I recently wrote a blog about FHA’s new rule on paying off or negotiating/settling collection accounts that total more than $1000.  See Recent FHA Changes That Will Affect the Real Estate Industry.

Looks like FHA has, thankfully, changed its’ mind…

By Peter G. Miller

It probably seemed like a good idea at the time: In February HUD said that FHA lenders could ignore credit disputes as long as the total amount owed by a borrower was less than $1,000 and at least two years old.

“If the borrower has individual or multiple disputed credit accounts or collections with singular or cumulative balances equal to or greater than $1,000, the accounts must be resolved (e.g. payment arrangements with a minimum three months of verified payments made as agreed) or paid in full, prior to, or at the time of closing,” said HUD.

FHA Loans

The new credit demand from HUD was set to go into effect July 1st and could be an absolute dealbreaker for many would-be mortgage borrowers for several reasons:

First, in the context of current prices and values $1,000 is not a lot of money, especially if you think about multiple accounts in the seven years or so that items are carried on credit reports. A lot of otherwise qualified people could get stung if the new rule was in effect.

Second, even if somebody cleaned up a damaged credit report the new requirement insisted that the lender verify at least three monthly payments. In practice this could mean four or five months could go by before a borrower could reach the required level of financial perfection.

Third, standards which start in the FHA program can become industry-wide and also apply to conventional loans and VA mortgages. So far this is not believed to have happened with the proposed credit rule but it is something to watch.

Leverage For Creditors

A related problem is that the proposed HUD rule could give enormous leverage to merchants, credit card companies, auto lenders and bill collectors. They would have no incentive to quickly resolve consumer complaints beyond what is now generally in place.

If a borrower needed to quickly clean up a credit report and an item was incorrect, a creditor or a bill collector who had bought old debt might say “well gosh, it could sure take a long time to resolve this issue but if you were willing to settle for half we could probably take action instantaneously.”

Not only would the creditor get some quick cash, but by making a partial payment a consumer could open the way to owing the entire amount of an old and otherwise time-barred debt.

“In some states,” says the Federal Trade Commission, “if you pay any amount on a time-barred debt or even promise to pay, the debt is ‘revived.’ This means the clock resets and a new statute of limitations period begins. It also often means the collector can sue you to collect the full amount of the debt, which may include additional interest and fees.”

New Rule

Now HUD has come out with the new ruling: Forget the proposed standard. It will no longer go into effect July 1st.

HUD explains the new decision by saying that It is being made “in order to provide clarification of policies concerning Disputed Accounts and Collection Accounts through future guidance.”

Nonsense. There is nothing to clarify. The February proposal was a bad idea, wasn’t workable, and should never have been suggested.

A central problem with the proposed credit standard is that it created the presumption that all debts were actually owed. This isn’t necessarily the case because credit reports can be wrong, items can be out-of-date and a resolved credit matter may not show up for weeks or months.

Mortgage Rates

Meanwhile, with errors the borrower’s credit standing has been damaged and the ability to close a mortgage has been delayed if not stopped completely. This is a substantial problem because when mortgage rates are low, as they are today, borrowers have every incentive to quickly close on new loans or to quickly refinance.

With the proposed FHA credit rule gone borrowers should take a moment to rejoice -– and then check their credit reports without cost at AnnualCreditReport.com. Why? To assure that there are no incorrect or out-of-date items because even without the HUD rule, credit report mistakes can still slow or halt loan applications and prevent borrowers from getting the best available mortgage rates.

Resources

Housing and Urban Development

Federal Trade Commission

FHA Mortgagee Letter on new ruling

AnnualCreditReport.com

 

 

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