FHA Pulls Back on “Collections Debt” Rule on Lending

Two week ago, the Federal Housing Administration (FHA) warned that it would no longer be lending the borrowers with more than $1,000 in disputed debt on their record unless the borrower cleared the debt or entered a payment plan and demonstrated a good-faith effort (three months of participation) in paying it. Then, a week later, the FHA decided to exclude “life-event related debt” like divorce, job loss, and death, from the equation. Yesterday, the FHA backed off even further, postponing implementation of the rule until July of this year – it originally went into effect April 1, appropriately enough – and announcing that it would be considering additional changes to the policy.

Critics of the new rule protested that borrowers with good credit but disputes on their credit report might be denied a loan for as little as $1,000 owed. Although the FHA allowed exceptions for identity theft, people paying on their debts, and any debts more than two years old, opponents were still concerned that the regulation would severely limit eligibility for FHA loans, particularly in terms of younger would-be homebuyers who often have “steep debt in the form of college and graduate school loans” and are also struggling with unemployment to the tune of 16.3 percent for Americans age 16 to 24 years of age. The FHA announced that it would delay the new rule in order to “allow mortgagees additional time to adapt their procedures to implement portions of the new guidance” and to “seek additional input on the rule.”

According to the Ellie Mae Origination Insight Report, FHA-insured loans accounted for a quarter of all new market share in February 2012. Do you think that this is a good thing? Should the new rule go into effect in July?

*God Speed*
TLD Investments LLC


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