Loan Officer Training - 10/31/2024 - Navigating Disputed Accounts in the Loan Application Process

Disputed accounts can be a stumbling block in the loan application process, impacting everything from credit scores to approval timelines. In this episode of Loan Officer Training, we’ll guide you through the complexities of handling disputed accounts and how they can affect a borrower’s loan eligibility. Learn why disputed accounts matter, how they influence credit reports, and what you can do to navigate these situations with confidence.

We’ll explore key topics like identifying different types of disputed accounts, understanding credit bureau policies, and knowing when a borrower needs to resolve disputes before moving forward. Discover best practices for advising clients on their options, mitigating risk for lenders, and managing the documentation required to satisfy underwriting standards. By mastering these strategies, you’ll be able to streamline the loan process, protect your clients’ best interests, and minimize delays.

Whether you’re a seasoned loan officer or just starting out, this episode is packed with actionable insights to help you handle disputed accounts like a pro. Tune in and add this essential knowledge to your toolkit, ensuring smoother applications, fewer surprises, and a more successful lending experience for your clients.

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Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documen

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Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as thousands of Non-QM mortgage loan program variations using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as acc...

Transcript

Restream recording Oct 31, 2024 • 04:01:35 PM: 0:13

So let's get right into today's training on navigating disputed accounts. in the loan application process. So what exactly do we mean by a disputed account? Okay. A disputed account is an account that has been questioned or complained about by the account holder, which in this case is our borrower, and appears as disputed in a disputed status on the credit report. Now, please note these very important points. A disputed account may affect the ability to get a loan. Uh, credit bureaus generally do not use disputed accounts to calculate credit scores until the investigation is complete. So this is why it's going to affect the loan. Uh, because if you have an account that's in a disputed status, Uh, when you remove that account from disputed status, it may affect the credit score, right? Credit score usually may go down once the disputed status is removed from the account. Uh, and all of a sudden that accounts history is now all of a sudden put back into the mix for the credit score. And then in most cases, the credit score goes down. Doubt. Now, please do be aware that the only way to remove an account from a disputed status is to con is for the borrower to contact the creditor and the credit bureau to remove the disputed status on the account if that is what is needed. And, uh, you know, so if you have an automated underwriting approval for a conventional loan. And it's in a disputed status, then, you know, same as for an FHA loan. The only way to, uh, have that DU or AUS be valid is for the account to be removed at the Bureau level. Right. And the only way to do that is for the customer to request for it to be taken out of dispute status. And then, as we discussed in yesterday's training, to complete a rapid rescore so that the dispute status is removed at the Bureau level. So now, again, like I was stating when we first started talking about this, It is very important that part of your credit report review process be to thoroughly check all of the accounts on the report to make sure that none of the accounts are in a disputed status. If they are in a disputed status and it's a zero balance, then, uh, that will probably be okay. But if it's not a zero balance, then definitely pay attention to the guidance. so that you know how this is to be resolved. So let's break it down into different loan types and how this may affect us when we are reviewing the file and viewing our approval and seeing what we need to do to be able to get this to close. So for a conventional loan, um, when you do have a disputed account, automated underwriting, whether it's DU or LP, whichever you're using, For Fannie Mae or Freddie Mac. Automated underwriting will review the credit report and will determine if an approve eligible for DU or an accept, uh, finding for LP is valid depending on if automated underwriting was able to include the disputed account in the analysis. Now this will be verbiage that you will find in In the findings, it's going to tell you either we saw that you had disputed accounts, we were able to consider them in the findings, and you have your prove eligible, or, uh, we saw that you have disputed accounts, we were not able to include them, In the analysis. So your approved eligible findings will have to be downgraded to a manual underwrite. Now, you know, that manual underwrite is not an option for conventional loans. So at that point, your automated underwriting findings are not valid. Now, let me explain again, very clearly here. This is a super important point because it is not the first time that an MLO has received. And approve eligible finding, which is, you know, you're, you're approved or an except findings and LP, which means you're approved and did not read the small print. Did not notice that there was a disputed account in the account in the credit report did not read the small print You know ran with the approval. Here we are. It's approved. Good to go Submits the file to underwriting only to be told two three days later You have an issue here Your loan is in suspense because you have a disputed account and your automated underwriting So, like I was stating, for a valid AUS, automated underwriting, the disputed account will need to be removed from dispute status, again, by reaching out to the creditor and reaching out to the credit bureau, letting them know that you're no longer disputing the balance, disputing the payment history, disputing whatever it was that you disputed, that everything's okay, and that you want it removed from dispute. dispute status. Uh you will then need some type of documentation from the creditor or from the credit bureau acknowledging, yes, your account has now been removed from a dispute status, right? And then that letter would have to be provided to the credit agency, uh, in the form so that a rapid rescore can be completed. To remove the status, the dispute status from the credit report at the Bureau level. That's the only way to resolve this. This is not like we'll do a credit supplement, give it to the underwriter and they can see it. No, it has to be taken up at the bureau level. Automated underwriting has to pick it up that it's no longer in dispute status. And then you're going to get your findings and hopefully you will still be approved eligible because taking that account out of dispute status, hopefully did not downgrade your borrower's credit score. Or credit profile to the point that you will now not approve it. Now that could always be a probability. Remember? Cause when the account is disputed, it may not be able to analyze the account properly. That's why you would have gotten that alert in the first place. So do be aware, conventional loans, you may get that verbiage that it was either yes, approved or no. We couldn't review it because the disputed account and now you've got a downgrade to manual underwrite. So don't get bit by that one right there. Now FHA loans is a little bit easier to deal with the disputed accounts. FHA loans, when you're running them through automated underwriting, for example, for DU, you will get a verbiage pre written on the findings. That state, this is not exact, uh, quote here, but that state that any account with a, with a balance of a thousand dollars or greater, or any group of accounts with a cumulative balance, meaning if you add up all of the individual account balances, they are more than they are a thousand dollars or more, then. The AUS approval is downgraded to a manual underwrite with manual underwriting guidelines and DTI in effect. So do all remember please that FHA manual underwriting guidelines are different than when you are submitting the loan through AUS. Manual underwriting guidelines, housing expense maximum. Is 31 percent DTI and a total debt maximum is 43 percent DTI. Right? So keep in mind totally different than the 45. 9 and 56. 9 maximums that you get when you run through automated underwriting. That's why it's such an issue. If you do get downgraded to a manual underwriting, your borrower was approved at a 43. 55 and now all of a sudden you need to meet 31. 43 or conversely the borrower can pay down some of those account balances, right? That's why I was saying with FHA it's a little easier. Then conventional with FHA, you can tell the borrower, okay, we have five accounts and we have a total of 1, 400. So we're over the limit. Uh, maybe you can pick two accounts that total 500 that will get them under a thousand dollars if they paid those accounts down. So then you would just have the borrower pay those two accounts down. Uh, and then, uh, you can do, uh, what you're going to do there of, uh, telling them. Okay, send it to underwriting and we're good to go. And hopefully, uh, you would be good to go there. Non QM loans, uh, remember non QM loans are manual underwriting. So if it's a non QM loan, there is no automated underwriting that is, that is going to come into question there. Uh, it is simply going to be based on whatever the guidelines state. For that individual investor where you're submitting that loan. And I did want to make a point here on the FHA loans. I do have a mistype there for validate US account. Account will need to be removed from the speech status. That is not correct. That Just out of populated there when I was working the, uh, the slide, but do note for the FHA loan, you do not need to do the rapid rescore if what the borrower is doing is basically just paying down the account balances and doing a credit supplement, providing that. to underwriting and they should accept that for your FHA loan. Now, again, going back to non QM, it's guideline specific. There is no manual underwriting. So if, for example, um, the guideline for that particular, uh, option doesn't have any guidance on disputed accounts, or maybe it says, uh, disputed accounts are okay, You know, it's whatever the guidelines state. Most of the guidelines are going to require the disputed account balance to be reduced to 250, uh, in order to eliminate the disputed account issue. So if you have a non QM loan and the borrower has three disputed accounts and the disputed accounts have zero balances, then no action needs to be taken by the MLO. Regarding, uh, the disputed accounts. However, if, uh, the disputed account has a balance above two 50 and I recently had that, uh, it was a credit card where the borrower had just been disputing some type of charge previously charged to him. Uh, he wasn't disputing the payment history. He wasn't disputing necessarily the balance. Uh, so what the borrower did in that case, I think the account had a balance of like. 2, 250. So he just paid the credit card balance. down and it was a credit card that was not in a derogatory status either. It was actually in a none of the derogatory area. It was an open account. He just had disputed some type of charge previously and that was still being, uh, shown in the account status. So he just paid the account balance down to 250, provided a documentation from the online portal. With the new account balance, I went ahead and ordered a credit supplement, uh, to also document the new account balance, uh, provided my documentation to underwriting and underwriting cleared the disputed account condition because we met the guideline requirement. So you see, uh, three different loan types, three different ways that the disputed accounts, uh, can be resolved. Uh, so there is no homogeneous process. For, uh, disputed accounts, you just simply have to review the guidance for each specific loan type and make sure that you follow the necessary guidance to clear these disputed accounts and be able to proceed with your loans. Remember, in the convention alone, you need to get a rapid rescore, uh, to take the disputed account off. Uh, because, uh, in the FHA loans, it's going to be balance based. So if you reduce the cumulative balance on the disputed accounts below a thousand dollars, you should be okay. And in non QM, you have to look at the guidelines, see what they state. And it's usually going to require reducing the balance of the disputed account. Below a certain amount in order to be able to proceed with the loan. So that's, uh, today's guidance on disputed accounts. And I'm going to give it a moment here to see if there's any questions. Cause this is a very tricky topic and one that can be missed. So let's give it another minute here. Okay. Well, it looks like I did a pretty thorough job done. If we don't have any questions, uh, and I do look forward to seeing you on next week's Tuesday training. Everybody have a good day.