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From Privacy Times, October 23, 2009


In the wake of a Privacy Times story, mortgage underwriting giant Fannie Mae said it was "reviewing" its policy of blocking the automated underwriting of mortgage applications accompanied by credit reports with an account notated as "disputed by consumer," according to Ken Harney, the syndicated columnist.

Fannie Mae's "review" implicitly acknowledges the potential controversy over a quiet change in its policy that effectively punishes honest consumers for exercising their rights to dispute credit report errors.

Because Fannie did not respond by our deadline, Privacy Times reported last issue that it "appeared" that the mortgage giant had begun rejecting applicants whose credit reports showed the "disputed by consumer" notation.

After our story broke, and after Harney inquired about the practice, Fannie Mae Spokeswoman Amy Bonitatibus conceded that its key program, "Desktop Underwriter," had begun scanning credit reports for the term "dispute." But she said Fannie itself wasn't rejecting applications outright. Instead, it was kicking applications back to lenders and requiring them to determine if consumers' disputes were valid.

'Punting' To Creditors

"Fannie Mae's eligibility requirements do not prohibit the delivery of a loan to Fannie Mae where the borrower has disputed information on their credit report. In order to protect borrowers from adverse impacts resulting from inaccurate reporting data, our policy requires the lender to determine and document whether or not the disputed information is accurate and underwrite the borrower's credit accordingly," Bonitatibus said.

PT's story recounted how several consumers with excellent credit histories complained of being denied loans because of Fannie's program. Eddie Johannson, president of Credit Security Group, a Texas-based firm that works with mortgage applicants and their lenders to improve credit reports so that consumers can qualify, had witnessed several such cases. The most recent involved a borrower who had excellent credit scores and met all the other loan qualifications yet was rejected for a home loan because a credit card account was marked "Consumer Disputes." The account was paid up with no late payments. "There's no good reason to reject this borrower," said Johansson, whose firm was working to resolve the issue and so the application can be approved.

Fannie actually adopted the policy late last year. But it appears that Fannie's only mention of it came in the October 16, 2008 "Release Notes" for Desktop Underwriter Version 7.1, under the section "Miscellaneous," in which it told lenders:

"The following Verification message will be issued on DU Version 7.1 loan casefiles to remind lenders of this requirement: DU identified the following tradeline(s) as disputed by the borrower and did not include the tradeline(s) in the credit risk assessment. The lender must verify the accuracy of the tradeline(s) by determining if it belongs to the borrower and by confirming the accuracy of the payment history. If the tradeline does not belong to the borrower, or the reported payment history is inaccurate, no further action is necessary. If the tradeline does belong to the borrower and the reported payment history is accurate, it must be taken into consideration in the credit risk assessment. To ensure it is considered, the lender may obtain a new credit report with the tradeline no longer reported as disputed and resubmit the loan casefile to DU, or the lender may manually underwrite the loan."

What FCRA?

Fannie's notes did not mention that consumers' have a legal right under the Fair Credit Reporting Act (FCRA) to dispute, with both credit bureaus and creditors, any information in their credit reports. In fact, they are encouraged to do so by the Federal Trade Commission, consumer groups and the news media.

Christopher Cruise, a Maryland-based mortgage originator and a founding member of the National Association of Responsible Loan Officers, told Harney that "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."

Harney also reported that 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."



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