Thursday, October 29, 2009

Credit account dispute could stall mortgage application

It sure seems as if there are a lot of tripwires and landmines out there when attempting navigate through the finance market these days.

Many of these measures are established with the best intentions however in the haste to implement safeguards, innocent people suffer and the process of tweaking them is excruciatingly slow... The best defense is to be informed.

Read the piece from the New York Times (below) and if you are working on a mortgage or refinance be sure to check your credit report prior to submitting your loan application. RD



Credit account dispute could stall mortgage application

Fannie Mae and Freddie Mac, seeking to prevent fraud, have been kicking such applications back to lenders for manual underwriting.

Reporting from Washington - Could a little-known and potentially controversial practice by mortgage giants Fannie Mae and Freddie Mac kill or stall your next loan application? Absolutely.
Picture this scenario: You've got outstanding credit scores close to 800 and solid equity in your home. All you want is to refinance your mortgage to take advantage of today's rock-bottom interest rates.

Your application should rocket through your lender's system and get you a great rate. But your bank says: Sorry, we can't do your loan. Fannie Mae's automated underwriting system won't accept any application where there is a notation in the credit report that a consumer has disputed an account or "tradeline."

You explain that the dispute -- over a medical bill or a credit card charge -- was valid. The account was closed. The creditor promised to remove the dispute notation but apparently didn't. Your loan officer won't budge. Policy is policy, he says. Your refi application is dead.

What's going on here? Under the Fair Credit Reporting Act, consumers are guaranteed the right to dispute erroneous information on any account in their credit files. Once a consumer challenges that information, a notation to this effect must be made on the file. As long as it remains, most credit-scoring systems generally will not factor the disputed account into the computation of the consumer's score.

Does Fannie Mae deny loans to consumers simply because they exercised their legal rights? In an e-mail response, communications director Amy Bonitatibus confirmed that the firm's automated underwriting system -- used by virtually all lenders doing business with Fannie Mae -- sends applications with "consumer disputed" items on credit reports back to the lender for what is known as "manual underwriting."

Bonitatibus said the company does "not prohibit delivery of a loan . . . where the borrower has disputed information" on his or her credit report. Through manual underwriting, she said, "our policy requires the lender to determine and document whether or not the disputed information is accurate and underwrite the borrower's credit accordingly."

What's the practical effect of bucking back applications to lenders for potentially lengthy discussions with applicants and their creditors? According to consumer postings on FiLife, a financial education website, the net result often is that the bank brushes you off and blames it on Fannie Mae.

Christopher Cruise, a Maryland mortgage originator and founding member of the National Assn. of Responsible Loan Officers, said, "There's no question -- when there are lots of other applications and business is good," applications requiring extra time and research "just aren't going to move."

Evan Hendricks, author of the book "Credit Scores and Credit Reports" and publisher of Privacy Times, a newsletter that outlined Fannie Mae's policy in a recent report, calls it "extremely unfair to honest consumers who are simply doing what they should -- challenging misinformation."

Freddie Mac's policy on disputed tradelines is broadly similar to Fannie Mae's, spokesman Brad German said.

Why are Fannie and Freddie so uptight about applications with disputed accounts? Mainly because credit repair companies have been gaming automated systems tied to credit scores by disputing accurate but negative items. When tradelines in a consumer's files contain a "disputed" notation, most scoring software ignores them for the purposes of computing the score.
A seriously delinquent account that could legitimately depress a FICO score might be taken out of the equation -- at least temporarily -- if a "consumer disputed" notation is in the file. Fannie and Freddie are trying to protect themselves from fraud.

For the time being, it's tough luck for all applicants with disputes in their credit files.
Fannie Mae, however, says it is reviewing its policy, so maybe there's a chance for a change.

Source: New York Times, October 25, 2009 by Kenneth R. Harney


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