Consumer Protection Law
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You should submit what is called a RESPA Qualified Written Request to you lender. In the request state the lender is incorrectly reporting balances to Credit Agency and list the balance reported. The lender will respond back with a complete payment history including balances due. You can then use the data from the qualified request to submit a request to each credit bureau to modify the incorrect credit information.
Here is a link to how to make the request (sample letter):
Once the credit bureaus get you request they are required to investigate and fix the incorrect information.
what are they actually supposed to report ? actual principal balance or payoff amount?
They report principal balance remaining.
There are no guidelines. I would suggest you contact the Big 3 and have each fix any misreporting.