Suspension of Home Equity Line of Credit Leads to Major Credit Score Damage

April 22, 2008

Barbara wrote in earlier this week with a shocking story:

The recent "suspension" of our home equity loan is showing up a "major derogatory" on my and my husband’s credit reports. Our lender was Citibank.  Our payment record is perfect. I am not disputing Citi’s right to suspend the loans (we all know there was some vague fine print in there some where) but their right to trash my credit.  After my complaint to Citi, they changed to loan to zero dollars available which lowered our scores even more.  This started with a "major derogatory" on Trans Union only.  As I have continued my husband has major derogatories on two credit bureaus.

It is WRONG, WRONG, WRONG to trash people’s credit score over this.  We are hostages to this system yet there is no reporting accountability.  We are at the end of the long process of building a home and looking for financing.  We have our 20% down and can afford the house… this is making this really hard.

Barbara sent over copies of her credit reports and called with more details. She’s been in discussion with representatives at Citibank and TransUnion for days. John Ulzheimer, our FICO expert, and I talked it over yesterday and are continuing the investigation.

Basically, there is no precedence for this home equity account to be reported as a "derogatory" record to the credit bureaus. The account should probably be marked as "suspended," "non-performing" or "closed." These accurate statuses may have a small negative credits score impact, but nothing close to a derogatory.

If the record were to stay marked as a derogatory, the credit score damage (which could be as severe as 200 points) will continue for 7 years. Barbara is in the process of applying for a construction loan and her damaged credit is becoming a major hurdle. With lenders tightening their credit score standards, this inaccurate reporting is particularly damaging. 

This report comes at a point where large banks across the country are suspending HELOCs due to falling home values. CaveatEmptor has a copy of the letter borrowers received from Citibank. Countrywide has shut down 122,000 home equity loans and other banks are following suit.

Is this an isolated incident or a widespread credit reporting error? If your HELOC has been suspended, please share your story with us by email or in the comments section below.

4/11/08 Update: We had Barbara check her FICO scores and it appears that the damage is contained to just her TransUnion report and TransRisk score. It looks like there is a "tagging" problem with the way that bureaus is reading the suspended record. Her FICO scores are undamaged, meaning that the accounts aren’t being marked as derogatory on the base credit file.

Emily Davidson – A former TransUnion insider and a member of Credit.com’s expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

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