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"As Lenders Clamp Down, Credit Scores Take a Hit"

on Tuesday, 08 January 2013. Posted in CLA News Coverage

By Kathy Chu and Sandra Block, USA TODAY
Long after the economy recovers, millions of Americans will be left with a grim legacy of the recession: damaged credit scores, the three-digit ratings that help determine consumers' ability to get loans and other types of credit.
Even though some consumers have seen their credit scores improve as they trim their debt, others have seen their scores drop significantly because of late payments on bills, foreclosures and rising credit card debt.

Meanwhile, lenders' actions during the recession are delivering another blow to borrowers — even some with pristine credit. Lenders are closing credit card accounts and lowering credit limits for millions of consumers and business owners who have never paid late. Some lenders are reporting mortgage modifications in a way that dings consumers' scores, dealing a setback to those trying to get their finances on track.

More lenders also are adopting a new scoring model the financial industry believes is better at predicting risk — but that could move consumers' scores more than 20 points up or down. The most widely used credit score, the FICO score, ranges from 300 (poor) to 850 (excellent). Consumers with scores above 750 generally qualify for the lowest-rate loans.

"The credit environment has a whole lot of moving parts that weren't there three years ago," says John Ulzheimer, president of consumer education for Credit.com. "Consumers can't just sit still and expect all is well."

From the third quarter of 2006 to the second quarter of 2009, the number of consumers considered "deep subprime" — with such low credit scores they qualify for credit only at steep interest rates, if at all — rose from 34.4 million to 39.8 million, according to research by the Experian credit bureau and Oliver Wyman, a consulting firm.

Meanwhile, the percentage of "superprime" consumers, who are able to qualify for the best rates, dipped in recent quarters, partly because more people paid their bills late, the firms found.

Lenders say they're taking steps to reduce their risk in a difficult economy. Some admit they're concerned about the impact of their actions on consumers' credit scores but say they have no control over how scores are determined.

"Banks have no motivation to take an action that will impair someone's ability to obtain credit," says Claudia Callaway, partner at Katten Muchin Rosenman, a law firm that represents lenders.

But consumer advocates say regulators and Congress need to address lender actions that are unintentionally hurting credit scores. They say that as underwriting standards tighten, even a small change in a credit score could affect what rate consumers get on a loan — if they get one at all. Some analysts also say the fact that consumers' credit scores can fall even if they've never missed a payment or exceeded their credit limits raises questions about the score's usefulness.

"All these changes are new structural changes in the financial system," says Leonard Bennett, a Newport News, Va., lawyer who has testified before Congress about credit-reporting issues. "The ability to predict risk and integrate that into a credit score — based on historic data — is logically impossible."

But Tom Quinn, a vice president at Fair Isaac, which created the FICO credit score, says its data show the scoring formula "is working," because it's able to rank consumers' riskiness.

For now, with little guidance from regulators, lenders are moving ahead with actions that could lower many consumers' credit scores and hinder their ability to get credit. Here's how:

 

1. Cutting credit card lines

As lenders slash credit card lines and close accounts, they're raising the percentage of available credit that consumers are using — a key factor in FICO credit scores — and making many people look riskier to lenders. By the end of 2010, lenders will eliminate $2.7 trillion of the $5 trillion in available credit on cards, analyst Meredith Whitney says.

Surprisingly, those who pay their bills on time and don't go over their limits are experiencing the bulk of lenders' reductions, industry research shows. These consumers often have a lot of unused credit. By paring back this available credit, lenders are freeing up capital they're required to hold against the loans in case consumers default.

Mary Lou Reid of Arcadia, Calif., is an unwitting symbol of the lenders' actions. Despite being a financial planner and having a perfect payment record, she's had 68% of the available credit on her credit cards eliminated over eight months.

When USA TODAY profiled Reid earlier this year, Chase had closed two of her accounts, citing inactivity. Since then, four other lenders have closed or cut limits on eight accounts. One lender also more than doubled her credit card interest rate, prompting her to close the account.

Reid says the lenders' moves have taken a toll on her credit scores.

Her FICO scores have dropped — each of the three major credit bureaus (Experian, TransUnion and Equifax) has its own FICO score — with her Experian score plunging the most, down 52 points to 722. She attributes the lower credit scores largely to lenders' credit reductions. As multiple issuers closed or reduced her credit lines, Reid says, she borrowed from an inactive card to try to prevent it from being closed.

Because of the lenders' actions, she says, she's halted the expansion of her office. She's also cut back on buying major business supplies and hiring workers at a time when the economy could benefit from a boost in consumer spending. "I'm angry that I spent years dotting my i's and crossing my t's, and this is where it has gotten me," says Reid, 62.

Chase declined to comment on Reid's situation. In a mailing earlier this year, it stated, "If we close your account or suspend your credit privileges or any feature, we will not be liable to you for any consequences." Bank spokeswoman Stephanie Jacobson says the bank is trying "to be more transparent" in such cases.

From October 2008 through April, an estimated 24 million U.S. card holders had their credit card limits reduced or accounts closed, even though they had no new "risk triggers" such as late payments in their credit reports, Fair Isaac says. Of that group, 8.5 million saw their credit scores fall.

Most consumers saw "little impact" to their FICO scores, Fair Isaac says, with a typical drop when it happened of less than 20 points. Yet a 20-point drop can be disastrous and mean paying up to $552 more a year in interest on a home equity loan, Fair Isaac and Informa Research Services data show.

Credit line reductions are particularly problematic for small businesses, says Todd McCracken, president of the National Small Business Association. A 2009 NSBA survey shows that 59% of small businesses use cards to finance their business. This survey also shows that 41% of businesses had their card limits cut from April 2008 to April 2009.

Marilyn Landis, 56, a small-business owner in Pittsburgh, says that in the past year she "hunkered down" to cut her card balances. As she did so, one issuer lowered her card limit by $5,000 — to $100 above her balance — without citing a specific reason. Then another issuer sent her a letter saying that because her credit score had dropped, it was lowering her credit limit. (She didn't check to see how much her score dropped.)

"I'm paying my balance down, and the end result is that I end up with a worse credit score and less credit availability," says Landis, whose firm analyzes businesses' balance sheets and inventory systems. "That's a lousy cause and effect."

 

2. New credit scoring

More than 400 lenders have begun testing or using a new version of the FICO credit score — called FICO 08 — including five of the USA's seven largest banks. The model is expected to more accurately assess consumers' riskiness, which could help lenders trim their losses. The new score emphasizes how much available credit consumers are using, says Fair Isaac, because its data show that consumers with higher usage tend to be much riskier.

But the switch comes as lenders are cutting credit lines, making it appear that consumers are using more of their credit even if they have done nothing wrong. "It's bad timing," says Bennett, a lawyer for consumers on credit issues. The new score "adds unpredictability to the financial system."

 

3. Loan modifications

A growing number of cash-strapped consumers are working with lenders to modify their mortgages so they can stay in their homes. But these modifications could wreck consumers' credit.

A modification is typically a change in loan terms. Usually, the interest rate is reduced temporarily to lower monthly payments. The amount of principal owed isn't changed, and no debt is forgiven.

But such arrangements can damage a credit score because of the way lenders report loan modifications to credit bureaus. Under Credit Data Industry Association rules, loan modifications are reported as "partial payments." This could result in "a serious hit to your score," Ulzheimer says. "The argument we keep getting is that if you modify your loan, it means you can't afford it," he says. "That's not true. If you modify a loan, that could be a ... decision to lower your payment."

Borrowers who have done a loan modification may not know that their score has been hurt until they're rejected for a loan or get a notice that their credit card account has been closed, he says.

Cathey and Glenn Hargrove of Tampa applied for a modification in March after Glenn, 55, lost his job as an environmental consultant. They were approved for a trial modification in May and made all their payments on time, Cathey says. But the couple say their mortgage servicer, CitiMortgage, reported to the credit bureaus that they made partial payments that were delinquent. They recently learned that their modification had been denied.

Their Equifax FICO score plummeted to 635 from 801, then returned to the high 700s after CitiMortgage corrected the record to show their payments weren't delinquent, Cathey says. Their TransUnion FICO score, however, went from 801 before the modification to 645 and hasn't budged.

Spokesman Mark Rodgers says CitiMortgage generally doesn't comment on individual situations. The government's modification program says the lender "must report" the payment so it complies with the Credit Data Industry Association, he says.

The industry should come up with another way to classify loan modifications, Cathey Hargrove says. "If we were a bad credit risk, it was going to show up before this," she says. "If you haven't seen that, do we really deserve to look like 645?"

"Credit Error? It Pays to Be On VIP List"

on Tuesday, 08 January 2013. Posted in CLA News Coverage

Credit Error? It Pays to Be On VIP List. - New York Times

By TARA SIEGEL BERNARD
Published: May 14, 2011

The credit rating bureaus, whose reports influence everything from credit cards to mortgages to job offers, have a two-tiered system for resolving errors — one for the rich, the well-connected, the well-known and the powerful, and the other for everyone else.

The three major agencies, Equifax, Experian and TransUnion, keep a V.I.P. list of sorts, according to consumer lawyers and legal documents, consisting of celebrities, politicians, judges and other influential people. Those on the list — and they may not even realize they are on it — get special help from workers in the United States in fixing mistakes on their credit reports. Any errors are usually corrected immediately, one lawyer said.

For everyone else, disputes are herded into a largely automated system. Their complaints are often electronically ferried to a subcontractor overseas, where a worker spends, on average, about two minutes figuring out the gist of the matter, boiling it down to a one-to-three-digit computer code that signifies the problem — “account not his/hers,” for example — and sending a dispute form to the creditor to investigate. Many times, consumer advocates say, the investigation translates to a perfunctory check of its records.

“The legal responsibility of the credit reporting agencies and of the creditors is well established,” said Leonard Bennett, a consumer lawyer in Newport News, Va. “There is a requirement that they do meaningful research and analysis, and it is almost never done.”

Consumers who have trouble fixing errors through the dispute process can quickly find themselves trapped in a Kafkaesque no man’s land, where the only escape is through the court system.

“You are guilty before you are proven innocent in a situation like this,” said Catherine Taylor, 45, of Benton, Ark., who said she had been denied employment and credit because her filing was mixed up with a felon who had the same name and birthday.

Judy Johnson of Bossier City, La., was confused with a less creditworthy Judith Johnson, with a similar address and Social Security number. For nearly seven years, Judy Johnson, a 63-year-old credit manager for a building supply company, said she tried to remove the black marks from her credit report. But when she was denied a credit card, she knew the problem had returned — a third time. “This time, I was livid,” she said.

She ultimately brought a suit against one of the bureaus, and recently settled for an amount she cannot disclose. But the problems still linger. A deputy sheriff recently came to her door to serve her papers for a debt she says she does not owe.

The credit rating bureaus, private-sector companies that each attempt to track all American consumers’ credit use, have grown much more powerful over the last couple of decades as credit has become a crucial cog in the nation’s financial system. Their reports are used to formulate the all-powerful credit score, which lenders use to determine creditworthiness.

But as the bureaus’ work has become more important, consumer advocates say, regulation has not kept up, in large part because their overseer, the Federal Trade Commission, lacks broad authority. That could change once responsibility for the credit bureaus shifts to the new Consumer Financial Protection Bureau, which will be able to write rules and examine the credit agencies’ policies.

The bureaus, meanwhile, do not have an economic incentive to improve the system, consumer advocates say, because their main customers are the creditors, not consumers.

“There is no neutrality in the credit reporting agencies,” said John Ulzheimer, who has been an expert witness in more than 80 credit-related cases and is president of consumer education at SmartCredit.com. “They work for the lenders who buy credit reports from them, and anyone who suggests otherwise is not being intellectually honest.”

When asked about the V.I.P. category, TransUnion said all consumers “have the ability to speak to a live representative.” Equifax said consumers who received a free copy of their credit report were provided with a number for customer service.

Experian denied that it had V.I.P. lists. But a spokeswoman did say that prominent people deemed high risk — like politicians in an election year — might have their credit files taken offline so that creditors or other companies making inquiries could not get access without the bureau’s permission. Experian said those people did not receive any other special handling.

David Szwak, a consumer lawyer in Shreveport, La., who has handled dozens of credit cases, said that the V.I.P. designation and preferential treatment did exist at Experian, and he provided sworn testimony from former Experian employees that the category existed.

Estimates of credit reports with serious errors vary widely, anywhere from 3 to 25 percent. A recent study, paid for by the Consumer Data Industry Association, the trade group for the bureaus, found potential errors in 19.2 percent of reports, but said that less than 1 percent of them had disputes that, when settled, resulted in a meaningful increase in scores. Even 1 percent translates into millions of consumers, since there are at least 200 million files at each of the bureaus.

The F.T.C. is expected to deliver a nationwide study on credit report accuracy next year that could provide more clarity. It could also include recommendations for legislative action.

The volume of disputes has been rising as consumers borrow more and gain greater access to credit reports. The automated system was a response to that. A spokesman for the trade group said most consumers received an answer within 14 days.

Experian is the only bureau that still processes disputes in the United States, experts said, though most complaints wind their way through the same online system — unless the dispute involves a V.I.P.

“They get a lot more high-end treatment,” said Mr. Szwak, the lawyer, who has read the bureaus’ internal procedure manuals and deposed or cross-examined employees. The biggest difference at TransUnion and Equifax, lawyers said, is that V.I.P.’s disputes are specially handled domestically. Regular consumers’ files, meanwhile, may get priority treatment if they involve a time-sensitive issue, like a mortgage pending, or if the consumer is represented by a lawyer or dealing with fraud.

Last year, new rules went into effect to strengthen existing regulations on the accuracy of reports. The rules also allow consumers to dispute errors directly with the creditor. But critics say the rule lacks any teeth because consumers don’t have the right to sue the companies. (Individuals can, however, sue the bureaus and creditors after lodging a dispute through their system.)

But the problem, advocates say, is that consumers cannot vote with their feet. “They cannot remove their information from the bureaus,” said Chi Chi Wu, a staff lawyer at the National Consumer Law Center, who wrote a report on the automated dispute process in 2009, “or take their business elsewhere.”

Brim v. Midland Credit Management

on Tuesday, 08 January 2013. Posted in Recent Litigation

a $723,000 verdict

In a Fair Credit Reporting Act (FCRA) case, a federal jury returned a verdict for CLA's client Mr. Brim and against debt buyer Midland Credit Management in the amount of $723,000.  As a prevailing party under the FCRA, Mr. Brim is now entitled to have his attorney's fees and costs added to the verdict.

At trial, the evidence showed that Mr. Brim had paid his Dell account off within 30 days of purchasing his computer via a check by phone.  However, Dell never properly posted the payment.  Mr. Brim disputed with Dell for several years and then Dell sold the account to Midland.  Midland immediately began reporting the account on Mr. Brim's credit report.  Brim disputed to the consumer reporting agencies (CRAs) on numerous occasions, and a total of 9 notices of electronic dispute were sent to Midland from the CRAs.  Midland claimed not to have received all of them but every one of the electronic dispute notices (ACDVs) received by Midland was handled by its "Batch Interface System".  

Midland never had a single person actually investigate any of the ACDVs and it never contacted Dell.  Midland's position was that it had no responsibility to do anything because its computer "investigated" the dispute when it reviewed the information in Midland's system and compared it with the informatio supplied by the CRAs.  Midland's other position was that even if they had contacted Dell, the result would have been the same.  

The jury disagreed, found that Midland willfully failed to investigate and awarded $100,000 in actual damages and $623,180 in punitive damages.

Inaccurate Credit Reports

on Tuesday, 08 January 2013. Posted in Credit Reports, Credit Learning Center

Main Reporting Agencies: There are three main national consumer credit reporting agencies (CRAs): Experian Information Solutions, Inc., Equifax Information Services, LLC, and Trans Union LLC (the "Big Three").

How CRAs Get Information: Experian, Equifax and Trans Union all collect information from court records, banks, credit card companies, finance companies, department stores, cellular phone companies, court records, and many other companies issuing credit. The Big Three do not necessarily have the same credit information because not all creditors send reports to all three agencies and the agencies do not all collect information from the same public records. One CRA may have incomplete information, for instance reflecting a tax lien but not the amount or the fact that it was released. Another might not even report the first lien.

Your Credit Report Is Constantly Changing: A credit report is not a paper file kept in one place at a credit reporting bureau. This is part of the reason correcting credit errors can be so frustrating. The credit reporting bureaus have all your information saved in a particular format in a big, interconnected database. Your information is maintained with everyone else's. When a credit reporting bureau receives information from creditors and others, it all goes into one big "vat" of information or a few different vats owned by affiliated companies.

When a business inquires into or "pulls" your credit report, a search program or algorithm pulls information from this vat based on your "personal identifiers" such as your name, address, date of birth and social security number. It is kind of like an internet search engine algorithm, except of course the credit reporting algorithm should be very selective in what it includes. The search algorithm is supposed to filter out obsolete credit information and credit information that doesn't belong to you. The remaining information is combined into one report. Your credit report isn't something fixed since the information used to create your credit report is constantly changing as creditors pour information into the vat.

 

Obtaining a Free Copy of Your Credit Report

Consumers may obtain a free copy of their consumer report online once every 12 months. Simply go to www.annualcreditreport.com and request your complimentary Equifax, Experian and Trans Union profiles.

You are also entitled to a free report within 60 days of ANY credit denial. The agency on which denial is based will be mentioned in the notice that you receive from the company that denied your credit application.

 

Reading the Report

When you get your credit report the credit reporting agency may include a pamphlet or similar paperwork explaining how to read their particular format. There are generally five sections as follows:

Identification Information: This section usually includes your name, address, social security number, date of birth, former addresses, your employer's name, your job description and possibly your home phone number.

Credit History: This section shows various accounts and how timely you paid on them. There are two main types of accounts you see under "credit history." The first is revolving credit - meaning the minimum amount owed may be definite, but the payment due each month can be variable. This is typical of credit cards. Second is "installment accounts" - a definite amount due in fixed installments. A mortgage payment is typical of these, as are student loans. Underneath the accounts, it may reflect how and when payments were made on them. The credit bureaus break-down the account if there are late payments to show how many payments are 30, 60, 90 and 120 days past due (and some indicate later past dues of 150 days). Thus (3)(30), (2)(60), (1)(90) means you have paid three times past 30 days, two times past 60 days and once 90 days past the due date. If an account is fairly old, it may state that it is a "charge off", if you paid it after it was charged off it may state that it is a "paid charge off."

Collection Accounts: These accounts are being collected, usually by a collection agency, but sometimes also by companies that buy huge portfolios of charged off debt as well as some law firms.

Public Records: These records are usually obtained by a contractor for the credit bureaus. The contractor goes through the public records maintained by various courts and county records offices. Bankruptcies, judgment, satisfaction of judgment, tax liens, releases of tax liens and foreclosures are just some of the records that can go from the public record into your consumer report.

 

Speak to a Consumer Attorney Immediately

Once you have noted and documented errors in your credit reports, it is critical that you speak to an attorney who understands the various rights afforded to you by the Fair Credit Reporting Act.  The law requires that you dispute the inaccuracies to the consumer reporting agencies and specifically notify them of the problem(s) in your report. The credit bureaus must then notify the companies that published the information on your report about your dispute.  

When you reach the point where you are dealing with the dispute process, please contact us or another consumer attorney as soon as possible.  

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