Past credit performance is the most useful guide to use when

• determining a borrower's attitude toward credit obligations, and
• predicting a borrower's future actions.

Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower's credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.

When analyzing a borrower's credit history, examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments.

A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty.

The lender must document the analysis of delinquent accounts, including whether late payments were based on

• a disregard for financial obligations
• an inability to manage debt, or
• factors beyond the borrower's control, such as
• delayed mail delivery, or
• disputes with creditors.

Minor derogatory information occurring two or more years in the past does not require an explanation. Major indications of derogatory credit, such as judgments, collections, and other recent credit problems, require sufficient written explanation from the borrower. The explanation must make sense, and be consistent with other credit information in the file.

TOTAL Scorecard Accept/Refer Recommendation

The TOTAL Scorecard Accept recommendation does not require an explanation for adverse credit, or other derogatory information; however, there must be evidence of payoff for any outstanding judgments shown on the credit report.

The TOTAL Scorecard Refer recommendation requires an explanation for major indications of derogatory credit, such as

• judgments and collections, and
• any minor indications within the past two years.

Reference: For more information on the TOTAL Scorecard recommendations, see Pages 18 & 19 of the TOTAL Mortgage Scorecard User Guide at http://www.hud.gov/offices/hsg....

The lack of a credit history, or the borrower's decision to not use credit, may not be used as the basis for rejecting the loan application.

Some prospective borrowers may not have an established credit history. For these borrowers, including those who do not use traditional credit, the lender must obtain a non traditional merged credit report (NTMCR) from a credit reporting company or develop a credit history from

• utility payment records
• rental payments
• automobile insurance payments, and
• other means of direct access from the credit provider.

TOTAL Scorecard Accept Recommendation

If TOTAL Scorecard has issued an Accept recommendation, additional development of credit history is not required.

Reference: For more information on the TOTAL Scorecard recommendations, see the TOTAL Mortgage Scorecard User Guide at http://www.hud.gov/offices/hsg....

Only if a NTMCR does not exist or such a service is unavailable may a lender choose to obtain independent verification of credit references. Lenders must document that the providers of non traditional credit do exist, and verify the credit information. Documents confirming the existence of a non traditional credit provider may include

• public records from the state, county, or city, or
• other documents providing a similar level of objective information.

To verify credit information, lenders must use a published address or telephone number for the credit provider and not rely solely on information provided by the applicant.

Rental references from management companies with payment history for the most recent 12 months may be used in lieu of 12 months cancelled checks. Credit references may also be developed via independent verification directly to the creditor. If a method other than NTMCR is used to verify credit information or rental references, all references obtained from individuals should be backed up with the most recent 12 months cancelled checks

Lenders may use a non traditional mortgage credit report developed by a credit reporting agency as an alternative method for developing a credit history. Use of this type of report requires that the credit reporting agency has verified

• the existence of the credit providers
• that the non-traditional credit was actually extended to the borrower, and
• the creditor has a published address or telephone number.

Reference: For more information on non traditional credit reports, see HUD 4155.1 1.7.