Letters of Explanation are like toilet paper. There's a world of difference between the best and the worst. Prior to automated underwriting, explanations were required for every blemish on the credit
report. Borrowers responded with heart-wrenching
tales of woe, steadfast denials of fault, unconvincing
excuses, and, sometimes, the truth. Recurring themes
were checks lost in the mail, extended vacations,
department store returns credited to the wrong
accounts, and--for upper-end borrowers--negligent
bookkeepers since fired. At closing, some borrowers
refused to sign letters they had no part in writing.
The first generation of Automated Underwriting
Systems (AUS) conditioning required fewer Letters
of Explanation. The rationale was that evaluation of
credit quality should be based on factual data and
that inaccuracies were best handled by disputing, not
explaining. I disagree. An honest Letter of Explanation
gives insight into credit management skills. The dishonest ones often are transparently untruthful, although I
once fell for an articulate sociopath's convincing letter.
His loan was a first payment default.
Abuse of the system does not justify abandoning
the system. No explanation can save abysmal credit.
Conversely, no explanation is necessary for inconsequential lapses. But an explanation for somewhat negligent credit can help decide whether to be conservative on qualifying income or how to handle a property
with marketability issues. The circumstances behind
dated and clustered lates, dated major derogatory
credit, scattered lates after major derogatory credit,
an imperfect mortgage history, or credit-related issues
found elsewhere than the credit report (like judgments on title-work or garnishments on pay-stubs)
A few letters remain lodged in my memory. An
explanation of late payments caused by simultaneous high medical expenses and interrupted income
ended with "It was ketchup soup for a while but we
survived." A letter about seasoned funds stated the
borrowers "saved all the money we could not possibly
spend." Both letters were endearing and acceptable.
An eye-opening letter described devastating property demand after an earthquake justified mortgage
default. The loan was denied since the property was
miles from the affected area, and Federal Emergency
Management Agency (FEMA) financing was readily
available. Not long after, the same loan request was
received from a different source with a letter blaming
By Anne Elliott UNDERWRITING