Category: Credit Reporting

  • 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.

    (more…)

  • 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."

    (more…)

  • 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?

    (more…)

  • 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.

    (more…)

  • 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.

    (more…)