One of the most active threads on the Credit.com forums has been the one that discusses mortgage loan modifications under the Making Home Affordable program. A number of consumers have been sharing stories of how modifying their home loans hurt their credit ratings.

In an effort to get the latest news on this topic, I spoke with Norm Magnuson at the Consumer Data Industry Association (the trade association for the credit reporting industry). He told me that after numerous discussions with creditors, Treasury officials etc., the Metro 2 reporting guidelines that credit reporting agencies follow have been updated to indicate that lenders should:

Report the account with the “partial payment” notation while they are in their trial period. The trial period is supposed to last three months, but it has dragged on for some consumers. One forum member told us it took her 344 days to modify her loan with Citi!

The partial payment notation is considered negative and will significantly hurt these homeowner's credit scores. If they have been current up to the time of their modification their scores will likely drop quite a bit. (One forum member, for example, saw his score drop from 760 to 650.) If they have credit cards, their issuers will likely lower their limits/close their accounts, and/or raise their credit limits.

Report the account with a new code that indicates they are making payments under a government plan when their modification becomes permanent. This code has no effect on credit scores, at least for now. That’s because FICO is still studying the data to determine whether these consumers are riskier as a result of the modification.

This information is somewhat contradictory to what one Treasury official stated in this New York Times blog post:

But recognizing that participating in the modification program alone need not harm credit scores by default, the trade association, in cooperation with the Treasury Department, developed a new code, which took effect in November. “The administration felt that it was important to ensure that homeowners who faced foreclosure weren’t unfairly punished for seeking a loan modification,” said Meg Reilly, spokeswoman for the Treasury Department.

The trial period reporting does, in fact, hurt consumer’s credit scores, as Mr. Magnuson confirmed. While consumers who successfully complete the trial modification should see some relief when their modification becomes permanent, no doubt damage has already been done.

I also asked him what consumers should do if they are in permanent modification but have not seen their reports updated to reflect that. He indicated that borrowers can dispute the listing with the credit reporting agency and ask that it be updated.

Note that these guidelines only apply to loans modified under the government's Making Home Affordable plan. If you negotiate a modification outside that program, the lender may report it differently.

If you are in the process of modifying a loan, or have already done so, we'd like to hear about how it's affected your credit scores. Feel free to weigh in here or on our forums.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.