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Fannie and Freddie Say “No” to Disputes

By Faye Mergel
Published: Tuesday, October 27th, 2009

Loan experts warn consumers that any dispute in a credit report may cost them the refinance they need. As noted by specialists, Fannie Mae and Freddie Mac do not accept loan applications from consumers who have a disputed item under their name. This is regardless of how high the credit rating of a person is.

Fannie and Freddie Say “No” to DisputesExperts say consumers who have a credit score near 800 and a solid equity in their home do not have the assurance that they will get mortgage refinancing from government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Fannie Mae, which is short for Federal National Mortgage Association, uses an automated underwriting system which does not accept any application where there is a notation in the credit report regarding a disputed account or trade line.

Consumers dispute a medical bill or credit card bill that is inaccurate or does not belong to them (those that were charged on the wrong person’s name because of identity theft). According to loan specialists, a valid dispute closes any inaccurate or fraudulent account. Creditors normally promise to remove disputed items afterwards. However, there are instances when they fail to do so.

Even if a dispute has been won, experts say, a loan officer will not recommend an approval for a mortgage refinance if the lender has not removed the negative items yet.

Federal law, through Fair Credit Reporting Act, guarantees a consumer the right to contest any fraudulent or inaccurate item in his credit report. Once an item is challenged, a notation is placed in his file with the credit reporting agencies (CRAs).

Most lending systems do not factor accounts with a disputed notation. But Fannie Mae’s automated underwriting system does not. Instead of forwarding applications to banks immediately, they send those with disputes back to lenders concerned.

A representative from the GSE explains that they automatically send “consumer disputed” accounts back to lenders for manual assessment. Lenders then have the responsibility to determine whether the dispute is valid and underwrite the borrower’s credit accordingly.

Analysts say Fannie Mae does this since banks normally reject consumers with disputed items in their accounts and blame the GSE for forwarding illegible applications.

National Association of Responsible Loan Officers, in a statement, explains that national creditors, large banks in particular, do not entertain applications, which need additional time and manual research. They add that banks do not want delay in operations.

Freddie Mac representatives say they have similar policies with Fannie Mae so they advise consumers to get their credit reports clean before applying for government-back loans.

On a brighter note, Fannie Mae says it is reviewing its policies regarding the matter.

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