FHA & disputed accounts - official policy change

[ShanetheMortgageMan]

Periodically HUD will send out emails with news, bulletins, program updates, and general guidance to lenders regarding FHA programs.  To subscribe to these types of updates you can go to Join FHA's Single Family Housing Industry Email List.  So on April 28th Jerrold Mayer (who the emails come from) sent an email about a new mortgagee letter, and in the middle of the email it also provided some guidance to lenders who are underwriting FHA loans which said:

If the credit report reveals that the borrower is disputing any credit accounts, Manual Downgrade of a TOTAL Scorecard Approve/Accept recommendation is not required if:

1. The disputed account has a zero balance

2. The disputed account is marked as “paid in full”, or “resolved”

3. The disputed account is both

a. less than $500, and

b. more than 24 months old, based on the date of dispute

Which is great news for those with disputed accounts that fall into one of the above 3 categories.  However this was just Thursday, so not many lenders have followed suit.  I suspect over the next few weeks lenders will gradually update their guidelines.  

Back on April 15th there was a similar announcement, but it specifically had to with if within the findings it said "Refer to manual underwriting because of disputed accounts" then that comment could be ignored if one of the above 3 applied, however I've never seen "Refer to manual underwriting because of disputed accounts" comments and I've had plenty of people with disputed accounts run through FHA's automated underwriting system... so it's a good thing they provided this clarification or I don't think many lenders would have changed their guidelines.

[Lel]

Good concrete information, Shane.

One question I have is this: are these guidelines that are recommended to lenders or requirements that they now need to follow?

For example, the FHA specifies a minimum FICO score in order to theoretically qualify for a mortgage.  However, lenders can have their own "overlay" - stricter requirements in order for them to extend a mortgage to a prospective borrower.  The minimum FICO score is a guideline, but lenders are not beholden to that number if they want to use a higher score as their minimum.

So, even though the FHA has eased its stance towards disputed accounts, do lenders necessarily have to adopt any or all of these guidelines?

In my opinion, I think most lenders would not have a problem with these guidelines, since they really do focus on the little things that won't cause much trouble for the borrower - zero balances, paid accounts, or small balances.  These seem quite logical.

[ShanetheMortgageMan]

Unfortunately it is just guidance, not a requirement.  Lenders are still free to manually underwrite any loan they feel doesn't have it's FHA TOTAL findings accurately represented... but I have a good feeling this guideline will be implemented.  I think it'll start with some of the bigger lenders (not necessarily the biggest) changing their guidelines, and then the rest of the lending community will adapt in order to remain competitive.

[ShanetheMortgageMan]

I see a few lenders have already started to implement this guideline change, so things are looking up.

[doeblinv]

does this apply if the account is not in dispute but was disputed at one time? Mine are not in dispute it just says' consumer disputed meets fcra"..... so we should be able to go electronic underwriting right??

[ShanetheMortgageMan]

It's impossible for an underwriter to determine if it's an active dispute or just comments that it was in dispute at one time.  FHA TOTAL (the automated underwriting system that FHA uses) doesn't identify them, so I am really not even sure what the issue was to begin with... but I suspect it's when Fannie Mae came out with their software that was finally able to identify actively disputed trade lines, FHA got word of it, and then took the same stance but apparently couldn't update their software to identify them so they started out with any trade line in dispute, and then changed it to their current policy.  If the disputed trade line meets one of the 3 requirements above then the underwriter should be fine accepting any automated underwriitng approval that FHA TOTAL spits out.