30 posts categorized "Credit Reporting"

The Evidence on Pre-employment Credit Checks

posted by Bob Lawless

Senate BillElizabeth Warren, a blogger who left Credit Slips for the lesser fame of the U.S. Senate, has introduced the Equal Employment for All Act, which would bar credit checks for most pre-employment screening. A few states already have taken steps in this direction, with varying levels of efficacy. Senator Warren's bill would institute a federal ban and has been widely reported elsewhere (see here (Slate Salon) and here (CBS) for useful overviews).

The growth in the use of pre-employment credit checks has been the subject of several Credit Slips posts. Katie Porter first noted the development in 2006 and in 2010 discussed Rep. Steve Cohen's bill which was the model for Senator Warren's proposed legislation. Debb Thorne commented about the lack of any evidence connecting credit reports with job performance. Debb's own research documents how "off label" uses of credit reporting undermine bankruptcy's fresh start when credit reports are used to determine things like how much people pay for insurance or whether they get a job.

Senator Warren's bill has attracted opposition from the expected places such as the Consumer Data Industry Association and the Society for Human Resources Management. The former has data to sell, and the latter has services to sell. Those motives do not necessarily make their positions illegitimate. We should keep in mind, however, that there is money to be made in convincing those who make hiring decisions that there are data and services that can unlock the hidden traits of job applicants. 

Continue reading "The Evidence on Pre-employment Credit Checks" »

Woman Wins $18.6 Million Verdict Over Smeared Credit

posted by Nathalie Martin

I had to laugh at a comment made by Ken Doran in response to my post on credit score internet dating.  Ken claimed that while he agrees that people considering joining their lives should share financial information, he wouldn't give a rodent's backside about the future partner’s credit score. Thirty plus years as a consumer bankruptcy attorney has taught him that the reports often contain errors, a fact confirmed by a Federal Trade Commission study finding that 21 percent of reports do contained errors.

With an error rate that big, it is surprising that creditors rely as heavily as they do on such reports. Smeared credit is serious business, though, as a recent $18 million jury verdict shows. Julie Miller of Oregon was awarded $18.4 million in punitive damages and $180,000 in compensatory damages against Equifax, after Miller contacted Equifax eight times between 2009 and 2011 in an effort to correct inaccuracies, including erroneous accounts and collection attempts, a wrong Social Security number, and an incorrect birth date.

Continue reading "Woman Wins $18.6 Million Verdict Over Smeared Credit " »

Finally, A Dating Site for the Money Minded: CreditScoreDating.com

posted by Nathalie Martin

Props to Jodi Helmer for her recent story on creditcards.com about dating and credit scores. I am interested in this development in general and also in how it might jibe with current protocol on who pays for dates. 

For about ten years now, I have taught a weekend class to law and undergrad students on financial self-defense. Sometimes the students practice active listening in pairs about what financial issues trouble them most going forward. While student loan debt always tops the list (more so lately), a fair number of students share fears about the role of debt and credit in finding partners. Helmer’s story tells of the increasing role of creditworthiness in determining partner eligibility. I get it. To me, how one uses credit is one widow into how he or she handles commitment and obligation. A relatively new dating site, CreditScoreDating.com, capitalizes on those who care about credit and helps them find love. A few people who commented in the story thought this was a bad sign but I disagree.  If credit is not important to a person, they can use another site. 

While my clinic students today were not impressed and thought that screening based upon credit scoares was a wee bit superfical, I have always encouraged students to have the money talks sooner, and to unquestionably share credit scores before getting married.  This site helps determine credit compatibility from the beginning. The users will likely be self-selected people for whom credit use is of particular interest.  The site may also draw people who want to talk honestly about debt and credit issues and not shove them under the rug as is often done.

One thing about modern debt and dating that mystifies me is that guys are supposed to pay.  Every year men in my class report that this is the protocol, at least at first.   They also say that dating can put them in the red.  How does this square with equality? It seems wrong for women to care about credit scores if they are not footing the bill?   Back in the day (yes I am an AARP member), women wanted to pay for themselves for the sake of equality and independence, and perhaps for other now antiquated reasons.

Can our younger readers please confirm that this “the guy should pay” rule is indeed in place, and also explain it?  I look forward to learning from you.

Who Do You Want to Believe -- Equifax or the U.S. Census?

posted by Bob Lawless

The Chicago Tribune is running a Reuters story describing a study from Equifax that student loan write-offs totaled $3 billion in the first quarter of 2013. It's an impressive study. According to the story, "Equifax analyzes data from more than 500 million consumers to track financial trends."

Yes, according to the article, Equifax has managed to find about 184 million more people than the U.S. Census says are living in the United States. The credit reporting companies appear to throw around the "500 million" figure as their global reach, not their U.S. database. Does anybody bother to do any reporting anymore?

Facebook & Credit Scores

posted by Bob Lawless

From the February 9th Economist:

Some firms piece together scores by analysing applicants’ online social networks. Professional contacts on LinkedIn are especially revealing of an applicant’s “character and capacity” to repay, says Navin Bathija, the founder of Neo, a start-up that assesses the creditworthiness of car-loan applicants. Neo’s software helps determine if applicants’ claimed jobs are real by looking, with permission, at the number and nature of LinkedIn connections to co-workers. . . .

Neo’s efforts to improve accuracy include recording borrowers’ Facebook data: Mr Bathija reckons that within a year there will be enough evidence to determine if making racist comments on Facebook is correlated with a lack of creditworthiness.

Racists? Sure, let's jack up their borrowing costs. But, if linking to cat videos on Facebook is correlated with a lack of creditworthiness, people are going to get upset.

The article is worth a read as it shows where we might be heading with Big Data and credit scoring. Regulation does and undoubtedly will play a major role in drawing boundary lines around what data can be used in credit scoring. But, where Big Data offers competitive advantages, companies will seek it out. It will be tough to get the genie back in the bottle once the horses have left the barn.

H/t to Frank Venis.

Two very Important FTC Studies, One on Credit Reports and One on Debt Buyers

posted by Nathalie Martin

A recent FTC study of errors in credit reports is getting a lot of press. According to the most recent in a number of studies of the accuracy of credit reports, about 5% of U.S. consumers have an error on their credit report that is serious enough to increase their cost of credit. Although the credit industry is arguing that this is a small percentage (and I agree that this is a lot smaller than I expected), the head of the FTC does not consider it small. "These are eye-opening numbers for American consumers," said Howard Shelanski, director of the FTC's Bureau of Economics. "The results of this first-of-its-kind study make it clear that consumers should check their credit reports regularly. If they don't, they are potentially putting their pocketbooks at risk." The industry quickly noted that the errors in the other 95% do not affect people’s credit.

Continue reading "Two very Important FTC Studies, One on Credit Reports and One on Debt Buyers" »

MyConsumerTips.info

posted by Amy Schmitz
I have been working for a few years in developing and creating a consumer outreach website at MyConsumerTips.info.  The site is purely non-profit and has no sponsors or advertisers. It aims to simply provide consumers with “consumer tips” that change each day, independent summaries regarding debt-related and other consumer rights, quizzes and polls regarding such issues, and other consumer protection resources. It is user-friendly and interactive. This is part of my larger “Consumer Empowerment”service and experiential learning projects, and outreach endeavors.

Unfortunately, it is tough to gain traction for such non-profit sites without paying for promotions through Google or others. Also, there so many sites that purport to provide consumer resources that individuals suffer information overload and are not sure what to trust.

Hopefully, MyConsumerTips.info will deservedly gain trust, do some good and expand in ways that benefit consumers!  Check it out.

Hey Dude, What’s Your E-score

posted by Nathalie Martin

Following on to my Acxiom story last week,  check out yesterday’s NYT story on e-scores.  The e-score is a private digitized ranking of consumers in the range of 0 to 99 that tells marketers your full socio- economic status, including your occupation, salary, and home value. It also reports on your distinct spending habits, such as the percentage of income spent on luxury goods, hotels, etc. Supposedly, the algorithm perfectly predicts spending and obviously knows more about us than we do. I’d like to know mine actually, but they are not available to us. The e-score process is entirely nontransparent and obviously not regulated.

Perhaps this is not news or even new, but it is interesting. The data are used to know to whom to spam, er..market, and also to know to whom to send the really great deals (the wealthier people, dud..) and to whom to send the ads for subprime loans, vocational and for-profit universities, payday loans, etc.

Customer service also differs for different scores. For example if a high-scoring person calls a credit card company, the person is directed to an elite agent, while the poor schmoes at the bottom get sent to an overseas call center. The same system is used to determine which insurance products to offer to whom.

Continue reading "Hey Dude, What’s Your E-score" »

Credit for Parenthood (in the Wall Street Journal)

posted by Melissa Jacoby

Wall Street Journal Reporter Jessica Silver-Greenberg casts a spotlight on the market for fertility treatment loans - including loans that enable the purchase of other women's eggs  - in the article "In Vitro a Fertile Niche for Lenders."  (subscription required). Perhaps this will prompt some coverage of the adoption loan market, which also has very interesting not-for-profit lending options; the direct financial price of the credit may be low but some complicated strings are attached. My earlier efforts to broadly evaluate the impact of loans in these markets are here and here

Keeping Up with the Joneses: Credit Score Edition

posted by Katie Porter

Do you have good credit? Compared to whom? While your credit price may depend largely on how your credit fares against objective criteria (above 680 to avoid being "subprime," for example), do you ever wonder how you are doing compared to everyone else? Maybe you think the national banks would give credit to a ham sandwich; what you want to know if whether you are  keeping up with the Jones in managing your financial behavior.

Experian provides a chance to test your credit against your neighbors with its National Score Index. (Hat tip to Harvard student Mazen Elfakhani for letting me know about this). Using this tool, you type in your zip code and out pops the "score index," the average credit score based on a representative sample of consumers, for the nation, region, state, and your area. You also get comparable figures on other credit statistics like debt, late payments, and credit inquiries.

The areas are pretty broadly defined, like "Boston area," so you can't really see how you compare to the Jones family on your street. But it's still kind of fun, especially for someone like me who seems to move all the time. This year, Cambridge, MA: 715 score; last year, El Cerrito, CA: 708; prior years, Iowa City: 721. How am I doing? That will have to wait for another blog post; I'm definitely not paying Experian for my credit score.Remember that what you are entitled to one time per year for free is your credit report, not your score. That site: www.annualcreditreport.com, and as the FTC explains, there are lot of imposter sites and efforts to get people to pay for their credit scores when they are only trying to access the free report.

Foreclosures in Violation of the Servicemembers' Civil Relief Act

posted by Adam Levitin

A few months ago, after the robosigning scandal broke, the banks assured us that they had done a thorough review of their foreclosure processes and everything was in order.  I seem to recall JPMorgan Chase's CEO Jaime Dimon stating in an Oct. 13, 2010 earnings call, "for the most part by the time you get to the end of the process we're not evicting people who deserve to stay in their house." Thus, by mid-fall, the banks had sounded the all clear sign, and said it was safe to go back in the waters. 

And yet now we learn that JPMorgan Chase has been engaged in wide-scale violations of the Servicemembers Civil Relief Act, including overcharging active duty military members on their mortgages and wrongfully foreclosing on their homes.  That's a lot of egg on JPM's face right now.  I guess, given the scope of JPMorgan's foreclosures, Dimon's "for the most part" statement is true, but it hardly instills confidence that our foreclosure process is working properly.

Banking is a business based on trust, and the farther we go down the foreclosuregate rabbit hole, the harder it becomes to believe the banks.  How many times are we going to keep believing the "there's nothing to see here folks" line?  Can we trust Jaime Dimon when he tells us that the situation is under control?  What happens to our financial institutions when they lose their credibility with the public?

Footnote:  anyone want to specultate on whether JPM as a servicer is liable for FDCPA violations? How about FCRA?

Let’s Stop Praying to the Credit Score

posted by Nathalie Martin

Mortgage brokers, and those hoping to buy homes, are disgusted by the preeminence of the credit score in “scoring” a home loan today. According to an article, in Friday’s New York Times, this overemphasis on credit scoring in the home mortgage market is not helping the economic recovery either, because people just cannot qualify for a home. Some people’s scores have decreased even though they have done nothing differently. The author’s interesting article recounts many mistakes in his own credit report, a common phenomenon as it turns out.  The author is so disgusted he thinks the CFPB ought to take up credit reporting and scoring as a high priority once it is up and running.

I agree that this is a shame, all this focus on credit scoring in lending, but I also think consumers can whip themselves into a frenzy over these scores, even when they do not want, need, or plan to use future credit. Always remember what the score is for, to qualify for more credit. Staying out of debt is as good a strategy as any for keeping the score high. Students acquire more credit cards than they need in order to get three open items.  Before they know it, their scores are lower because they cannot pay. I know a terminally ill woman, with no job and no intention to take on any more credit.  She wants to keep paying dribs and drabs on her enormous medical debts to protect her score until the end. Why?  I hate to give these scores, and the agencies that create them, more power over us than they deserve.

Wanted: People with Good Credit for Low-Paying Jobs

posted by Katie Porter

Despite the increased proportion of Americans who are behind on their mortgages or have lost their houses to foreclosure, the practice of doing credit checks on prospective employees continues to climb sharply in popularity. The Society of Human Resources Management’s recent survey found that 60 percent of employers run credit checks on at least some job applicants; back in that “healthy” economy of 2006, the comparable figure was 42 percent. The growth in credit checks by employers is some evidence to counter arguments that the stigma of financial distress, bankruptcy, or foreclosure is falling as more and more Americans struggle to meet their debt obligations. Employers seem to be taking the opposite tact, with the weak labor market permitting them to be increasingly selective about whom to hire. Credit checks are a fast and cheap way to screen out candidates. And one in 8 employers checks the credit of every applicant for every job--meaning that people like janitors and retail workers can suffer employment discrimination on the basis of their credit.

Continue reading "Wanted: People with Good Credit for Low-Paying Jobs" »

Experian and FreeCreditReport.com Sink to a New Low

posted by Bob Lawless

One of the many banes of my existence is FreeCreditReport.com. Not only do their ads play incessantly during any sporting event that I care to watch, but my children also used to walk around the house singing the catchy tunes featured in the commercials. That behavior--along with all other forms of fun--has been banned in the Lawless household. And, I suppose I have raised an existential question of whether one can have multiple banes against one's being.

FreeCreditReport.com, of course, is not free. To use the service, you must enroll in "Triple Advantage," a credit monitoring service that you can get for the not-so-low price of $14.95/month. The Federal Trade Commission (FTC) had recently taken action to prevent these sorts of abusive practices. Under rules that just went into effect, any web site that purported to offer a "free" credit report had to include prominent text and a link at the top of the page directing consumers to AnnualCreditReport.com, which is the legitimate site offering consumers to request a free credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.

In what appears to be a transparent attempt to evade this new regulation, FreeCreditReport.com's owner, Experian, has begun charging $1 for FreeCreditReport.com and says it will donate the $1 to charity. Under Experian's reasoning, FreeCreditReport.com is no longer "free," and hence it doesn't have to comply with the new FTC rule. Will it comply with truth-in-advertising laws (and common decency) and rename its site "OneDollarCreditReport.com?" That won't make for as catchy of a tune, I suppose.

For further information, read Ron Lieber's article in the New York Times about Experian's move and the FTC's web site about free annual credit reports. There is also the news that the actor in the FreeCreditReport.com ads is French-Canadian, now making poutine only the second-most questionable cultural development to come out of Quebec.

Things That Have Piled Up

posted by Bob Lawless

Long time readers of Credit Slips may have noticed that my blogging has flagged the past few months. That is because my colleagues, Jennifer Robbennolt and Tom Ulen, and I have been working on a text entitled Empirical Methods in Law. It is intended to be a user-friendly guide to the topic, useful (we hope) as both a deskbook and a textbook. It should be out later this year, and I'll try to say more about it.

In the early part of this past week, I was at the annual meeting for the National Conference of Bankruptcy Judges (NCBJ). It was in Las Vegas, which is always fun, but for me I got to meet up with many of my former colleagues at UNLV. The NCBJ meeting is always great. The panels are a good mixture of day-to-day practicalities and the big picture. Plus, you often get to hear what is on the judges' minds. There were about 1800 attendees this year--so I understand--if you're a bankruptcy lawyer it's worth going if you never had a chance. Next year, it's in New Orleans.

Between our book and my trip--oh, and I had to do a faculty workshop on Thursday--a few things piled up.

Continue reading "Things That Have Piled Up" »

Does a Tarnished Credit Report Equal an Untrustworthy Employee?

posted by Debb Thorne

Last week, the NYT ran a piece describing how common it has become for employers to use the credit report as a screen device for job applicants ("Another Hurdle for the Jobless: Credit Inquiries"). In a nutshell, if your credit report shows too much debt, a bankruptcy, or a low credit score, employers don't want you.

Based on some of the employers' comments in the article, there seems to be a widespread belief that a tarnished credit report necessarily results from "bad decision making" and that it is evidence that an employee is "unreliable, unwise or too susceptible to temptation to steal."

Continue reading "Does a Tarnished Credit Report Equal an Untrustworthy Employee?" »

Mortgage Servicing Problems for Prepayments

posted by Adam Levitin

With all the problems in the mortgage industry caused by defaults, it's easy to forget that the traditional bugbear of mortgage lenders isn't credit risk, but prepayment risk.  If a lender contracted for a 6% return and the loan is prepaid, there's a chance that the best return the lender can get now is say 4.5%. 

As it turns out, prepayments can cause just as many problems for servicers as defaults.  Recently, one of my relatives laid into me with this story about her problems getting her servicer to correctly credit her prepayments.  The servicer has been crediting them all to interest, not to principal, so the loan balance isn't getting paid down (and the servicer is making more money that way, at the expense of the investors).  What's worse, is that the servicer says it can't correct the problem because some of the prepayments were made before it acquired the servicing rights.  And, the servicer says that if it corrected the problem, it would result in the account being listed as 30-days late and credit reported because the servicer did not make an automatic withdrawal one month because it treated the prepayment as a regular (but partial) payment (even though the total prepayments should put the loan way ahead on its original amortization schedule). 

Put another way, the servicer is saying that they cannot produce an accurate payoff balanceand that if the homeowner demands one it will result in her being credit-reported incorrectly. 

This aggrevating situation illuminates what a mess the mortgage servicing world is in.  For all of the attention justly paid to mortgage servicing problems with defaulted homeowners and servicing fraud in the context of default, my relative's case makes me wonder whether the rot in the servicing industry extends all the way up the tree, to an inability to properly handle transferred servicing rights and an inability to properly handle prepayments. 

And here's the real problem: consumers trust financial institution creditors to be competent and fair.  They trust that balances are right, that APRs are properly applied, that amortization schedules are correct, etc.  Without that trust, the entire system of financial intermediation cannot work.  Financial institutions trade in trust.  Absent that trust, every consumer would have to subject every credit card bill, auto loan bill, mortgage bill, and student loan bill, etc. to a forensic accounting.  That would be astonishingly inefficient.  We shouldn't want consumers to have to be so careful.  It's one thing to expect consumers to look at their bills to make sure that there are no unauthorized line items.  It's another to expect them to run interest and amortization calculations.

For the most part the system works, as it's all highly automated.  But when it doesn't, the power imbalance between the financial institution and the consumer puts the consumer at a serious disadvantage.  We really need a better system for resolving consumer disputes with financial institutions.  I'm not sure what it is, but maybe the trick is to avoid the disputes by making sure the FIs get things right. The least cost avoider of the errors is the financial institution, and we should really have stronger incentives for FIs to get it right. 

It's Not You, It's Where You Shop

posted by Bob Lawless

A lot of stories had been circulating on the Internets and through the Google that consumers were getting hit with lower borrowing limits on the credit cards. Sometimes, they received notice the limit was lowered, and sometimes they found out only when they went to go use the card. American Express was often mentioned. A story is up at the New York Times web that delves into the mysteries of this practice. It helps answer a lot of the questions about what the heck was going on. Cutting through the rhetoric, I understand American Express to be admitting that they were cutting credit scores based on where you shopped. Sure, it was not all done on where you shopped, but it appears that was an important component. As the NYT article suggests, we know American Express was doing it--they say they have stopped--but who else is doing it?

Bankruptcy Risk Scores

posted by Bob Lawless

People talk a lot about credit scores as if there is some magic number hanging over your head and that number is following you everywhere. Isn't there maybe even some commercial like that? Like many things, the perception about credit scores is generally correct but often wrong in the specifics. It is generally correct in that the credit score does follow you just about everywhere. One way, however, that the perception is incorrect in the specifics is that there is nothing magical about the particular scoring system that is used. It's all about the algorithm the credit scoring company uses.

What many people don't realize is that different creditors might use different internal scoring systems to make their own decisions. One such system is the "bankruptcy risk score," which purports to identify which borrowers are more likely to file bankruptcy. The credit scoring companies might tell me that this is not a "credit" score because it is trying to measure something else, but a rose by any other name .... even if these are not particularly sweet smelling roses. Jeremy Simon over at CreditCards.com recently called me about these bankruptcy risk scores, and the article he wrote is here. It's an often overlooked aspect of the credit reporting industry. You may want to check it out.

Credit Rating Agencies

posted by Adam Levitin

Credit rating agencies have begun to be scrutinized as the mortgage market struggles, but the scrutiny has been on corporate credit rating agencies that graded (and essentially blessed) securitized mortgage debt. But what about the consumer credit rating agencies?

Continue reading "Credit Rating Agencies" »

Security Freezes One Year Later

posted by Bob Lawless

My first substantive blog post on Credit Slips was about security freezes. I had become interested in the topic because I thought a "security freeze" was something I could buy at Dairy Queen. When it turned out that a security freeze was actually an alert one could place on one's credit report, I was very disappointed. Basically, a security freeze allows a consumer to tell a credit reporting agency not to release the consumer's credit report without prior authorization using a secret personal identification number (PIN). A security freeze can be useful to mitigate the effects of an identity theft. Nevertheless, security freezes are not for everyone. They come with their own costs and hassle as they will tie up a lot of consumer transactions that otherwise come off without a hitch.

Continue reading "Security Freezes One Year Later" »

FTC Report on Credit Scores in Insurance

posted by Bob Lawless

For anyone who missed it, the U.S. Federal Trade Commission released a report last week about the use of credit scores in the insurance industry. The report is generally favorable to the use of credit scores by insurance companies, finding credit reports "effectively predict the number of claims consumers file and the total costs of those claims." The report also found that, although the use of credit scores were distributed differently for racial and ethnic groups, the predictive power of these scores was not a substitute for membership in these groups. In other words, the credit scores were not duplicating the status of membership in a racial or ethnic group but were capturing something else.

Katie Porter has discussed on Credit Slips the increasing number of "off-label" uses for credit scores--that is, using a credit score for something other than granting credit. Insurance pricing is one of these off-label uses, and the FTC report seems to be a big boost for that practice. Time precludes a more extended analysis here. Those interested in the issue might read the dissenting opinion of Commissioner Pamela Jones Harbour to the FTC's report. The gist of the dissent is that it questions the methodology used in the FTC study, noting it relies primarily on industry-supplied data.

Sitting in the Back Row

posted by Bob Lawless

This semester, I am teaching a required first-year course that teaches principles of statutory interpretation within a specific topic, and for my topic I am teaching the consumer credit statutes. As I have posted about previously, I structured my course as a mini-legislature. Students elected a speaker and adopted their own set of procedures to vote on amendments to the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), or the Illinois Payday Loan Reform Act (ILPRA).

Recently, we had our committee hearings, which consisted of students presenting their proposed legislation to the class. I just sat in the back row and listened. This is depressing for several reasons. First, the more I stay out of their way, the more they apparently learn. I watched presentation after presentation where students had studied each of these statutes, researched the academic literature and public-interest reports about problems with the statutes, and proposed changes to the statutes to make them work better. The other thing one learns sitting in the back row is that are more students than you would hope reading e-mail or surfing the Net instead of listening to their colleagues' presentations (note well if you are one of my students!).

I have been very impressed by the proposals that my students have made, and I thought I would share a few of them here. To catalog all of them would take too many pages, and this post will be long enough as it is.

Continue reading "Sitting in the Back Row" »

Defaulting on inter-family loans

posted by Melissa Jacoby

Major news media outlets have been reporting on a business that manages inter-family or inter-friend loans, focusing on a company called Circle Lending (thanks to Salil Mehra for the tip).  Medical debts are among the business'  list of popular reasons for personal loans between family members, so the service was of immediate interest to me.  But beyond this, I would focus readers' attention on the stated protect-the-personal-relationship justifications for an formalizing intermediary and how these justifications relate to broader discussions of our debt collection system that sometimes is thought to be inefficient.  If an inter-family secured loan is set up properly, and the borrower defaults, the lender may exercise formal remedies (and in an NPR story linked on the website, the founder makes clear that this is contemplated).  Of course, foreclosing on one's grandson could indeed have relationship implications, so the relationship-protecting idea presumably stems from the belief that a borrower is less likely to default on an inter-family loan given the use of extra formalities that expand collection and enforcement entitlements even if rarely used.  Presumably, the risk of default is also lessened to the extent that these loans are granted with lower interest rates than those available from those in the business of extending credit to individuals?

A Pretextual Post

posted by Bob Lawless

"Pretexting" is the use of using false information or misrepresentations to gain access to another person's confidential phone or financial records. The word was barely in the public consciousness until a few weeks ago, until it was alleged that Heweltt-Packard used pretexting to obtain access to the personal phone records of its directors in an attempt to learn the source of a leak. Yesterday. the FTC announced that it had reached a settlement with an Internet firm that was using pretexting to obtain access to consumers' telephone and credit card records. Under the settlement, the malefactor has to disgorge its ill-gotten gains--all $2,700 of them.

More Supreme Court Action on Credit Issues

posted by Katie Porter

Earlier this week, the Supreme Court granted certiorari in two cases (Safeco Insurance v. Burr and GEICO v. Edo) about the proper interpretation of the Fair Credit Reporting Act (FCRA). As Ronald Mann noted in one of his guest blog posts, the big action in this area is shifting away from correcting errors in credit reports, the traditional emphasis of FCRA.The narrow issue in the pending cases is the correct standard for determining whether a violation of FCRA is  "willful." (Read more about this  issue at the Consumer Law & Policy Blog.) For me, these cases raise the specter of a much broader issue. What should be the permissible uses of a credit report?  Is it desirable or responsible to use credit reports for "off-label" purposes--i.e., those not concerning a decision to grant credit--such as a decision to insure someone?

Continue reading "More Supreme Court Action on Credit Issues" »

Strategic Credit Reporting

posted by Ronald Mann

I thank the people at Credit Slips for asking me to guest blog this week.  It has been a great sounding board.  I want to close by highlighting a part of Charging Ahead about which I am not at all sure: my praise of the American credit reporting system.  As I explain there, you can say that our credit reporting system works well compared to systems in most other countries because it is private, centralized, voluntary and technologically advanced.

But as lending decisions become ever more standardized, I wonder if the incentives to game the process are starting to undermine it.  In particular, increasingly the hot-button disputes about credit reporting are not the inevitable problems about the hassle of correcting unintentional errors.  Rather, what we now see is a set of problems that relate to whether the system is sufficiently complete.  For example, Capitol One and Target want to keep the information about their credit limits private, because disclosing that information would make it easier for other lenders to poach their customers.  Credit card issuers in general have pressed the national bureaus to ignore available information about bankruptcy discharges.  As far as I can tell, most of the strategies move in one way -- keeping "positive" information out of the system to make credit scores lower.

The natural response of many consumer groups, of course, is to try to force more information into the system.  But there are serious costs to an unbounded drive to gather all information into the credit reporting system.  In general, the added information is going to make it easier for lenders to identify and serve riskier sections of the market.  There also are serious privacy concerns, and not just for people of Euro-centric sensibilities.  Here, as in insurance rate-setting, do we really want a system with complete information?  Should the interest rate on my mortgage depend on the grocery store at which I shop?  The items I buy when I go there?

On the flip side, the recent growth of fringe lenders suggests that increased access to this information presents some real value to the lower middle class.  If the credit bureaus had as much information about those people as they have about the swath of the middle class that has a dozen credit cards and two mortgages per household, the rates charge in the markets in which those people borrow well might fall significantly from the levels that are so easily challenged as "unconscionable."

I don't yet have a good answer to this.  Banking groups oppose regulatory intervention, claiming that smaller lenders will drop out of the system.  And our voluntary system obviously would be undermined if a significant group of lenders dropped out.  Still, I can't accept the idea that lenders' incentives are properly aligned with those of borrowers, so I question whether lenders should be allowed to decide what and how much to report.  Farewell!

Our Indebted Military

posted by Ronald Mann

Payday borrowing by the military has been a hot topic since an August 2006 DoD report estimated that as many as 17% of military personnel use payday loans.  But the spin surrounding this report has missed some troubling points.

First, I do not find it useful to accuse payday lenders of "targeting" military families by responding to demographics.  Military personnel always have been ideal customers for check-cashers.  They have relatively low salaries, and thus are persistently cash-poor.  They are unlikely to be laid off or to have their payroll checks late or dishonored.  So, it should surprise nobody that check-cashing stores, and the payday lending stores that have grown out of them, appear near military bases.  We might just as well say that bars "target" college students because they proliferate near the campuses that house their most profitable customers.  If there is a link between financial distress and payday lending, it affects both civilian and military populations.  And, I haven't seen any evidence that military personnel are more susceptible to cognitive biases than the immigrants and other low-income civilians who routinely use these products.

Second, the report does not acknowledge a more significant disparity between civilian and military personnel -- that the credit reporting system disadvantages those who do not own homes.  Because the credit bureaus collect very little information about non-mortgage expenses, they assign lower credit scores to families that make regular rent and utility payments, but not mortgage payments.  {Some make similar claims about payday transactions, but access to this data would only identify payday loan borrowers as potential customers for other subprime and fringe products.}  Unfortunately, the unstable location of military families makes them more likely to rent and less likely to own than similarly situated civilian families.  So military families as a group will have a harder time gaining access to intermediate and long term credit products.  In general, then, they will be more likely to use short-term products like payday loans.

What can be done?  The FTC's plan to increase the reporting of rent and utility information is a start, but DoD's responses are less useful.  The military would take away the product that the military personnel are using without either addressing the conditions that make the product attractive or facilitating a more reasonably priced alternative.  While a well-designed rollover ban would limit reliance on payday loans for intermediate credit needs, the 36% rate caps will make the national chains inaccessible to military families.  If enacted, we could expect to see those families depending more heavily on subprime credit cards, pawn shops, rent to own providers, and unlicensed payday lenders, all which in the long run will be worse for those families than the prohibited payday loans.

I understand that the military (as a large employer) has a real need to control the spending and borrowing activities of its employees.  But financial distress is not limited to the military.  Congress should view the military as an illustration of a general problem, not as a special case of activity that in other settings is benign.  As Jim Hawkins and I explain in a working paper, the policy issues are complex and deserve thoughtful consideration.

Update: Security Freezes

posted by Bob Lawless

In a previous post, I criticized a House bill that would remove the choice some consumers have under state law to freeze their credit reports. News reports indicate that the preemption provisions have been stripped from the bill. Consumer groups continue to oppose the overall bill for weakening other consumer protections against identity theft. The U.S. Public Interest Research Group has a good summary of their reasons for opposing the bill.

Security Freezes

posted by Bob Lawless

In this security-conscious era, a "security freeze" strikes me as a great name for the newest treat at your local ice cream store. As it turns out, a security freeze is something a consumer can impose on their credit report and will stop most attempts to access a credit report for purposes of extending new credit. According to Consumers Union, twenty-two states now have laws that allow all consumers to put a security freeze on their credit report before identity theft strikes. In a few states, only victims of identity theft can impose a security freeze.

To be sure, a security freeze is not a good solution for everyone. It can be a powerful tool to prevent identity thieves from entering into transactions and stop problems before they occur. But just as a credit freeze stops identity thieves, it also can stop consumers. For a consumer with a security freeze in place, even a transaction as simple as buying a cell phone might be delayed for several days while the consumer directs the credit reporting agency to temporarily lift the freeze. There is also the hassle and expense. In many states, a request for a security freeze has to be done through certified mail. It generally costs $10 per credit reporting agency to start a security freeze and another $10 each time one is temporarily lifted. Consumers should think long and hard before they impose a security freeze on their credit reports, consider whether the benefits outweigh the costs and hassle given their individual circumstances.

The House of Representatives has on its calendar another one of those perversely titled bills, the Financial Data Protection Act of 2006 (H.R. 3997), that would preempt all state security freeze laws and as well as some other state laws intended to prevent and protect against identity theft. The federal law would allow only victims of identity theft to initiate a security freeze, rolling back the choice twenty-two states have given to their citizens. Groups such as Consumers Union, the Consumer Federation of America, the AARP, and the National Consumer Law Center have spoken out against the House bill, saying “Consumers today would be worse off under this bill than if nothing passed.”

If the bill emerges from the House, its prospects in the Senate are unclear. The upcoming midterm elections may deter any congressional action on a law opposed by so many consumer groups. The bill does have strong support among financial interests so it could find legs in a lame-duck congressional session or in a new Congress next spring. It wouldn't be the first time that Congress has limited consumer rights under the guise of a bill that purports to protect consumers in its title. If truth-in-advertising laws applied to Congress, this bill would be entitled, "The Limit Consumer Choice in Credit Reporting Act of 2006."

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