No, the new lender (For my buyer) denied the loan because of that clause - and they said it was a Fannie Mae guideline.
A number of things might be at work:
Sometimes the broker can't find someone to place a loan for something he should have known all along and they come up with some baffling reason. (Like one time I had a buyer who said she worked for Verizon but she was a temp, so we went out shopping and day before closing we find out the deal is not going through and they tried to spin it..)
Yes, the seller should pay the outstanding dues prior to or at settlement. (unless you checked the wrong box on the contract!)
Anything that's part of an HOA is going to have a PUD rider.
Fannie does whatever it wants and they have been denying loans even with known exceptions issued by HUD rulemakers.. they just do what they want if they have a distaste for it, don't expect them to swallow it no matter what the book says.