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Disputed Tradelines and Loan Approvals - A look into a little known underwriting technicality

By
Mortgage and Lending with Peachtree SEO

800 Credit Score Borrowers Putting 50% Down Can Be Denied for A Loan!!! 

With an attention getting headline like this, one can only wonder how! 

This post is aimed at consumers and realtors, and should provide some insight into a questionable practice that the automated underwriting systems employ when evaluating a borrowers credit profile.  I've seen more and more situations where consumers are being turned down for mortgage loans that they easily qualify for due to a quirky technicality.

If you have accounts on your credit report that are listed as "Disputed" or "Consumer Disputes" on any one of the three big credit bureaus, the automated underwriting systems used by Fannie Mae and Freddie Mac will deny your loan. 

Yes, you read it right..... if you spot a discrepancy on your credit report, dispute it in good faith, you may be rewarded with a notation on that account that says, "Disputed or "Consumer Disputes", you are in a very tough spot if you are in the process of obtaining a new mortgage loan.  Here's what happens.....

When a loan officer runs a file through the AUS system - where DU (Fannie Mae) or LP (Freddie Mac), the credit report is scanned as part of the computerized underwrite.  If the system detects the word "Dispute", the system provides a message to the loan officer, in essence putting the file in limbo.  Here is a sample message:

Disputed Tradelines

    DU Disputed Tradeline Message

The logic behind this is that there are numerous credit repair companies that use large scale disputes to unethically raise a clients credit score and attempt to circumvent valid items.  This is obviously only a short-term fix, and does not truly repair any credit.  Unfortunately, in an attempt to shut down this tactic, Fannie Mae and Freddie Mac have inadvertently penalized honest consumers who have attempted to dispute errors on their credit report.  Consumers may have legal rights under the Fair Credit Reporting Act (FCRA) in disputing incomplete or erroneous information.  As you can tell, these rights protected under Federal law, can sometimes be twisted against the consumers they were designed to protect!

So...where does this leave the borrower? 

The applicant has no choice but to attempt to contact the account in question (credit card, car loan, mortgage, etc.) and request that they contact the credit bureaus to remove this language from the report.  At a minimum this will take 4-6 weeks!

If you are only doing a refinance, it just stalls your application for 1-3 months!  Can you imagine the effect on your purchase loan?  It is almost a death blow to any purchase transaction -- if not for our current economy and market, it would spell death to any deal.

While many mortgage professionals know and understand this "glitch" in the AUS systems, it is not widely known by most realtors and consumers.  The only real take away here is that when you review your credit report, you need to look at more than just "mistakes" or other negative items.  Somtimes, it is something as simple and innoculous as this honest dispute that can kill the deal.

Posted by

Brian Anderson

Partner

404-667-8864

Peachtree City, GA

www.peachtreeseo.com

Comments (6)

Justin D. Bethea
Cavalry Realty LLC - Marysville, PA

I've experienced this glitch first hand with a buyer and after quite a bit of research found a quicker way to resolve the issue. If the consumer disputes the "account disputed by consumer" notation directly with the credit reporting agency as opposed the data furnisher (company doing the reporting) they can often resolve the issue in about two weeks. Sometimes that's quick enough to save your deal.

Jan 12, 2010 02:14 PM
Brian Anderson
Peachtree SEO - Peachtree City, GA
SEO and Social Media Marketin

Wow -that is impressive!  I'm pretty impressed that any consumer has accomplished updating something like this on one or more credit bureaus in 2 weeks or less. 

The real fix here needs to happen from Fannie/Freddie, to avoid anyone having to go through it.  I know it's on their radar, and is something they are talking about.

Jan 12, 2010 02:16 PM
Rob Muller
ReMax Town & Country - Canton, GA
Cherokee County Real Estate

Yet another idiotic over reaction as a result of trying to fix things

Jan 12, 2010 02:25 PM
Anonymous
Traci Gregory

Bravo! Nicely put, and nice to know there are several ways to approach it.

But, MORE IMPORTANTLY, everyone needs to know what is going on behind the scenes when they a) attempt to correct their credit, or b) get a mortgage.

The machinations of using someone else's money are costly and complex, whether it is for a mortgage or anything else.

And the general public seems to have the notion that credit bureaus provide a service to people . . . and wants to do a good job of it.  The service is to lenders, and quality control doesn't seem to be in their respective vocabularies.

 

Jan 13, 2010 12:42 AM
#4
Brian Anderson
Peachtree SEO - Peachtree City, GA
SEO and Social Media Marketin

Thank you Traci.  I agree, making sure all parties are aware of the underwriting process and helping educate them on how to work aroudn this issue is critical.

Jan 13, 2010 06:56 AM
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Dec 17, 2010 02:09 AM
#6