Disputing error on credit report stonewalls mortgage application
WASHINGTON — A little-known and potentially controversial practice by mortgage giants Fannie Mae and Freddie Mac could kill or stall your next loan application.
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 current mortgage because of low interest rates.
By any measure, your application should rocket through the system and get you a great rate. But the bank officer rejects it. Fannie Mae's automated underwriting system won't accept any application with a notation in the credit report that a consumer has disputed an account or "tradeline."
You explain that the dispute was valid. The account was closed. The creditor promised to remove the dispute notation but apparently never did. Your loan officer won't budge. Policy is policy, he says. Your application is dead.
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 the notation remains, most credit scoring systems generally will not factor the disputed account into the computation of the consumer's score.
Does Fannie Mae, currently operating under federal conservatorship, deny loans to consumers simply because they exercised their legal rights? In an e-mail response, communications director Amy Bonitatibus confirmed that the company'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 emphasized that 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."
Christopher Cruise, a Maryland mortgage originator and a founding member of the National Association 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 hands-on 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." Instead, he said, "they get ambushed" when they apply for a mortgage.
Freddie Mac's policy on disputed tradelines is broadly similar to Fannie Mae's, according to spokesman Brad German. Though the specific requirements of its automated system are "proprietary," he said in an e-mail, "the presence of disputed tradelines will affect (the system's) determination of a borrower's credit reputation and its decision to accept the application or refer it to the lender for manual underwriting."
Why are both Fannie and Freddie so uptight about applications with disputed accounts? Mainly because during the past several years, 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 was in the file. Fannie and Freddie are trying to protect themselves from gamesters and frauds.
But what about the impact on disputed items where the consumer was right — or files where creditors failed to remove the disputed account designation? For now, it's just tough luck.
Fannie Mae, however, says it is reviewing its policy, so maybe there's a chance for a change.
Ken Harney can be reached at firstname.lastname@example.org.