Denial of Credit — RPI Form 219 | firsttuesday Journal

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This form is used by a loan broker or lender when processing a mortgage application, to inform the borrower of adverse action taken on their application.

Your use of RPI Form 219

The consumer mortgage

A consumer mortgage is a debt:

incurred primarily to fund personal, family or household purposes;
secured by a parcel of real estate containing one-to-four residential units; and
owner occupied or buyer to occupy.

Consumer mortgages are either:

conventional mortgages; or
government-related mortgages.

A conventional mortgage is any mortgage that is not made, insured or guaranteed by the federal government.

A government-related mortgage is a mortgage insured by the Federal Housing Administration (FHA), guaranteed by the U.S. Department of Veterans Affairs (VA) or guaranteed or funded by the U.S. Department of Agriculture (USDA).

The ability of a buyer or owner to obtain financing is an integral component of most real estate transactions, whether fee simple or leasehold.

The submission of a mortgage application to a private or institutional mortgage loan originator (MLO) is the catalyst setting the machinery of the regulated mortgage industry in motion to provide consistent and expected results as housing policy.

However, lenders rely heavily on credit scores to make their lending decisions, be it on a mortgage, a credit card or a car loan. Most buyers know they have a credit score, and its general use, but few consider the nuts and bolts behind the score — that is, until they apply for a mortgage and are denied or offered unfavorable terms.

Thus, understanding credit management and credit scores is intrinsic to an individual’s understanding about the likely availability of a mortgage.

Credit report score, the past vs the present

An individual’s consumer credit score is a credit agency’s trailing indicator of the applicant’s probability to repay debt obligations. However, MLOs initially use the score, a single three-digit figure, as the sum for an individual’s debt payment history reported in an easy-to-apply number. The score is used like a gross rent multiplier (GRM) number is used to initially qualify an income property for acquisition.

The score, obtained in a third-party credit report, guides an MLO in their initial response to an application. For a homebuyer, their management of accurate credit information in a credit report on their financial behavior is critical to success when seeking a mortgage.

Using the information complied in a credit report, the MLO now starts a more thorough analysis of the risk of default the homebuyer presents when originating a mortgage to fund their purchase of a home.

A homebuyer’s mortgage application submitted to an MLO authorizes the MLO to pull the homebuyer’s credit report to assist the MLO to determine whether the applicant is apt to pay as agreed. [See RPI Form 302]

A FICO score is supplied by one of three credit reporting agencies (TransUnion, Experian and Equifax). An alternative credit score model developed by the three reporting agencies, called VantageScore, also produces an acceptable credit score. The report contains information about the payment history and credit standing of a buyer as viewed by the credit agency — the score.

A traditional FICO credit report guides an MLO in their review of the buyer’s past (trailing) performance for repaying debt obligations. The newer VantageScore claims to offer a more predictive model for how likely consumers are to repay their debts in the future. Debt reporting includes amounts of money owed, past and present, on:

loans or financing agreements;
judgments or tax liens; or
retail and bank credit accounts.

The MLO is allowed to charge the buyer for the cost of the credit report.

Notably, neither the credit reporting agency nor the credit report assures, much less guarantees, the future performance by the buyer to make payments on the mortgage. For the MLO, the report content in no way addresses or provides evidence of the buyer’s ability to pay, the basis for repayment and qualification for mortgage default insurance (PMI/MIP).

The separate issue for an MLO of a household’s ability to make monthly payments on a mortgage debt is resolved by an income and net worth financial analysis performed by the MLO. The data needed is supplied in the mortgage application submitted to the MLO by the homebuyer or owner seeking the mortgage.

Ability to pay is confirmed by investigating an applicant’s employment status, income and assets. The MLO applies an income-to-payment ratio to set the maximum amount of mortgage funding available to the applicant. Generally, the ratio limits monthly mortgage payments to 1/3^rd of the household’s gross income expectations.

This income-to-payment ratio is used by a buyer agent to approximate the mortgage funds likely available to the buyer-client to buy a home.

The credit score consequences in use

Most MLOs and landlords rely heavily on an individual’s credit score, most often the Fair Isaac Corporation (FICO) Score. This score is calculated by each of the three credit reporting agencies based on payment reports the agencies receive from banks, MLOs, credit card issuers and landlords.

The debt information received is primarily from institutional lenders, called traditional credit sources. However, landlords, employers, utilities and other non-traditional credit providers now also provide agencies with information since individuals with cash often do not borrow, carry no debt on their credit card which accrues interest, and have no bank-type credit history.

Credit reporting agencies are limited to three operators consisting of TransUnion, Experian and Equifax. As aggregators of debt behavior on individuals, these agencies collect and condense the information they receive into a score. Each agency independently calculates the score they issue on an individual from the data they have compiled.

Although FICO scores are the most common credit rating system used for mortgage underwriting, Fannie Mae and Freddie Mac (Government-Sponsored Enterprises) have recently accepted an alternative rating system, VantageScore.

VantageScore uses a smaller amount of credit history to generate a score based on a predictive model. It was developed by the three main credit reporting bureaus (Equifax, Experian and TransUnion).

A FICO generated credit score is based on the individual’s installment debt payment behavior and consists of:

35% payment history;
30% amounts owed;
15% length of credit history;
10% new credit opened; and
10% type of credit used.

The range of FICO credit scores among the agencies are from a low of 300 to a high of 850. Generally, MLOs rank credit scores by tiers of probability for debt performance, such as:

poor when they are below 580;
fair when they are between 580-669;
good when they are between 670-739;
very good when they are between 740-799; and
excellent when they are 800 and higher.

Critical to applicants for a mortgage, an MLO discloses to the applicant their credit score and key debt information adversely affected their credit score. The MLO credit data is presented to the applicant by using a form called the Credit Score Disclosure Exception Notice. [See RPI Form 217]

Mortgage-related credit reports

The consumer credit report pulled by an MLO or carryback seller to finance $150,000 or more on the purchase of a home contains more trailing payment information than a tenant screening report used by landlords, including:

bankruptcies predating the report by no more than ten years. Chapter 13 bankruptcies stay on file for seven years, but Chapter 7 bankruptcies remain for ten years;
civil suits and judgments, and records of arrest predating the report by no more than seven years;
paid tax liens predating the report by no more than seven years;
accounts placed for collection or charged off as a loss predating the report by no more than seven years; and
records of criminal activity predating the report by no more than seven years; and
foreclosures remaining on the record for seven years.

Foreclosures negatively impact a score between 85-160 points.

Bankruptcies reduce a score by about 130-240 points.

30-day mortgage delinquencies reduce a credit score between 60-110 points, and the impact is higher for 60- and 90-day delinquencies.

An MLO informs a mortgage applicant that their credit score affects their qualification for a mortgage by using a form called the Notice to Home Loan Applicant. [See RPI Form 217-1]

A mortgage applicant might also have negative items on their credit report which need addressing by the applicant. Here, the applicant, with the help of their agent, submits a form called a Derogatory Credit Explanation Letter to their MLO. Through the form letter, the applicant explains why the derogatory items exist and provides reasons for the hardship that interfered with payment of the items. [See RPI Form 217-2]

When the MLO denies the applicant’s mortgage application, or offers the mortgage on different terms, the MLO uses a form called the Denial of Credit. [See RPI Form 219]

The denial of credit form analysis

An MLO uses the Denial of Credit form published by RPI when processing a mortgage application to inform the applicant of the MLO’s adverse action taken on their application. [See RPI Form 219]

The Denial of Credit contains:

the date, applicant’s information and MLO information;
the loan application number involved [See RPI Form 219 §1];
the adverse action taken by the MLO on the application, including:
- mortgage denied;
- mortgage offered on different terms; or
- other action (blank) [See RPI Form 219 §2];
reason(s) the adverse action was taken, including:
- delinquent payment of debts;
- inadequate references to establish credit;
- derogatory trade references; or
- references not responsive to verification requests [See RPI Form 219 §3];
advising the applicant that they may request a free copy of their credit report from the identified credit bureaus [See RPI Form 219 §4];
boilerplate information for the applicant’s response, such as the right to dispute inaccuracies and a discrimination notice [See RPI Form 219 §§5 and 6]; and
signatures of the applicant(s), confirming they received a copy.