Will co-signing a loan for my daughter affect my credit?

February 22, 2013 18:18 by Consumer Ed

Dear Consumer Ed:

My daughter wants me to co-sign a loan for a car. If she is late on a payment, will this affect my credit, as well as hers?

Consumer Ed says:

Yes, when you co-sign on a loan, of any kind, both you and the borrower put your credit scores at risk.  If your daughter is late or misses a payment, this fact will be reflected on your credit reports and may negatively affect your credit ratings.  Any late or missed payment will affect your daughter’s creditworthiness as well.
   
There are a number of other responsibilities and risks that you might want to consider before you agree to this co-sign arrangement.  First, you need to understand that cosigning a loan is the same as guaranteeing a debt.  This means that if your daughter does not pay her own debt, you will then have to make the payments for her.  Second, in most states, including Georgia, if the borrower misses a payment, the lender can immediately collect from you as the cosigner.  Therefore, you should carefully evaluate your own finances and only co-sign on the loan if you can afford to pay off the loan plus any potential late fees or collection costs associated with the account.  
   
It is very common for parents to cosign on a child’s loan.  Assuming your daughter pays at least the minimum due every month, this arrangement will help her establish or re-establish good credit.  As her parent, you are better equipped to evaluate whether your daughter is financially responsible and if the terms of the loan are an economically feasible undertaking for her. 

If you decide to cosign on her loan, you should then take appropriate steps to protect yourself and your credit as much as possible.  One way to do this is to try to limit the terms of your obligation.  For example, you can request a contract that states, “The cosigner will be responsible only for the principal balance on this loan at the time of default.”  The lender is not required to consent to your request, but may if asked. You could also ask the lender to agree, in writing, to notify you in the event you daughter ever misses a payment, prior to effecting collection.  Early notification will help you prevent any potential problem from escalating to the point where you would be asked to repay all at once the entire amount owed.  Finally, get copies of all of the important documents involved in the transaction from either the lender or the borrower—the loan contract, Truth-in-Lending Disclosure Statement, and warranty.

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Can a mortgage company ask your neighbors about you if your payment is late?

February 8, 2013 00:52 by Consumer Ed

Dear Consumer Ed: 

Can a mortgage company call your neighbors when you are late on your payment and ask questions about you?      

Consumer Ed says: 

It depends on what you mean by “mortgage company”—whether that company that is your mortgage lender, your loan servicer, or both.  Your mortgage lender is the company that actually loaned you the money to purchase your home; your loan servicer is the company that handles the day-to-day aspects of your loans following the original disbursement.  Your mortgage lender and loan servicer can be the same company.  If you do not know who your loan servicer is you can check this on your monthly billing statement. Or you can call the MERS Servicer Identification System at 888-679-6377, or visit the MERS website at www.mersinc.org/information-for-homeowners/my-mortgage-info.

If your mortgage company is your loan servicer, but not your mortgage lender, these phone calls to your neighbors are regulated by the Fair Debt Collection Practices Act (“FDCPA”).   Under the FDCPA, it is legal for a third-party debt collector (such as a loan servicer) to call your neighbors, provided the content of the conversation is limited to three inquiries—your home address, your home phone number, and where you work.  All other inquiries are illegal.  It is also illegal for a third-party loan servicer, in making such inquiries, to disclose the fact that you are late on your payments or any other confidential information.

If your mortgage company is both your loan servicer and your mortgage lender, the restrictions set out in the FDCPA will not apply.  This is because technically the mortgage company is your creditor, rather than a “third-party” debt collector. 

However, there are other regulations recently put into place by the Consumer Financial Protection Bureau (“CFPB”), the federal agency charged with oversight of all financial institutions, which apply to communications between covered financial entities and third parties.  Under the new CFPB regulations tighter rules will apply. Thus, regardless of whether the company was your mortgage lender or your loan servicer, if the company and the communication it had with your neighbor falls within CFPB regulations, then the company is required to give you notice and an opportunity to opt-out of its third-party disclosure procedures before releasing information about you to your neighbors or other unaffiliated third parties.   

You can learn more about these new federal regulations by visiting the CFPB’s web site at www.consumerfinance.gov/regulations.  If you believe your mortgage company and/or loan servicing company have disclosed protected information about you in a way that violates the law, you can to file a complaint with the CFPB at https://help.consumerfinance.gov/app/mortgage/ask.

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Refinancing a title pawn

January 16, 2013 17:02 by Consumer Ed

Dear Consumer Ed: 

I saw a billboard that said I could refinance my title pawn.  Is this just a lower interest title pawn, or is it a way to keep from losing my car if I am late with a payment?

Consumer Ed says: 

It sounds like this company is likely just offering possible lower interest title pawn financing.  When refinancing any type of loan agreement, the amount owed under the old agreement is paid off in exchange for a new loan with new terms.  There are two advantages to refinancing a title pawn, but there is also a potential drawback. The first benefit is that payments due under the new agreement should be lower than your old agreement.  Lower interest rates might now be available to you due to changes in market conditions or the improvement of your credit score.  Second, title pawns, unlike other loans, are usually issued for only 30 days, after which the entire loan becomes due.  Refinancing your title pawn would give you more time to repay your loan. 

The potential disadvantage is the risk of falling into the trap of having to constantly refinance your title pawn.  Before you refinance, ask yourself if you think you’ll be able to pay off your loan one month from now.  If you can’t, you’ll be in the same position you are now, and you’ll either have to refinance again or risk losing your car. 

If you are thinking about refinancing your title pawn, you should make sure that the company through whom you will be refinancing has a good rating with the Better Business Bureau (www.bbb.org).  Remember, as long as you are using your car as collateral for a loan, you run the risk of losing it if you’re late with any payments.

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