HUD Issues Formal Guidance for Disputed Credit Tradelines

Written By: Stacey Sprain

If you blinked you might have missed it but HUD recently communicated guidance to lenders on how to evaluate disputed credit accounts for FHA loans. The information was included in an outgoing announcement from Jerrold Mayer to the HUD email subscription list. The following guidance was not in the form of a Mortgagee Letter as one might expect:

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Guidance for FHA Lenders on TOTAL Scorecard:

If the credit report reveals that the borrower is disputing any credit accounts, Manual Downgrade of a TOTAL Scorecard Approve/Accept recommendation is not required if:

1. The disputed account has a zero balance
2. The disputed account is marked as “paid in full”, or “resolved”
3. The disputed account is both
a. less than $500, and
b. more than 24 months old, based on the date of dispute

This is good news because until this recent announcement, lenders had been required to follow the direction given in the TOTAL Scorecard User Guide which clearly states a requirement to manually downgrade any AUS-approved FHA loan when any tradeline or public record reflects disputed status. This new guidance allows lenders to exercise some basic common sense when evaluating whether or not a disputed account could really have any affect on the accuracy of a borrower’s credit score.

For disputed accounts that fall outside of the above issued guidance, the DE underwriter must continue with manually downgrading an AUS Accept/Approve to a Refer and must manually evaluate the borrower’s credit. Some rules of thumb to follow when evaluating such accounts follow.

• The account reflects derogatory ratings within the most recent 24 months
• The account is open with a current balance and payment reflected
• The account shows an outstanding balance that is higher than the credit limit
• The account shows a past due balance rated current
• The account shows a dispute date that is considered current/recent
• There are numerous accounts reflecting dispute status
• The disputed account is an item of public record such as a tax lien, judgment or bankruptcy reporting
• The dispute account could clearly have a negative impact on the borrower’s credit score if the dispute status were removed and the account considered in credit scoring models

• The account reflects no derogatory ratings
• The account is closed and paid off
• The account reflects late payments over 24 months old that appear isolated in nature
• The dispute account status is isolated (there are not multiple accounts reflecting disputed status)
• The commentary includes mention of “dispute resolved”
• The disputed account is clearly a duplicate of another account which is accurately reported and therefore included in both credit scoring and AUS analysis
• The dispute account would clearly not have a negative impact on the borrower’s credit score if the dispute status were removed in order for the account to be considered in credit scoring models

A blurb on disputed credit was also included in the most recent communication from Fannie Mae on DU for Government Loans Release Notes. See Page 5 where it states the following:

Disputed Tradelines 
The FHA TOTAL Mortgage Scorecard User Guide states that the loan case file must be manually downgraded to a Refer recommendation and the loan must be reviewed by a Direct Endorsement (DE) underwriter if the borrower is disputing any credit accounts or public records. As a result, the following new message will be issued on all FHA loan case files to remind lenders of this requirement, but the recommendation will not be changed to a Refer due to this message:

If the credit report reveals that the borrower is disputing any credit accounts or public records, the mortgage loan application must be referred to a DE underwriter for review.

This is also good news because DU will start messaging disputed accounts which will serve as a pleasant reminder to manually review the borrower’s credit report to look for accounts that reflect disputed status.

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The most important thing about evaluating a borrower’s credit is to make sure that the borrower’s credit scores used in the underwriting analysis are considered accurate at the time of loan approval. When disputed accounts are present, depending on the circumstances, they may create artificial credit scores because they are not included in the borrower’s credit score calculations.

About The Author

Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at:


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.