CFPB Ability-to-Repay Rule for Mortgages – Should Mortgage Loan Originators be Liable or Not?

Posted on May 7, 2012 by Reney DuBose

The new Consumer Financial Protection Bureau  (CFPB) Chief -Richard Cordray- wants mortgage lenders to make sure that when they approve mortgage loans for consumers, they verify the consumers’ ability to repay the loans.

It sounds pretty fundamental, but it’s actually a little more complicated than it appears. Why? Well there’s a split in the industry regarding how to enforce the proposed rule as part of the “qualified mortgage” or QM regulation. Lenders that follow the guidelines stand to gain legal protection against borrower defaults.

Some believe this matter should be a “no brainer”. Before lending money, of course you need to know if the borrower has the ability to repay the loan or not. They say there’s really nothing new about income verification. So what’s the big deal?

However, the problem occurs when we get to the question of whether or not mortgage loan originators should be subject to legal liability for proper verification of the borrowers’ ability to repay the loan.

In other words, should borrowers and/or bondholders be allowed to sue mortgage lenders for failing to act in good faith when issuing mortgage loans? Should there be legal accountability for proper verification of income and assets by the mortgage lenders?

That is at the heart of the industry debate. According to a recent Bloomburg report, the CFPB may release the new rule as early as next month. The report further stated:

“The Fed proposal included two alternatives. The first was complete protection from liability known as “safe harbor.” The other would provide less legal protection – a “presumption” that loans issued according to quality standards were non-abusive – that could nonetheless be rebutted by a borrower or bondholder in court.”

Many consumer groups are concerned that if mortgage loan originators are given complete protection from liability, consumers will suffer similar abuses experienced before the real estate bust of 2006 and feel neither approach is in the best interest of consumers.

Others are concerned that less legal protection would result in fewer consumers qualifying for mortgage loans and result in higher costs for consumers because mortgage lenders would simply add a larger risk premium to their loans.

I’m not sure how this debate will turn out but, what is clear is that the rules are changing and the name of the game in the mortgage industry is “proper file documentation”. Your mortgage loan originator will be more thorough than ever before regarding file documentation, when processing your mortgage loan application.

This means you will have to do your part to help. So if you’re planning on applying for a home loan you need to get your papers in order. Make sure you have paycheck stubs, bank statements, and tax records available for financial verification.

Also, be sure to check your credit reports far enough in advance so that if you need to resolve any inaccurate, outdated, or unverifiable credit items listed, you’ll have plenty of time to do so. You can get a free copy of your credit reports at www.annualcreditreport.com.

Then, learn to fix your own credit, or hire a reputable credit repair organization to help you legally improve your credit.

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President Obama and Romney Agree on Proposal for Student Loans

Posted on April 30, 2012 by Reney DuBose

Last week the associated press reported that both President Barak Obama and the hopeful Republican presidential nominee Mitt Romney, announced their respective support of a proposal to extend legislation to prevent student loan interest rates from doubling from 3.4% to 6.8% effective July 1, 2012.

Its encouraging to see that both presidential candidates see eye to eye on this proposal, because student loans have become an increasingly hot topic for many Americans struggling with consumer debt. Credit card debt is one thing, but student loan debt can be extremely difficult to handle. Particularly when it comes to dealing with defaulted student loans.

Unlike credit card debts or even mortgage loans, most student loans are very difficult to discharge in bankruptcy and the government has vast collection powers when it comes to Federal student loans. They can seize tax refunds, deny new student loans and grants, garnish wages without a court order, take a portion of Social Security benefits, and charge very large collection fees.

Also, there is no time limit for collection of Federal student loans. So dealing with student loans can be tricky for consumers later attempting to clean up their credit reports to qualify for home financing.

For example, I recently received a call from a consumer literally in tears regarding a mountain of student loan debts reporting negatively on her credit reports. She had co-signed for over $110,000 in student loans for her two daughters. The student loans consisted of a combination of both Federal guaranteed student loans as well as private student loans.

Once her daughters graduated from college, they each found it extremely difficult to obtain jobs with adequate income to make timely payments on their student loan debt. Consequently, they fell behind in their payments. As co-signer, mom was faced with the daunting challenge of trying to make ends meet based solely upon her income. When all of the student loans suddenly became due, it was simply too overwhelming, so her credit suffered as well.

Although many Federal guaranteed loans offer some temporary relief in the form of unemployment deferment, hardship deferment, loan consolidation, or defaulted student loan rehabilitation programs, many private student loans do not. They each have varying rules and restrictions regarding repayment and collection policies.

Unfortunately, this is an all too familiar scenario for many families faced with the challenge of financing education for their children. So to allow the interest rates to double on student loans would strike an even greater blow to consumers already struggling with ways to fund education.

Also, even if they are able to work out a debt solution for their student loans, many consumers later find themselves challenged with a poor credit history in the process. Late payments or a reported defaulted student loan status can plague their credit reports for up to 7 years, if not indefinitely in some cases, thereby lowering their credit scores.

However, even student loan lenders are obligated to comply with the credit laws when furnishing information to the credit bureaus concerning your student loan account history. So if any of the information reported is not 100% accurate, complete, timely or verifiable, you have the right to challenge the account information reported and demand removal of any non-compliant information from your credit reports.

So learn to do it yourself, or hire a reputable credit repair organization to do it for you!

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Can your Mortgage Lender Sue You for a Mortgage Default if you have Mortgage Insurance?

Posted on April 23, 2012 by Reney DuBose

Remember the quote “don’t bite the hand that feeds you”? Well that phrase may not necessarily apply when it comes to borrowers and their mortgage insurance providers. Although homeowners pay for mortgage insurance coverage, many times they’re later sued by the very same mortgage insurance providers they pay for coverage.

Mortgage insurance provides protection for mortgage lenders in the event a homeowner defaults on their mortgage loan. Basically, the borrower pays a percentage of the amount borrowed, as the premium for mortgage insurance coverage. The premium payment is typically between 1 and 3 percent. If the borrower later defaults on their mortgage payments, the lender can collect from the mortgage insurance provider to receive reimbursement of some portion of their losses. In some cases, the mortgage insurance will provide coverage for a default for not only mortgage foreclosures, but short sale transactions as well.

For example, there was a client we once helped with a problem regarding a previous short sale. He was a real estate investor purchasing an apartment complex. His financing for the $7 million deal was held up because his credit report reflected a $30,000 mortgage deficiency balance from a short sale he had transacted several years ago. In the previous short sale transaction with Chase Bank, his private mortgage insurance provider had paid Chase Bank’s default claim, years ago, for the short sale deficiency.

However, Chase Bank still continued to report the account as “paid for less than full balance”. In this case, the real estate investor had entered into a payment agreement to reimburse the mortgage insurance provider for the claim and successfully completed all of the payments to the insurance provider. Yet Chase Bank was furnishing information to the credit bureaus reporting an account balance deficiency on his credit reports. Fortunately, we were able to quickly resolve the matter and get the negative credit information deleted from the client’s credit reports so he could complete his real estate investment transaction.

However, here’s the controversial question still remaining in the credit industry: Since borrowers are the ones that actually pay the mortgage insurance premiums for mortgage insurance coverage, should the mortgage lender be allowed to pursue the borrower for a default? Some would argue the answer is “no” because the mortgage lender received payment of their default claim from the mortgage insurance provider. Therefore no deficiency balance is actually due the original mortgage lender.

However, in many instances the mortgage insurance provider may actually be able to “stand in the shoes” of the borrower’s mortgage lender and sue the borrower for the amount of the deficiency. It’s a legal concept called subrogation. Essentially, the mortgage insurer may be able to pursue the borrow for reimbursement of their payment of the insurance claim to the mortgage lender.

It’s a familiar practice in the auto insurance industry. If you were involved in an auto accident with another driver, you would file a claim with your own insurance carrier. After paying your auto insurance claim, your insurance carrier could then “stand in your shoes” and exercise their right of subrogation and go after the other driver for reimbursement of the money they paid you for your claim.

But the difference in the auto insurance example is your insurance company is seeking to get reimbursement from the other driver, not you. In the mortgage insurance example, the mortgage insurer would be seeking reimbursement from you, even though you are the one that actually paid the mortgage insurance premium!

There just seems to be something inherently unfair about your insurance company seeking reimbursement from you for paying a claim for insurance coverage you actually paid them to provide. Nevertheless it’s happening. Private mortgage insurers Fannie Mae and Freddie Mac are doing it as well as the Federal Government – Federal Housing Administration (FHA) and the US Dept. of Veteran Affairs (VA).

Mortgage insurance providers take the position that regardless of who pays the premium, their insured is not the borrower but the mortgage lender. Therefore they feel justified in pursuing the borrower for reimbursement of any losses resulting from the mortgage default claim paid to the mortgage lender.

Unfortunately, all too often, many borrowers are unaware that when they purchase mortgage insurance, the purpose of the coverage is to protect their mortgage lender, not themselves. They pay the premiums believing they are protected in the event of default and are completely unaware that the mortgage insurance provider may have the right to pursue them for reimbursement of the claim in the event of a default.

However, more and more homeowners are now fighting back. Because many homeowners mistakenly believe they purchase the mortgage insurance for their own benefit, some real estate attorneys argue that mortgage lenders fail to clearly disclose to the consumers that the mortgage insurance is actually being purchased for the benefit of the mortgage lender. As such, they raise it as a defense in subrogation actions brought about by the mortgage insurance providers.

Likewise, many professional credit repair organizations take the same approach to legal credit improvement on behalf of their clients regarding their mortgage lenders’ reporting of foreclosure and short sale accounts. In effect, oftentimes mortgage lenders will furnish credit information to the credit bureaus reflecting a balance deficiency for a foreclosure or report a short sale account as “settled for less than full balance” on the consumer’s credit report.

Arguably, since the mortgage lender actually received payment of the default claim from the mortgage insurance provider, any reference to a balance deficiency or statement that the account was “settled for less than full balance”, reported on the homeowner’s credit report would be inaccurate. To furnish or report inaccurate credit information on a consumer’s credit report is a violation of the Fair Credit Reporting Act (FCRA) and should therefore be deleted.

Considering the increasing number of foreclosures these days, mortgage insurance providers are pursuing more and more consumers for reimbursement of mortgage default claims. In other words they continue to “bite the hand that feeds them”. But now that you know, hopefully it won’t be yours!

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Best Strategies to Legally Improve Credit Following A Short Sale

Posted on April 16, 2012 by Reney DuBose

As a result of declining home values, unemployment, divorce, or due to several other factors, many homeowners have elected a short sale as their mortgage debt solution. Likewise, many investors finding themselves under water were able to get out from under their mortgage debt and avoid foreclosure by transacting a short sale.

Now, having come out of their financial dilemma, one of the biggest concerns for such consumers and investors is how to legally improve their credit to get back into the real estate market following their short sale. Providing solutions for such disenfranchised borrowers can be a competitive advantage for enterprising mortgage loan originators (MLO).

With real estate prices and interest rates so low these days, many investors and homebuyers are eager to get back into the market. But they are stalled by mortgage underwriting guidelines requiring they wait several years following their short sale to qualify for new financing.

So their options are to simply wait it out or consider strategies to legally improve their credit following a short sale in order to qualify for mortgage financing sooner.

However, the credit industry is sharply divided on the topic of legal credit improvement. Some credit industry critics take the position that it’s unethical or improper for consumers to make an effort to legally improve their credit following a short sale. They argue that since a short sale actually took place, the consumer should simply accept this fact and their credit report should genuinely reflect the status of their mortgage account.

Others argue that the Big 3 credit bureaus (Experian, Equifax, and Transunion) are not Government entities, but private “for-profit” companies. As such, they are obligated to fully comply with credit laws enacted to protect consumers from the reporting of inaccurate, outdated, or unverifiable credit information when earning their profits.

In other words, by law, these private credit bureaus are limited in what they may report concerning a consumer’s credit information. So credit information about a consumer’s short sale (although factual) must still fully comply with the credit laws in order for the private credit bureaus to report it.

Arguably, consumers are justified in challenging the private credit bureaus and mortgage loan servicers to prove the credit information being reported is in full compliance with the credit laws. If not, then the non-complying account information must be deleted from their credit reports.

The legal argument is similar to a criminal trial proceeding whereby evidence obtained improperly is inadmissible in court. Simply because the evidence exists does not mean it can be used arbitrarily. The use of factual evidence must still be in compliance with the applicable laws put in place to protect the rights of the innocent.

Similarly, regarding the credit industry, one such consumer protection law put in place for homeowners dealing with short sale transactions is the Real Estate Settlement Procedures Act (RESPA). If a consumer has a reasonable belief that their mortgage account information is not being reported accurately, they can submit a qualified written request (QWR) to their loan servicer for the account information to review for purposes of verification.

Also, consumers are cautioned not to simply assume the account information being reported is completely accurate. They have the right to verify it. This includes all of their account information such as the dates of posting of payments, escrow account transactions, proper allocation of interest, principal, taxes, insurance, etc. involved in determining the payment history, account balance, and other account information reported.

Unfortunately, due to the fact that during the life of the loan most mortgage loans have been resold multiple times, many mortgage servicers are unable to provide all of the information consumers are entitled to receive pursuant to their QWR. As a result, if the data cannot be provided to the consumer as required, the accuracy of the short sale data being reported is unverifiable and cannot be legitimately reported by the credit bureaus. To report unverifiable credit information is a violation of the Fair Credit Reporting Act.

Again, many credit industry professionals will disagree about the legitimacy or ethics concerning the use of legal credit improvement strategies to legally improve a consumer’s credit. However, credit laws are in place to protect consumers. And legal credit improvement is about the exercising of credit rights on behalf of consumers. If inaccurate, outdated, or unverifiable credit information is reported on a consumer’s credit report, they have the legitimate right to have it removed.

Considering this and the increasing number of investors and consumers locked out of the real estate market due to short sales, there exists a strategic business growth opportunity for MLO’s. By simply referring real estate investors and homebuyers to a reputable credit repair organization for professional help to legally improve their credit, an MLO can grow their pipeline of mortgage loans.

Just make sure the credit repair organization provides you an online referral affiliate portal enabling you track the credit improvement progress of each consumer you refer. It’s an essential tool for managing your growing pipeline of mortgage loans. Once your client’s credit has sufficiently improved, you will be the first to know they’re ready to apply for a mortgage loan.

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How the New FHA Guidelines Actually Hurt Homebuyers

Posted on April 12, 2012 by Reney DuBose

Just when homebuyers thought it was safe to get back in the market, new Federal Housing Administration (FHA) guidelines may now threaten their ability to do so. In February 2012 the FHA released mortgagee letter 2012-3. Among other changes, the new FHA underwriting guidelines included provisions addressing the treatment of disputed collection accounts and judgments listed on a potential homebuyer’s credit reports.

Basically, the new FHA underwriting guidelines require that if a potential home buyer has credit report disputes for accounts or judgments of $1000 or more with a date of last activity of less than 2 years, he or she must either pay the debts, before obtaining FHA loan approval, or enter into a repayment agreement and make on-time payments for at least three months. There is an exception for accounts disputed by reason of identity theft or unauthorized user transactions.

Any judgment listed on the credit report must still be paid to obtain FHA loan approval. Alternatively, a documented agreement to pay the judgment and proof of 3 timely payments may be acceptable.

The new guidelines were all set to commence on April 1, 2012. However, the FHA decided to delay implementation until July 1, 2012 to allow for more time for mortgagees to make necessary adjustments to accommodate the changes. Also, it will allow for time to solicit input from interested stakeholders.

It’s at least encouraging that the FHA decided to put the brakes on and regroup for a moment. When I first learned of the new FHA guidelines, I must admit I was very disappointed. I desperately sought an understanding of the reasoning behind the new changes. “How could this possibly be of benefit to the consumers?” I thought. “How will it help to grow nation’s economy?” “What are they thinking?”

Then I found the answer. I read the FHA’s rationale. I realized the changes had absolutely nothing to do with the interest of the consumers or the nations economy…

    ”We found that many borrowers with mortgage payment delinquencies had prior credit deficiencies, including unpaid collections and unresolved disputed debts prior to the approval of their loan,” an FHA spokesperson said. “This change was made to eliminate this layer of risk to FHA-insured loans and help protect our insurance fund.”

Basically, it was all about protecting their fund. It was just one more example of the “new normal of credit“. Insurance companies and other industries have started the practice of profiling their customer base and finding their most costly customers and cross referencing their credit report data to use in determining insurance premiums. They call it risk based pricing or analytics. They argue that consumers with late payments or defaulted loans have a higher risk of filing auto accident claims. So they charge them higher premiums simply based upon their credit report data. Regardless of whether they actually have a good driving record!

Likewise, the FHA is now using credit report data analytics as a means of limiting their portfolio risk. They have determined that consumers with unresolved disputed collection accounts and unpaid judgments are more likely to default on their mortgages. As a result, they have now factored this into their underwriting guidelines to protect their mortgage insurance fund.

However I have a few concerns with this approach. The first problem is the FHA policy will have a chilling effect on consumers’ credit protection rights.The new FHA underwriting guidelines serve to penalize homebuyers who choose to exercise their rights under credit laws like the Fair Credit Reporting Act (FCRA). The FCRA grants consumers the right to dispute inaccurate credit information listed on their credit reports. Many homebuyers may become apprehensive about filing legitimate credit disputes for fear of being rejected for a FHA mortgage loan in the future.

However, there is a good reason for the FCRA and other credit protection laws like the Fair Debt Collection Practices Act (FDCPA). Consumer studies have shown that over 76% of the credit reports provided by Experian, Equifax, and Transunion contain errors. Given the pervasive use of credit scores today, consumer protection laws are needed now more than ever.

Also, many consumers suffer abusive debt collection practices at the hand of unscrupulous collection agencies. Should consumers arbitrarily pay debts simply because they’re listed on their credit reports, without first requiring validation of the debt obligation or the collection company’s right to even collect the debt? Such a practice would fly in the face of the FDCPA but would certainly be encouraged by the new guidelines. What about accounts listed on credit reports simply in an attempt to collect debts beyond the statute of limitations? Or the wide spread practice of many collection companies to re-age accounts in violation of the Fair and Accurate Credit Transactions Act of 2003 (FACTA)?

Further, the new FHA policy results in lower credit scores for homebuyers, thereby causing them to either pay higher interest rates or not qualify for a loan at all. By requiring homebuyers to payoff collection accounts of $1,000 or more, the date of last activity on these accounts will update in the credit bureau database and may cause their FICO scores to actually drop to the point that they are unable to qualify for a loan or may have to pay a higher interest rate due to the lower FICO credit scores.

Consumers should not be forced to choose between foregoing the exercising of their consumer protection rights or run the risk of incurring higher interest rates due to lower credit scores. Or even worse – risk being denied a mortgage loan altogether.

So under the circumstances, in most instances, the best advice is for homebuyers to proceed with exercising their credit rights by disputing the credit information in an attempt to have the inaccurate collection accounts completely deleted.

Unfortunately many consumers lack the time, inclination, or basic understanding of their credit rights to properly dispute inaccurate collection account information. For example, most consumers are unaware of how the credit bureaus’ online dispute system called eOSCAR actually works. So many consumers will unwittingly give up certain credit rights by disputing the collection accounts online with minimum results.

As an MLO you may want to direct your clients to seek professional help from legitimate credit repair organizations to more strategically deal with the credit disputing process on their behalf.

In the meantime, hopefully the FHA will do the right thing and focus more on what’s necessary to help homebuyers feel it’s safe to get back in the market. But not at the expense of their consumer protection rights!

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When Money is Tight, Who Should You Pay First… Peter or Paul?

Posted on February 29, 2012 by Josh Turner

Debt elimination is definitely on the top of the list of consumer concerns these days. But forget about selecting a good accelerated debt elimination plan, many consumers are now faced with the dilemma of prioritizing their debts on a “shoe string” budget. Some have simply resorted to juggling debt payments based on the old adage of “robbing Peter to pay Paul”.

But for those of you in need of a more strategic method of deciding how to pay your debts when money is tight, here’s a list of 16 Rules About Which Debts to Pay First, compiled by the National Consumer Law Center’s Guide to Surviving Debt.

1. Always pay family necessities first. Usually this means food and unavoidable medical expenses if the medical provider requires pre-payment (Do not pay old medical bills first.)

2. Next pay your housing-related bills. Keep up your mortgage or rent payments if at all possible. If you own your home, real estate taxes and insurance must also be paid unless they are included in the monthly mort- gage payment. Similarly, any condo fees or manufactured home lot payments should be considered a high priority. Failure to pay these debts can lead to loss of your home.

3. Pay the minimum required to keep essential utility service.
At the very least, you should pay the minimum payment necessary to avoid disconnection. Working hard to keep your house or apartment makes little sense if you cannot live there because you have no utilities.

4. Pay car loans or leases next if you need to keep your car. If you need your car to get to work or for other essential transportation, you should usually make your car loan or lease payments your next priority after food, housing costs, unavoidable medical expenses, and utilities. You may even want to pay for the car first if the car is necessary to keep your job.

If you do keep the car, stay up to date on your insurance payments as well. Otherwise the creditor may buy costly insurance for you at your expense that gives you less protection. And in most states it is illegal not to have auto- mobile liability coverage.
If you can give up your car or one of your cars, you not only save on car payments, but also on gasoline, repairs, insurance, and automobile taxes.

5. You must pay child support debts. These debts will not go away and can result in very serious problems, including prison, for nonpayment.

6. Income tax debts are also high priority. You must pay any income taxes you owe that are not automatically deducted from your wages, and you certainly must file your federal income tax return even if you cannot afford to pay any balance due. The government has many collection rights that other creditors do not have, particularly if you do not file your tax re- turn. Remember, though, if you have lost income due to a change of circumstances, your tax obligations will also be reduced. Pay only what is necessary.

7. Loans without collateral are low priority. Most credit card debts, attorney, doctor, and hospital bills, other debts to professionals, open ac- counts with merchants, and similar debts are low priority. You have not pledged any collateral for these loans, and there is rarely anything that these creditors can do to hurt you in the short term.

8. Loans with only household goods as collateral are also low priority. Sometimes a creditor requires you to place some of your house- hold goods as collateral on a loan. You should generally treat this loan the same as an unsecured debt—as a low priority. Creditors rarely seize house- hold goods because they have little market value, it is hard to take them without involving the courts, and it is time-consuming and expensive to use the courts to seize them.

9. Do not move a debt up in priority because the creditor or collector threatens suit. Many threats to sue are not carried out. Even if the creditor does sue, it will take a while for the collector to be able to seize your property, and much of your property may be exempt from seizure. On the other hand, nonpayment of rent, mortgage, and car debts may result in immediate loss of your home or car.

10. Find out whether you have good legal defenses to repayment. Some examples of legal defenses are that the goods you purchased were defective or that the creditor is asking for more money than it is entitled to. If you have a defense, you should obtain legal advice to determine whether your defense will succeed. In evaluating these options, remember that it is especially dangerous to withhold mortgage or rent payments without legal advice.

11. Court judgments against you move debts up in priority, but often less than you think. After a collector obtains a court judgment, that debt often should move up in priority, because the creditor can enforce that judgment by asking the court to seize certain portions of your property, wages, and bank accounts. How serious a threat this really is will depend on your state’s law, the value of your property, and your income. It may be that all your property and wages are protected under state law. If this is the case, you are considered to be “collection proof.” This means that your income and assets are fully protected from seizure. If you are collection proof, you do not really have to worry about the judgment unless your financial situation gets much better. If you are not collection proof, you will need to evaluate whether the consequences of not paying your debts are likely to be worse than the costs of paying them. You might also want to consider whether bankruptcy is a useful option for you. This is also a good time to obtain professional advice if you have not done so already.

12. Government student loans are medium-priority debts. Government student loans should generally be paid ahead of low-priority debts, but after top-priority debts. The law provides special collection remedies to the government that are not available to other creditors. These include seizure of your tax refunds, special wage garnishment rules, denial of new government student loans and grants, and, in some cases, seizure of federal benefits such as Social Security. The law also provides special remedies for borrowers hoping to get out of default. These include reasonable and affordable payment plans, loan consolidation, and even cancellation in some circumstances. These extreme collection powers do not apply to private student loans. Private student loans should be treated more like other types of unsecured debt.

13. Debt collection efforts should never move up a debt’s priority. Be polite to the collector, but make your own choices about which debts to pay based on what is best for your family. Debt collectors are unlikely to give you good advice. Debt collectors may be most aggressive when trying to get you to pay debts that you should actually pay last. You can stop debt collection contacts and you have legal remedies to deal with collection harassment.

14. Threats to ruin your credit record should never move up a debt’s priority. Many collectors that threaten to report your delinquency to a credit bureau have already done so. If the creditor has not yet reported the status of your account to a credit bureau, it is unlikely that a collector hired by that creditor will do so. In fact, your mortgage lender, your car creditor, and other big creditors are much more likely to report your delinquency (without any threat) than is a debt collector who threatens you about your credit record.

15. Cosigned debts should be treated like your other debts. You may have cosigned for someone else and put up your home or car as col- lateral. If the other cosigner on the loan is not keeping the debt current, you need to treat that loan as a high-priority debt. If you have not put up such collateral, treat cosigned debts as a lower priority. If others have cosigned for you and you are unable to pay the debt, you should tell your cosigners about your financial problems so that they can decide what to do.

16. Refinancing is rarely the answer. You should always be careful about refinancing. It can be very expensive and it can give creditors more opportunities to seize your important assets. A short-term fix can lead to long- term problems.

However, with all of that said, if you should find yourself in a really tough spot to the degree that your income isn’t sufficient to even maintain payments on your high-priority debts, don’t make the mistake of using your income to pay your low priority debts. Some consumers take the point of view that if they can’t pay their mortgage, then they may as well just pay their credit cards.

Depending upon the severity of your financial situation, this may be a bad idea. Most long term payment agreements for your house or auto loan will require that you eventually start making payments again. So a better strategy may be to save the money you have and accumulate enough to make a down payment on a payment agreement later or get caught up later. Or worse case, you can use the money to move to another residence or buy another car if you have to.

Unfortunately, when you’re faced with such tough choices, your credit will suffer. However, once you recover you can then retain the services of a trusted credit improvement company to help you legally improve your credit and get things back on track.

Hopefully, this helps your dilemma with whether to pay Peter or Paul…

Posted in Money Management | Tagged , , | 2 Comments

Getting rid of outstanding debts with debt… Snowball Method

Posted on February 22, 2012 by Reney DuBose

By: Diana Degarmo

Every financial advisor suggests that you need to pay off your debts in time following
a particular order. Otherwise, you may need to settle your debts for less or consolidate
debt. However, it is always better that you pay off the debts within stipulated time.

Methods of debt elimination

There are different methods of debt elimination. Out of which avalanche and snowball
methods are the most popular. Some prefer avalanche for eliminating debts; while others
prefer snowball method of debt elimination. You can choose any of them, so that you
need not to settle or consolidate debt.

Snowball method for debt elimination

Debt snowball is a debt reduction method that helps to reduce debt by motivating
the debtor psychologically. Every creditor expects their debtors to pay the minimum
amount every month. Being a debtor, if you owe a single debt, you can manage it easily.
However, if you owe multiple debts, then they can be overwhelming for you. To manage
multiple debts, you can use snowball method.

Create an emergency fund – First of all, you need to set aside 1000 USD, so that
you can use it, if any emergency situation crops up. Make sure you are not going
to spend this money for paying off your debts or any other purpose, unless there is
a real need.

Make a list of existing debts – Now make a list of your outstanding debts from
lowest payoff amount to highest. Some debtors like to pay off the highest debt
first, in terms of interest rate (avalanche method); while others prefer pay off
the smallest amount, in terms of total debt amount (snowball method). The later
one is more motivating as it helps you to pay off the lowest debt first. Once you
can pay off one outstanding debt by your own, you will become confident about
paying off all outstanding loans in due course.

Start paying off the debts – After you have created your list and made your mind
about which debt you want to pay off first, start paying any extra money you
earn towards its payment. It would help you get rid of the first debt at the earliest
possible. Once you can get rid of the first one, you can start working on the next
one.

Use the excess amount for paying the next debt – After paying off the first
debt, you can free up some extra money that you can use to pay off the next one.
Repeat the process until you can pay off all outstanding debts.

Use snowfall method of debt repayment to pay off your debts without putting much
effort. However, if you fail to repay your debts, you can consolidate debt or settle your
debts through a debt settlement company.

Posted in Getting Rid of Debt | Tagged , , , , | 4 Comments

Deleting Credit Inquiries From Your Credit Report

Posted on January 31, 2012 by Reney DuBose

I get a lot of questions from MLO’s about consumers who have pulled their own credit reports and then realize a number of “inquiries” they feel should not be listed on their reports. Sometimes these inquiries are listed by companies unfamiliar to the consumer. And many times the inquiries are listed beyond the 2 year period authorized by law.
Although credit inquiries may not necessarily have the biggest impact to a consumer’s credit score, it can still affect an underwriter’s credit decision. Many loan underwriters consider frequent inquiries to be a significant credit risk and may decline credit for such reasons.

But before you get your clients too alarmed, first explain that there are two types of inquiries:

1. Hard pull inquiries occur when a consumer applies for new credit, like a credit card and or completes a loan application for a car or home. The “hard pull inquiries” can have an affect on credit scores.

2. Soft pull inquiries occur when an existing creditor pulls a consumer’s credit for a legitimate business purpose or if the consumer pulls their own credit. Soft inquiries will not affect a consumer’s credit score. However, oftentimes soft inquiries are mis-labeled and may be inadvertently treated by the credit bureaus as a hard pull inquiry.

So if your client has credit inquiries they feel should not be listed on their credit reports, here’s what you can tell them to do:

Step 1
First, identify which credit inquiries are listed as hard credit inquiries. Do not worry about the credit inquiries listed for promotional purposes. Make sure you identify only the credit inquiries that are shown to credit grantors. You should recognize the creditors as places where you actually applied for credit. If you don’t recognize the creditors listed, or if they have been listed for more than 2 years then proceed to step 2.

Step 2
Locate the addresses for each creditor listed. Experian’s credit report will list addresses for each credit inquiry. Unfortunately, TransUnion and Equifax reports do not include addresses for credit inquiries. You should be able to use the creditor addresses listed on your Experian credit report to deal with the Equifax and Transunion inquiries as well. If some of the credit inquirers don’t show up on your Experian report, you can call TransUnion and Equifax to get the addresses for the credit inquiries listed.

Once you have collected all of the addresses for the credit inquires you believe should be removed from your credit report, proceed to step 3.

Step 3
Prepare dispute letters to send to each of the creditors asking them to remove their credit inquiry from your credit report. Again, the law is on your side. The Fair Credit Reporting Act only allows authorized inquiries to be reported on your consumer credit report. So you have to challenge whether the inquiring creditor had proper authorization from you to pull your credit file.

Step 4
If the any of the creditors provide documentation that a credit inquiry was authorized by you, read the authorization that you signed very carefully. See if there is any ambiguity. Remember, you can write them back and argue your case. If you feel the inquirer’s authorization form was too complicated or not easily understood, you threaten to contact the State Banking Commission and complain about a deceptive and unclear authorization form if they don’t remove your inquiry.

Some creditors may ignore your challenge. Make sure you send each letter by Certified Mail Return Receipt Requested and keep close track of the time that you sent the letter. If they don’t respond within thirty days, you can then call the inquiring creditor and demand they delete the inquiry because they failed to reply timely.

Some creditors may agree to delete the inquiry as a courtesy or because they cannot verify your authorization. Remember, legal credit improvement is about exercising your rights under the credit laws. So use your credit rights and require the creditors to prove their compliance with the law. If they do not comply, the non-complying credit information must be removed from your credit reports, even unauthorized or unverifiable credit inquiries!

Posted in Credit Repair, Credit Repair Tips, Credit reports, Fico Scores | 4 Comments

Deleting the wrong credit items can actually lower credit scores!

Posted on December 22, 2011 by Reney DuBose

That’s right. Believe it or not, if you’re not careful you can actually cause your client’s credit scores to decrease by deleting certain negative credit items from their credit reports. I know as a mortgage loan originator you’re probably already more than familiar with the FICO credit scoring system and the typical 5 FICO Scoring categories that everyone talks about (i.e. Payment history, credit usage, average account age, credit mix, and inquiries).

However, there is much more going on behind the scenes as it relates to how FICO calculates credit scores. So stay with me as we run through the ABC’s of how the FICO credit scorecards impact credit scores. It may be difficult to stay engaged, but it’s worth it to make sure you properly counsel your clients about their credit reports to avoid accidently causing their credit scores to decrease.

Here’s how it works…

FICO separates consumers into various groups based upon the information contained in their credit reports. Those consumers with similar credit items in their credit reports are grouped together on the same credit scorecards.

FICO’s formula is programmed to start by looking for credit reports that only contain positive credit information. This is where the typical 5 categories come into play. The formula reviews the consumers’ age of accounts and the number of accounts, and the age of the youngest account. If there are any delinquencies listed on the credit profile, it then considers if there are any public records (i.e. judgments, bankruptcies, or tax liens). If there are multiple public records, the formula takes into account the worst of the public records listed. So a bankruptcy is worse than a tax lien, so credit histories with bankruptcies would be considered first.

Next, all of the data is gathered by the FICO system and assessed. The consumer is then assigned to one of the 10 FICO credit scorecards. Again, the credit scorecards represent groupings of consumers with similar credit information contained in their credit reports. For example, those with only a few late payments will be grouped with other consumers with only minimal delinquent credit histories.

FICO Credit Scorecards 1-5:

1.   Consumers with bankruptcies or other public records listed in their credit profiles.

2.   Consumers with serious credit delinquencies other than bankruptcies (e.g. 60, 90, 120 late payments, collections, judgments, charge-offs repossessions, etc.).

3.   Consmers with only 1 credit account in their credit histories (“very thin files”).

4.   Consumers with only 2 credit accounts in their credit histories (“thin files”).

5.   Consumers with only 3 credit accounts in their credit histories.

Scorecards 6-10 are for consumers without ANY serious delinquencies at all. However, FICO will not disclose exactly what they mean by “serious” delinquencies.

6.   Consumers whose oldest credit account is only 0-2 years old.

7.   Consumers whose oldest credit account is only 2-5 years old.

8.   Consumers whose oldest credit account is 5-12 years old.

9.   Consumers whose oldest credit account is 12-19 years old.

10. Consumers whose oldest credit account is 19+ years old.
Researching of the FICO credit scorecards and how FICO uses them, resulted in the discovery of these 10 scorecards, but FICO’s new FICO 08 release actually has12 scorecards.

FICO claims that grouping consumers by scorecards enhances the predictability of consumers’ following thru with timely payment of their credit obligations. They believe that by tracking the payment histories and default patterns of consumers with similar credit information will predict similar default rates by other consumers similarly situated.

Consequently, FICO uses the scorecards to assign different weight to the same information, in an attempt to make credit scoring more fair. Basically, the objective is to not score a consumer with a perfect credit history against a consumer with a poor credit history.

Why a credit score can actually decrease by deleting negative credit items

I have seen instances where consumers have attempted to improve their own credit scores by successfully getting a bankruptcy deleted from their credit score, only to see a significant drop in their credit scores. Here’s why. If the consumer is originally grouped with other consumers with bankruptcies, they could be listed at the top of that list depending upon the other credit report factors. So they may compete pretty well against that group of consumers. However, once the bankruptcy is deleted, they will be grouped with a different set of consumers and can be placed near the bottom of that scorecard. In essence, they may not be competing as well in comparison to other consumers’ credit information in the next scorecard grouping. It may take time to move up on the new scorecard.

The same thing can happen when a consumer moves from a scorecard of consumer with a “thin file” to a scorecard of consumers with older credit accounts that are more aged. The consumer may have to start at the bottom of the new scorecard group. Consequently, their credit scores can drop drastically. Here is an example that FICO provides on their website:

“You moved from one category of credit users to another as time passed. For example, you may have transitioned from the category ‘”consumers with a new credit history”‘ to the category ‘”consumers with a two- to five-year credit history.”‘ As a result, your credit report is evaluated differently, causing a slight change in your score. The good news is that moving between categories like this usually offers you the potential to reach a higher FICO score in the future.”

However, this doesn’t mean that all is lost. The good news is that as your client climbs up the rungs of the new scorecard group they have the potential to increase their credit scores beyond the maximum credit scores they could have achieved while still on the previous scorecard grouping. The key is to know how to make wise and “credit score friendly” use of their credit and add a good blend of positive credit information onto their credit reports when rebuilding their credit. I call this a credit score lifestyle by design.

FICO claims their new FICO 08 release resolves the problem of the drastic drop in credit scores for consumers that move between scorecard groupings, by increasing the number of scorecards from 10 to 12. The current FICO model uses 10 scorecards. FICO 08 adds 2 more. By now dividing the population into 12 consumer groups (i.e. 8 for consumers with good credit histories and 4 for consumers with poor credit histories), FICO hopes to level off the drastic reduction in credit scores resulting in changing consumer groups.

As I have mentioned in my previous blog article about Piggybacking, FICO has also indicated that the FICO 08 release will no longer include authorized users in the credit score calculation.

This is yet another example of why many consumers today can truly benefit from the services of a professional credit repair organization or credit repair attorney. Unfortunately, most consumers (as well as many Government Regulators) are simply not aware that credit improvement is not about simply removing inaccurate and non-compliant negative credit items from consumer credit reports. It also entails a working knowledge and consumer education regarding the credit scoring system and how to make smart credit decisions to optimize consumer credit scores as well. This is an essential part of professional credit improvement services.

Now aren’t you glad you hung in there and learned all you ever wanted to know about credit scorecards? In any event, hopefully, as an MLO, you will now be able to share this information with your clients and close the deal!

Posted in Credit Bureaus, Credit Repair Tips, Credit reports, Fico Scores | 5 Comments

Many Mortgage Loan Originators May Be Giving Bad Credit Advice!

Posted on November 30, 2011 by Reney DuBose

I recently received a call from a couple regarding their delinquent mortgage history. The couple has owned their home for about ten years. Unfortunately, they fell behind in their mortgage payments and now they’re facing foreclosure.

They were trying to decide whether a foreclosure, a deed-in-lieu of foreclosure, or a shortsale would impact their credit scores differently.  This is a very common question that I am often asked.

Many Mortgage Loan Originators (MLOs) assume that a short sale will have less of a negative impact on consumer credit scores than a foreclosure or a deed-in-lieu of foreclosure. So they oftentimes counsel consumers to pursue a shortsale to protect their credit scores.  However, according to a recent study released by FICO, that may not be true!

FICO recently conducted a study where they simulated the credit score impact of various types of delinquent mortgages.  In essence, they started with a representative sample of 3 credit bureau consumer profiles. The representative consumer credit scores started at 680, 720 and 780.

FICO identified credit profiles they deemed to be typical of consumers with these sample credit scores. So they identified credit profiles with credit utilization, payment histories, and age of file, etc. for these three credit scores.

Each representative consumer profile had an active current “paid-as-agreed” mortgage account reported.

During the study they simulated increasingly late delinquent payment histories and observed the impact to each credit score as a result.

The study demonstrates that whether a delinquent mortgage account is reported as a foreclosure, a deed-in-lieu of foreclosure, or shortsale has the same negative impact on the consumer’s FICO score. However, the negative credit score impact is more severe if the mortgage account results in a deficiency.

This information is important for homeowners to be aware of in the event of a financial hardship affecting their ability to pay their mortgage. The best advice for a consumer in such a situation is to contact their lender early in the process as possible to pursue options to try and limit the impact to their credit scores.

 

Posted in Consumer Protection, Fico Scores, Foreclosures, MLOs, mortgages, Short Sales | 2 Comments