I. ML 2013-25 (and 2013-24) – Collections, Judgments and Disputed Accounts
This guidance amends the TOTAL Scorecard User Guide (FHA’s guide for
using AUS) and is effective for all case numbers assigned on or after October
15, 2013. It applies to all FHA loans with the exception of non-credit
qualifying streamline refinance transactions.
A. FHA does not necessarily require collection accounts to be paid off for
approval, but it is recognized that collection efforts by the creditor could
affect the borrower’s ability to repay the mortgage. To that end, FHA is
requiring lenders to follow these guidelines when collection accounts are
present with an aggregate balance equal to or greater than $2000. When
the loan is rated approve/eligible or accept/accept by TOTAL:
1. If the cumulative outstanding balance of all collections is LESS than
$2000, then no further consideration is required.
2. If the cumulative outstanding balance of all collections of ALL
borrowers is equal to or greater than $2000 the lender must include
monthly payments in the borrower’s debt to income ratio for accounts
that will remain open after closing. This means that you will need to
document payment arrangements with the creditor and count the
payment or use 5% of the outstanding balance.
Note 1: Collections accounts of a non-purchasing spouse in a community
property state are included in the cumulative balance.
Note 2: Medical collections and charge offs are excluded from this
guidance.B. Judgments – Loans for borrowers with outstanding judgments are
generally not acceptable unless the following documentation is obtained.
a. Judgment must be on the credit report that is linked to the TOTAL
Scorecard findings and the findings must be “approve/eligible” or
b. If the judgment will not be paid off and released prior to the
closing, evidence of a payment agreement may be considered. The
payment agreement must be in writing and provided at the time of
underwriting. Crescent will require evidence that 12 months
satisfactory payments have been made as scheduled. Borrowers
may not pre-pay scheduled payments in order to meet this
requirement. The monthly payment must be considered in the
borrower’s debt-to-income ratio for qualifying.
c. Any judgments that are discovered in the processing of the loan
that ARE NOT on the credit report linked to the TOTAL findings
require the loan to be manually downgraded to “refer” status.
Crescent does not approve loans that must be manually
d. A subordination agreement will be required for any judgment that
is also a lien against the borrower and/or the subject property.
C. Disputed Accounts – Because disputed accounts are not generally
considered in the borrower’s credit report FHA will now require loans of
borrowers who have derogatory disputed accounts with cumulative
balances of $1000 or more (excluding medical) to be downgraded to
“refer” findings and manually underwritten. As you are aware, Crescent
does not approve loans that require manual underwriting.
NOTE 1: Disputed derogatory credit account of a non-purchasing spouse
in a community property state are not included in the cumulative balance
for purposes of determining if the mortgage application must be
downgraded to a “refer.”
NOTE 2: Disputed medical collections are excluded from the $1000 limit
as are derogatory credit accounts resulting from identity theft, credit theft
unauthorized use, etc. However, documentation must be provided to
conclusively support the disputed status. Documentation might entail
police reports, letters from the creditor, etc.
II. ML 2013-26 – Back to Work-Extenuating Circumstances
The guidance provided in ML 13-26 requires loans to be manually
underwritten. For this reason Crescent cannot approve loans that need these
credit underwriting leniencies. III. ML 2013-29 – Application of Unused Funds from Escrow Account on
This guidance is effective with case numbers assigned on or after November
A. Unused funds from an escrow account that are not sent directly to the
borrower must be used for a purpose authorized by the borrower.
B. If the current servicer nets the escrow balance out of the payoff, it does not
change the way the new loan amount is calculated. You must still start
with the unpaid principal balance on the current loan, NOT the payoff
C. When the borrower has determined that they want the unused funds to be
applied to costs associated with the new FHA loan the lender is required
a. Obtain a written authorization from the borrower to apply the funds
from an existing mortgage for any purpose prior to using them. The
borrower’s written authorization must clearly state the purpose for
which the authorization is provided.
b. The credit must show on the HUD-1 when the funds are applied to
settlement charges or to the new escrow account.
IV. Reminder: Loan officers are not to sign the initial 92900a (addendum to the
loan application for sponsored originator cases. This includes lenders who
have their FHA approval, but have not completed the test case phase of the
A link to the FHA mortgagee letters is provided here > Mortgagee Letters.