In case you didn’t know, NCAP is the National Consumer Assistance Plan. Under this plan, the 3 credit repositories will no longer report most civil judgments and tax liens, or unpaid medical bills less than 6 months.
They say it’s because, in many cases, these issues are not accurate and they may negatively impact a consumer’s credit profile and score. Nice win for consumers.
But, what about the effects on lenders? Fannie recently issued guidance for how lenders should handle loans going forward to ensure compliance with their credit guidelines.
In a nutshell, for the most part, Fannie says nothing changes. Lenders must continue to underwrite credit in accordance with their current guidelines.
Pretty broad statement. Under those guidelines, a lender must ensure the payoff of any civil judgments, tax liens, or collection accounts at, or prior to closing. The lender is required to determine if the borrower has unpaid debts or judgments which may affect loan performance and/or Fannie’s lien position.
If, after closing, it is determined that a debt or judgment exists that could have a negative impact, Fannie will cite the defect just to make the lender aware. No action would be taken at that point.
However, in the event of a later default, any final decisions on loan repurchase or indemnification would be governed by Fannie’s policies covering lender Life of Loan Representations and Warranties. These reps and warranties hold a lender fully accountable for any loan misrepresentations and fraud, whether intentional or unintentional. Again, a pretty broad statement.
In the guidance, Fannie says that a lender (although responsible for determining the potential for any undisclosed debts) is not required to use other sources to identify potential civil judgments and tax liens other than the loan application, credit report, and preliminary title report.
They further state that they continue to require lenders to assess information if the lender is otherwise made aware of outstanding judgments and liens prior to closing. So, is it a don’t ask, don’t find out scenario? Pretty risky…
Although lenders need not run any additional checks for the potential of unpaid tax liens, civil judgments or unpaid medical bills, they are still required to have these debts paid off, when they exist, prior to or at closing. Otherwise, they may be held accountable in the event of a loan default.
I suggest, “Better to be safe than sorry.” Run a supplement check to determine if any of these debts exist and have them paid at closing unless the applicant can provide indisputable evidence that the debt is not valid.
The devil is always in the details. Don’t leave anything to chance. A chance that Fannie may decide somewhere down the line that you didn’t do all you should have done to identify unpaid debts and have them paid. History tells us that there is a chance that could happen.