Ritchie School of Real Estate Finance - Arizona Mortgage Education: collections

Accounts in Dispute on Credit Report = BAD

Imagine going through airport security, would you rather walk through the metal detector and be on your way or go into a small room for a slow in-depth search of you and your luggage?

For most mortgage applications the file passes through automated underwriting and moves on through underwriting to closing with relative ease, like the majority of passengers filing through security at the airport. However, just like the occasional passenger who left a bottle of liquid in their carry-on by mistake, or forgot to remove their collection of metal elements from their pockets, there are certain things that can trigger a deeper look at a mortgage file. One of the most common I encounter is when there are 'accounts in dispute' listed on the credit report, this classification on a credit report triggers a manual underwrite.

A manual underwrite is when the automated underwriting is tossed and the file has to go through the full body cavity search, often times it turns up nothing, but in regards to those pesky accounts in dispute, they will likely have to be paid barring overwhelming documentation that they are a mistake, whereas if they were not in dispute they may not have had to be paid.

What are accounts in dispute? 'Accounts in dispute' is a classification of accounts that have been disputed by the borrower, but have not been resolved. Consumers should always dispute accounts on their credit reports that are incorrect, but the problem is with disputing accounts that are correct.

When someone disputes an account that is correct it will likely remain on the credit report as an 'account in dispute' rather than falling off. When an account is in dispute it is not supposed to score in the FICO score during the first 30 days while the dispute is going on, so it is a trick the credit repair industry uses in an attempt to circumvent the system: dispute everything whether it is correct or incorrect.

The problem with this is that not everything comes off the credit report, and those accurate accounts that do happen to come off will be put back on eventually. Credit repair as an industry is a waste of money for consumers, people need credit education so they know how to correct their credit reports when the need arises. My book The Credit Road Map covers the process of correcting the credit report, if you don't have it on your shelf come by my office for a complimentary copy. I always leave copies for real estate agents on my filing cabinet, if I am out just tell the front desk I left a copy for you in my office on my black filing cabinet. Take a copy for yourself and some for clients.

People spend thousands of dollars on credit repair that gets them nowhere, and leaves accounts in dispute on their credit report. So what should they be doing? If the account is inaccurate, dispute it until it is off the credit report. If the account is accurate, do not dispute it, either pay it or don't pay it. If the client plans on buying a house in the next 12 months I would like to assess their credit report before they do anything so I can advise them on what to do. If their credit score is high enough, my advice will likely be to leave the report as it is, if there are collections, they have already done the damage by being reported, so paying them is not necessarily going to help much. If there are other past due debts out there that have not been reported on the credit report yet I want them to pay those immediately before they report and damage the credit score. Those become priority debts because they can knock the score below 620 and now the client may not qualify for a mortgage.

Here is the tale of two clients, both have a few thousand dollars in collections, the collections are accurate, the debts are owed, there is nothing incorrect about the collections. One client has done nothing with the collections, no disputing, has not paid the debts, but his score is high enough and is income is enough to qualify for a mortgage. The underwriter determined that because the collections were medical she was not going to require them to be paid.

The other client had about the same amount of debt, mostly medical collections, but had paid a credit repair person over $500 to 'repair his credit.' All the bad debts he owed were disputed, in the end they were not removed from his report, they were all classified as 'in dispute.' Due to the in dispute status the file is red flagged and has to be manually underwritten instead of automated, the mortgage was still approved, he had a high enough FICO score and had enough income, etc. The difference was that he had to pay the collections at closing in order to 'resolve' the dispute, if these were not in dispute in the first place he probably would not have had to pay them if he chose not to. If he did not have enough money to pay the collections this would have been a problem for the client.

In summary, we want to avoid manual underwriting when possible, and the best way is to make sure clients are not frivolously disputing accurate information on their credit report.

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

When it comes to credit, prevention and protection are the best methods to maintaining good credit. What that means is making sure the bad stuff never gets on there in the first place, prevention. One method of protection is to make sure your credit score is so high that if something does slip through the cracks it won’t be completely detrimental. I have always told my students and readers their goal should be too reach an 800 FICO® score not because it will necessarily give them the best rate (typically anything over 740 will accomplish this), but because it will protect in the event of something bad appearing on the credit report. Obviously paying our creditors on-time is the main way to both prevent and protect our credit from the #1 bad thing, late payments, from occurring. However, there are many other bad things which can happen, so we need to be on guard.

A common bad thing is a collection, probably the most common. Medical collections make up the bulk of collections, 42% in fact, according to ACA International Top Collections Markets Survey. Typically they are small amounts, in many cases less than $250. However, no matter the amount, a collection will cause harm to the credit score, therefore potentially costing us more money when we seek to borrow money. The nature of the collection for many people is that if they knew they owed it they would have just paid it. I am going to cite a personal example that happened to me a few years ago.

My son was born in mid-2004; at that time I was writing checks to anyone who said I owed them money. If there is a downside to having a child it is the medical costs involved. Insurance may cover some procedures, but there are still deductibles, not to mention out of network medical providers who do not have a contractual with your health insurance provider. So out of the blue a call is received in November 2008 from a lady at a medical collection agency claiming $260 is owed to a pre-natal medical provider. Of course this sounded fishy to me. The first step in answering the claim of a collector, request a validation of debt. Provide me with documentation in regard to the debt, show me I owe it. That being said, there is always the possibility they are looking for a different person. For example, there is another Patrick Ritchie in the Phoenix area. I used to do a once per semester class at Scottsdale Community College, I received a check for an unusually higher amount than normal. Upon contacting Human Resources I discovered my check was mixed up with the other Patrick Ritchie, who apparently works there full-time in some capacity. We all know mistakes happen at times.

Since mistaken identity is always a possibility, request a validation of debt. It is a legal right under U.S. Code TITLE 15 > CHAPTER 41 > SUBCHAPTER V > § 1692g Validation of debts. Knowing this I made the request. A few days later I was provided with information pertaining to the service for which they say I owe. It shows the debts are from December 2003 and January 2004 for two separate ultrasounds. I save everything, so I went to my filing cabinet to dig out what I had. To verify I had not missed anything I also called my health care insurance provider to see what its records showed in regards to this claim. The insurance company showed the two claims as being paid. I called the pre-natal medical provider to have a conversation with them directly about the debt. They claimed they did not show receipt of payment. I had the insurance company fax me proof of payment. I drove to the medical provider’s office to show them my documentation. What I discovered was that they were out of network for my insurance company, so the insurance company had sent the payment to me instead of the provider. The provider continuously billed the insurance company, never me, and eventually gave up in June 2005. I never received a bill from them for any amount. As it turns out I had their money, or actually a portion of the money since the entire billed amount was not paid by the insurance company. So I did owe them the money.

To remedy it I wrote a check directly to the collection agency. Their bait was that the debt had until December 31st, 2008 to be paid before it would be reported on the credit report. As strange as the collection call was, it was not a scam, but it certainly seemed unusual. Knowing how many checks I had written for any invoices received at the time, it seemed extremely odd that I would have ignored a bill from this particular medical provider. The reality is that I was never sent an invoice for services provided. In late summer of 2004 I did move to another house, although my mail was forwarded to the new address. In discussing the situation with the billing department of the medical provider they could not show that an invoice had ever been sent out to me. Coincidentally, the same medical provider was used for ultrasounds in early 2005 for a subsequent pregnancy which resulted in a miscarriage. According to their records, those ultrasounds were all paid for, yet somehow, even though I was there writing checks a year after the first pregnancy, they never brought up the fact that I still owed them money.

Do you see why collections are so frustrating? Sometimes things just fall through the cracks, plain and simple. I will say that both the collection agent and medical provider were helpful in assisting me to figure this all out. This situation was fortunate for me; they were able to reach me before it was submitted to the credit report. Had they been unsuccessful in reaching me, the collection would have just been placed on the credit report. Then I would have been contacting them the next time I went to apply for a loan and this came up. I have heard this a million times, “This is impossible, there cannot be a collection on my credit report, I pay everything I owe.” Of course we do, but if we never receive a bill and a debt comes up four years later it can become a problem.

What kind of problem could it have been? My credit scores typically range between 780 – 810; I would think a collection would have knocked me down about 50 points. So my worst case scenario might have been a credit score in the 730 range. Still a good credit score. This is why we should always shoot for an 800, it reduces the fall if something unforeseen should occur. What about my worst case scenario?

My worst case scenario would have been if the collection had been reported, my credit card companies might have picked up on the derogatory account. Our credit card companies check our credit reports periodically to assess risk, typically every quarter, but possibly monthly. The good news is that this has no impact on the credit score because it is considered a “soft” inquiry, which means I did not initiate it, nor am I applying for credit. If I am deemed a higher risk my credit card limit could be dropped and/or my interest rates could be increased. This is known as universal default, it has come under a lot of scrutiny over the years. Higher interest rates do not impact my credit score; however, lowering my limits could have a majorly adverse impact. We always want to keep our credit balances as low as possible, the benchmark is under 50% of the available limit (always check to see what limit is being reported on your credit report, do not assume that what is on your credit card statement will always be what is reported to the credit bureaus). If my credit card limits were cut as a result of a collection being reported this could have a much worse impact on my credit score, potentially knocking my score down in excess of 100 points. I will get more in-depth on this in a future posting.

The point of this is to show the importance of protection and prevention in regards to our credit.

Doing so will ensure you are always on top of your credit when you need it.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

Ritchie School of Real Estate Finance - Arizona Mortgage Education

Saturday, December 8, 2012

Accounts in Dispute on Credit Report = BAD

Tuesday, October 2, 2012

Credit Protection & Prevention: The Best Offense is a Good Defense