores. VantageScore had viewed deferment as a negative factor, according to company spokesperson Jeff Richardson.
But VantageScore announced last week that it would change its algorithm “to minimize the potential of any negative impact associated uniquely” with deferred accounts of all types.
FICO, a competing and larger credit score provider, does not consider deferments in its score. Joanne Gaskin, the vice president of scores and analytics at FICO, confirmed that “there is no negative treatment” associated with a deferred federal student loan under the company’s scoring methodology.
Mike Pierce, who worked on credit-reporting issues at the Consumer Financial Protection Bureau during the Obama administration, said that it’s hard to believe assurances that the errors on borrowers’ credit reports will not end up harming borrowers.
“Across the economy, America has decided that what’s on your credit report is a proxy for how responsible you are,” said Pierce, who is now policy director at the Student Borrower Protection Center. “There are no guarantees when millions are newly looking for work that their job prospects or their housing prospects aren’t going to be held back by the fact that, for millions, their credit reports say they’re less responsible.”
Pierce said that inaccurate information in a borrower’s credit report could have far-reaching consequences. Once the error is “out in the world,” he said, it’s possible “you will see someone deny a borrower a job offer, or a landlord reject an application for a lease because they see this information and decide a borrower is too big of a risk to take in the middle of a pandemic.”
Antonio Salazar, Maryland’s commissioner of financial regulation, said his office was looking into the credit-reporting issues that have arisen with the emergency coronavirus relief for student loans.
His office on Monday issued an advisory, warning student loan servicers and credit reporting agencies about accurately reporting credit information for student loan borrowers who received emergency relief under the CARES Act. The advisory alludes to a “systemic error” and the Great Lakes incident, but it did not name the company specifically.
“We are aware that they are the subject of speculation about alleged mistakes, so we’re looking into it so that we can understand what went on,” Salazar, who was appointed by Republican Gov. Larry Hogan, said of Great Lakes. “The goal is to make sure people follow the CARES Act and Maryland law.” He said his office was also working with the state’s attorney general on the problem.
Consumer advocates said that borrowers who believe they were affected by the credit reporting problems should download and save copies of each of their free credit reports from annualcreditreport.com.
The Consumer Financial Protection Bureau first identified the issue with Great Lakes credit reporting through consumer complaints, including tweets, and has been working with the Education Department on the issue, according to a CFPB official.
The consumer bureau has also been in touch with Great Lakes, the credit reporting agencies and VantageScore, the official said. That person declined to discuss any potential supervisory or enforcement work.