10.9 COLLECTION ACCOUNTS (03/09/16)

© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook

Collection accounts are factored into the credit score. Collection accounts will be considered in the analysis of credit and capacity.

Paying an outstanding collection account is not justification, in itself, that would establish an applicant’s willingness to meet obligations in an acceptable manner. Payment of the collection account may cause the depletion of cash resources that may otherwise be available as reserves or for closing costs. The lender is responsible for determining which collection accounts, if any, should be paid in full by the applicant prior to or at loan closing. The repayment in full of unpaid collections is not a condition of mortgage approval. Whether a collection account represents a greater risk is entirely the lender’s decision, regardless of the credit score. This decision will be based upon several factors including the credit profile of the applicant(s), the amount of meaningful financial reserves available, the unpaid balance of the collection accounts, and whether they pose a threat to the first mortgage lien and are likely to affect the applicant’s equity or ability to repay the requested loan. Lenders must conclude the applicant did not disregard his or her financial obligations. Outside factors, such as disputes, illness, loss of job may have contributed. Lenders will evaluate all outstanding collection accounts.

Lender underwriters should perform additional analysis when making credit determinations if they encounter collection accounts that have:

• A record of irregular payments; or
• No satisfactory arrangements for repayment; or
• Payment in full within the last 6 months just prior to application, unless the applicant had been previously making regular payments.

Manually underwritten loans with collections reported.

For a manually underwritten loan, the lender must document mitigating circumstances in accordance with Section 10.8 of the Chapter, subject to the capacity analysis described below, for approving a loan
request when collection accounts are present and remain unpaid. The preferred method to document a lender’ decision to leave collections unpaid is the underwriting analysis. For each outstanding collection account, the applicant must provide a letter of explanation together with documentation supporting the applicant’s justification. The supporting documentation and explanation must be consistent with other credit information in the file. 

Collections reported for the automated underwriting system – GUS “Accept”.

For loans underwritten with the assistance of GUS when an “Accept” recommendation is received, lenders remain responsible for considering the existence of unpaid collections and the history of the collection accounts in the final credit analysis and loan making decision, subject to the capacity analysis described below. A letter of explanation or documentation supporting the presence of unpaid collections is not required when the underwriting recommendation is an “Accept. The lender will document reasons for approving a loan request when collection accounts remain unpaid. The preferred method to record the lenders analysis/reasons for approving the loan is to document their justification on the credit liability line under “notes” on the “Assets and Liabilities” page beside each individual collection.

Capacity analysis when collections are reported – all underwriting types.

Unpaid open collections could affect the future ability of an applicant to repay a mortgage when creditors pursue collection. Ensure all collections and charge-offs are listed on the loan application as a liability. Collections meeting the omission policy noted below can be omitted from the total debt to income ratio. Additional documentation is not required to omit those collections meeting criteria below.

In an effort to minimize future risk of open collections left unpaid, the lender will consider the following during the capacity analysis of the loan request, regardless of the method utilized to underwrite:

1) Determine if the total outstanding balance of all collections accounts of all applicants is equal to or greater than $2,000. Unless excluded by state law, collection accounts of a non-purchasing spouse in a community property state are
included in the cumulative balance of all collections.
2) Remove all medical collections and all types of charge off accounts from the total balance. Medical collections and charge off accounts must be clearly identifiable on the credit report.
3) If the remaining outstanding balance of collection accounts are equal to or greater than $2,000, any of the following actions will apply:

• a. Payment in full of all collection accounts at or prior to closing.
• b. Payment arrangements are made with each creditor for each collection account remaining outstanding. A letter from the creditor or evidence on the credit report is required to validate the payment arrangements. The agreed upon monthly payment for each outstanding collection account will be included in the borrower’s debt-to-income ratio.
• c. In the absence of a payment arrangement, the lender will utilize in the debt-to-income ratio a calculated monthly payment. For each collection utilize 5% of the outstanding balance to represent the monthly payment.