CREDIT DISPUTES AND YOUR HOME LOAN

You will find there's a little-known and debatable practice by home loan titans Fannie Mae and Freddie Mac,( the people who financially back the home mortgage loan business) that will end your next house loan app directly in its’ tracks.


Let’s take a look at an example: You have great scores: in the 780 range. You have great equity in your home. You want to refinance your home to send your child to college. You have been on the job for 20 years and have more than enough income. The rates are great.

But your bank states: Sorry. We're not able to do the loan. Why? What the ……………………………

Fannie Mae's automated underwriting system won't accept any application in which there is a note in the credit report that a consumer has disputed an account or "trade line."


You explain that the dispute -it was for a medical bill --was valid. The account was closed. The creditor promised to eliminate the dispute notation but evidently never did. The loan officer won't budge. The refi application is dead.

What's happening here? Under the Fair Credit Reporting Act (FCRA), you have the right to dispute incorrect information on any account within your file. When you challenge that information, a notation to this effect must be made on the file (as per the FCRA). So long as it remains, most credit scoring systems generally will not factor the disputed account into the calculation of the consumer's rating. Thus, the potential lender does not receive an accurate reflection of the real score.

Does Fannie Mae deny loans to customers because they used their legal rights?


Fannie Mae’s and Freddie Mac’s automated underwriting techniques -- employed by virtually all lenders doing business -- delivers applications with "consumer disputed" items on credit files back to the lender for what is referred to as "manual underwriting."

Freddie Mac and Fannie Mae do not forbid delivery of a loan . . . where the borrower has disputed information" with their credit report. Their underwriting requires the lender to ascertain and document whether or not the disputed information is correct and underwrite the borrower's credit accordingly. Here is the dilemma: The lenders typically won't manually underwrite because then they have the legal responsibility in the event the loan goes into default. And they typically will not keep these loans on their books. They need to sell them to the secondary market.

Whenever trade lines in a consumer's file include a "disputed" notation, most scoring software disregards them for the purposes of calculating the score.

A significantly delinquent account that could legitimately depress a FICO credit score might be taken out of the equation -- at least temporarily -- if a "consumer-disputed" notation is in the file. Fannie and Freddie are attempting to protect themselves from gamesters and frauds. This did happen a few years ago when sham credit repair companies and mortgage companies would challenge an item just to have it removed from credit scoring. At that time, the bureaus would totally remove the item during the dispute, the score would go up, the file underwritten and closed. Then the trade lines would be added back in once the item was validated and the score drops 50 or more points.

But what about the impact on disputed items when the consumer is correct -- or files in which creditors neglected to remove the disputed-account designation? For the time being, it's tough luck for all candidates with disputes in their credit files.


JOHN MACKEY