Published: May 07, 2013 11:15 PM EDT

WASHINGTON, D.C.- U.S. Sen. Bill Nelson (D-FL) wants federal regulators to investigate and crack down on the mortgage industry’s inaccurate reporting of short sales as more financially harmful foreclosures in many consumers’ credit reports.


The Florida Democrat represents a state that continues to be one of the worst in the nation for the number of homeowners who are underwater because of the late-2000’s recession and financial crisis.  Nelson’s call for probes by two federal agencies comes at the outset of a hearing today of the Senate Commerce Subcommittee on Consumer Protection, Product Safety and Insurance, which oversees credit issues.  Nelson is a senior member of the broader Commerce Committee and reportedly in line to become its chairman within two years.


In recent months, it’s increasingly come to light that the lending industry has been reporting short sales with the same computer code used for foreclosures in the credit reports of an untold number of consumers – tainting both their credit ratings and potentially their ability to qualify for new loans on things like homes or cars.  And - based on recent reviews conducted by mortgage giants such as Fannie Mae and Freddie Mac - the controversial reporting practice is widely known in the industry but little has been done to fix it.


“Many homeowners who go through short sales are hoping for a fresh start,” Nelson said in a news release.  “Instead, a lot of them might not even know they’re continuing to be punished.”


Having a foreclosure reported to the credit agencies, instead of a short sale, can hurt a borrower’s chance of getting another loan for up to seven years instead of only two; and, it could adversely affect the rate a borrower is charged for insurance or loans during the period in which their score is lower because of a credit-reporting error.


Banks and credit bureaus contend the problem lies in the standardized computer software they use, which, they say, has no special code to report a short sale.  Without such, home­owners who won a bank's approval for a short sale can appear in credit reports no differently than delinquent defaulters who ended up in foreclosure.


Regardless of who or what’s to blame many homeowners are being punished twice, first because of the economic downturn and loss of value in their home, then because their credit reports don’t distinguish between a short sale and a foreclosure - even though both the administration and Congress have encouraged people and banks to pursue short sales.


In fact, the Treasury Department proposed a plan to try and help stabilize the housing market by offering some alternatives to struggling home owners.  Part of that program gave homeowners an incentive to do a short sale.  And Congress passed tax breaks for cancelled mortgage debt - the difference between an original mortgage and the short sale amount.


In letters to the heads of the newly created Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC), Nelson asked both agencies to investigate the industry’s credit-reporting practice against the backdrop of the Fair Credit Reporting Act’s requirement that all information in credit files be reported accurately.  The CFPB is charged with protecting consumers against wrongdoing by mortgage-servicing operations and foreclosure relief services, among other things.  The FTC is responsible for stopping unfair, deceptive or fraudulent practices in the marketplace.


“This problem is growing as short sales have become more and more commonplace,” Nelson wrote.