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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 current mortgage to take advantage of today's rock-bottom interest rates.
By any measure, 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 never did. Your loan officer won't budge. Policy is policy, he says. Your refi application is dead.
Right to dispute
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, 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."
Hurts honest consumers
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.
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 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.
