California Credit Law Blog

Consumers might assume that Experian, Trans Union and Equifax restrict the the information they collect to creditors to whom consumers have applied for credit. On the contrary, the credit bureaus sell personal and financial information to various companies. The credit bureaus were recently criticized by the national mortgage brokers' association for selling "trigger lists" containing personal and financial information on prospective borrowers to sub-prime real estate lenders. Introduced in 2005 by Experian, a basic trigger list includes the names and contact information of people who recently applied for a mortgage. A more complete list includes credit scores, credit card debt summaries and estimates of the equity owned by prospective borrowers. By late 2006, consumers were complaining to the Federal Trade Commission that they were getting calls from sub-prime lenders as explained in a December 2007 article in USA Today.

The FTC, which is supposed to regulate credit bureaus, has taken no action on the sale of trigger lists according to USA Today.

Posted by Mark F. Anderson | Permalink | Email This Post

Posted In: Consumer Credit 101

Bookmark:

The San Francisco City Attorney apparently has some enthusiastic cheerleaders for its recent suit against the National Arbitration Forum (NAF), which we discussed here.

Credit Slips is a terrific credit and bankruptcy blog which contributors are mostly law professors with deep knowledge about their topic. Professor Bob Lawless's post today provides links to previous posts in the Credit Slips blog about the NAF. Those posts include some nightmarish horror stories about consumers' experiences with arbitration. He also notes the NAF's high win rate for creditors and describes how the NAF acts almost as if they are a disguised debt collection agency.

We are encouraged by this commentary. Mandatory arbitration is a very bad way to resolve consumer disputes.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In:

Bookmark:

Our consumer law firm has learned that if a potential client's dispute is covered by an arbitration clause, we generally won't take the case. There are several reasons. First, the company on the other side uses the arbitrator frequently. Since the company wouldn't continue to use the arbitrator without good results, the arbitrator has an incentive to rule for the company. Second, there's no requirement that the arbitrator follow the law. If an arbitrator doesn't like a consumer's case, that's the end of it; there is no right to an appeal as there is in court. Third, arbitrations can be enormously expensive upfront, since arbitration is essentially a form of private justice system. Finally, even if there's a statutory right to attorney's fees for the winning consumer, because the arbitrator doesn't have to follow the law, there is no guarantee that the arbitrator will award any fees at all.

We were delighted to read in The San Francisco Chronicle's recent article that San Francisco City Attorney Dennis Herrera has sued the Minneapolis-based National Arbitration Forum (NAF), one of the nation's biggest arbitration companies, for unfair business practices. The lawsuit says the NAF "is actually in the business of operating an arbitration mill, churning out arbitration awards in favor of debt collectors and against California consumers."

The complaint cites statistics showing that of 18,075 cases brought before one of the NAF's arbitrators from January 2003 to March 2007, only 30 resulted in victories for consumers.

"The lengths to which [the NAF has] gone to ensure that California consumers lose in arbitrations against debt collectors is shocking," Herrera said in a statement.

Continue reading "National Arbitration Forum Sued by San Francisco City Attorney" »

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In:

Bookmark:

Credit scores are determined using formulas designed to predict how likely a consumer will pay his or her bills. Fair Isaac is the leader having created the FICO credit-scoring formula. Fair Isaac has announced its formula will be revised this year. The new formula will deemphasize the effect of one late payment on your credit score on an otherwise unblemished record.

Fair Isaac states the company's analysts pulled reports of 5 million consumers to see how their credit profiles fared over time. More information may be found in a recent issue of SmartMoney magazine.

Posted by Mark F. Anderson | Permalink | Email This Post

Posted In: Credit Scores

Bookmark:

Identify theft affected somewhere between 8 and 15 million Americans in 2005, according to Tom Abate's article in today's San Francisco Chronicle. One report just issued by the Federal Trade Commission estimated that identity theft struck about 4% of all adult Americans in 2005. Those numbers mean that identity thieves are twice as likely to target American consumers as are street criminals.

But another report issued last February estimates that the problem is much worse than the FTC calculates. The market research firm Gartner's study suggested that 15 million Americans had been victimized in the 12-month period ending August 2006. If these numbers are right, you're four times as likely to be an identity theft victim as to be a street crime target.

The bottom line is, no one really knows how much identity theft occurs in the U.S. And what knowledge we do have about data breaches is only possible because California and about 35 other states require companies to reveal when certain sensitive data are leaked. Congress has so far failed to pass any equivalent federal law.

How do identity thieves gain access to so much sensitive consumer information? According to private sector data security expert Larry Ponemon, half of the data breaches were due to lost laptops. Malicious employees accounted for another 9 percent. A whopping 40 percent of the breaches involved a third party--either an outsourcer, consultant or other business partner.

Continue reading "Identity Theft Mostly Caused by Lost Laptops, Third Parties" »

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Identity Theft

Bookmark:

Students graduating from college have a few months to savor their accomplishment before worrying about repaying their student loans. But what happens when they have problems making their payments? A new website, Student Loan Borrower Assistance, includes information on repayment options, avoiding and getting out of default, dealing with collections agencies, and much more.

The website was created by Deanne Loonin, a staff attorney at the nonprofit National Consumer Law Center. She says "the site describes the rights and obligations of student borrowers in plain language, so that they can understand their options, and stand up for themselves."

In a press release, Student Loan Borrower Assistance describes itself as "the first and only independent resource that provides advice and objective information for borrowers, their families, and legal advocates." The site features straightforward information about topics ranging from choosing a student loan to getting out of default and dealing with aggressive collection agencies. It also includes policy briefs, legal case studies, sample documents and promissory notes, and other valuable resources.

This should be an important resource for borrowers, who graduate with an average of $20,000 in student loans.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Consumer Debt

Bookmark:

Consumers who are sued by debt collectors can defend in court by demanding that the debt collector prove it is entitled to collect the debt. Particularly when the debt collector is not the original creditor, the debt collector is frequently unable to prove it owns the debt. The result? The court dismisses the debt collector's case and the consumer wins.

Yesterday, the New York Times reported that an Ohio federal judge dismissed 14 foreclosure cases brought on behalf of Deutche Bank National Trust Company for a similar reason: Judge Christopher Boyko ruled that the bank had failed to prove it owned the properties it was trying to seize. The bank is trustee for securitization pools which claim to hold mortgages underlying the foreclosed properties.

Securitization pools are comprised of thousands of individual home loans packaged together by Wall Street firms. The pools are then sold to investors in different slices, based on risk. Trustee banks oversee these pools' operations and ensure that consumer payments go to the appropriate investors.

Deuthche Bank's problem was that it couldn't show that it really owned the note and mortgage on the properties it was trying to foreclose. Apparently that isn't unusual: One mortgage securities specialist quoted in the report said he has heard of instances where the same mortgage loan was in two or three mortgage pools. The report also cited a University of Iowa study that found 40 percent of creditors foreclosing on borrowers did not show proof of ownership, even though such proof gives them standing to foreclose and is required by law.

Attorneys for Deutche Bank argued that the judge didn't understand how foreclosures were supposed to work when securitization pools hold the mortgages, but Judge Boyko wasn't impressed; he said the bank's argument revealed a "condescending mindset." Needless to say, consumer advocates have applauded the ruling.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Consumer Debt

Bookmark:

Consumers in New York City are faced with unprecedented numbers of debt collection suits, according to a new study by the Urban Justice Center (UJC), a provider of free legal services to low-income working poor New Yorkers.

The study's results are shocking. In 2006 alone, debt collectors tried to collect nearly $1 billion from New York City consumers, and got judgments for about $800 million--an 80% success rate. Most of those suits are filed by debt buyers--not the original creditors--and about four out of every five of those suits result in default judgments for the debt collector, in which the consumer never appears in court or enters into a settlement agreement. The study revealed that 99% of the time that debt buyers brought lawsuits, they submitted invalid hearsay "evidence" that would be inadmissible in court if anyone ever challenged it.

What's the reason for the steep rise in consumer lawsuits? One reason is that regulators and courts largely gutted the regulatory schemes governing fees and interest that creditors are allowed to charge, beginning in the 1970s and continuing through the 1990s. A second factor is that these days nearly every consumer has access to credit of some kind or another, but lower-income consumers generally have to pay higher interest rates for their credit. Third, identity theft is on the rise. If a consumer's identity is stolen, she likely doesn't even know about the underlying debt, and probably isn't informed about a debt collection lawsuit either. Finally, the market for the purchase of defaulted debt--including debt that can no longer legally be collected--is exploding. Debt buyers purchase defaulted debt for pennies on the dollar, and then try to collect the full amount, an exceedingly profitable venture if it works.

Continue reading "Consumers Are Targets of Skyrocketing Numbers of Debt Collection Suits, Most By Debt Buyers" »

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Consumer Debt

Bookmark:

Loan servicers tack on all kinds of bogus fees and charges to consumers going through Chapter 13 bankruptcy and whose homes are being foreclosed upon, according to an article in today's New York Times. Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

The article suggests that when housing sales are down and the loan originating side of the lender is originating fewer mortgages, the loan servicing side makes up for the shortfall. That is because loan servicing can be extremely lucrative. Servicers, which collect payments from borrowers and pass them on to investors who own the loans, generally receive a percentage of loan income and typically generate profit margins of about 20 percent. Servicers typically keep charges such as late fees assessed on delinquent or defaulted loans, so defaults can give servicers an opportunity for additional profit.

Bankruptcy lawyers say that many of these servicer charges are blatantly illegal. For example, some lender charge hundreds of dollars in fax fees, overnight delivery fees and loan payoff fees that are never approved by the bankruptcy court.

Another problem is that in nearly three-quarters of bankruptcies, the lender says the borrower owes more than the borrower calculates, often due to excessive and unnecessary fees. In one especially egregious case, Wells Fargo charged the borrower for 16 unnecessary inspections of the borrowers’ property in the 29 months the bankruptcy case was pending.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Consumer Debt

Bookmark:

This post linked to BusinessWeek's fine article about consumers who file bankruptcy under Chapter 7 and are supposed to have their debts erased. Many post-bankruptcy consumers were finding that debt collectors were continuing to pursue them for debts already discharged in bankruptcy. BusinessWeek's article said the driving force behind this phenomenon is a vibrant market in which certain debt buyers avidly buy and sell debts that should have been extinguished.

I just received a telephone call from one of these debt buyer's New York lawyers. This person disputed the accuracy of a quote in the article from a lawyer for one of the debt buyers and demanded I take down the post. So, First Amendment consideration aside, read the article yourself. It's well worth it.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Consumer Debt

Bookmark:

Study after study show how expensive it is in the United States to be poor. A new report by The National Consumer Law Center about so-called fee harvester cards brilliantly illustrates that principle. These fee-harvester cards look like credit cards, but they have little or nothing to do with issuing credit. They are "subprime" cards designed to maximize profit by targeting consumers with poor credit. They look too good to be true, and are: these cards come with extremely high fees that eat up most of a low credit limit, meaning the cards are virtually useless.

A typical card will advertise a credit limit of $250, but that is reduced by a $50 membership fee, $119 acceptance fee and $6 monthly participation fee, leaving the consumer with only $75 of actual credit. And if the consumer goes over that, they are charged a $29 overlimit fee! The report tells the story of a sailor on leave who charged $85 on one of these cards with a purported $250 credit limit. Yet, because her net available credit was only $72 after the company charge its upfront fees, she incurred huge additional charges and is now paying off a balance of more than $300 for her $85 shopping spree.

Most "mainstream" credit card companies make their profits by generating interest income on account balances. These cards don't. They make their money by charging front-end fees to obtain the cards in the first place, because many cardholders are unable to make their payment on time or at all. Then, when the card issuer writes off the balance, it consists mostly of unpaid fees to itself! For example, in 2006, CompuCredit charged off more than $700 million, yet took in enough fees and interest to make $107 million in profit.

Continue reading "Fee-Harvester Cards: Credit Cards That Are Really Just Fee-Generating Scams" »

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Credit Card Scams

Bookmark:

Consumers with poor credit naturally want to clean up their credit reports. But as Michelle Singletary reported in her Wahington Post column last week, there are credit repair scammers out there that are perfectly willing to take consumers' hard-earned cash and then fail to do anything useful. Worse, some of their "methods" can be unethical or even unlawful.

Consumers should look for these red flags in deciding whether a credit repair organization is legitimate. Beware of credit repair organizations that do any of the following:

1) The company requires an upfront fee. Under the federal Credit Repair Organizations Act, it is illegal for companies to charge consumers money before performing the promised credit-repair services

2) The company says it will dispute everything in the consumer's file including information that is correct. This seems like a no-brainer: disputing legitimate information is lying. If a company wants to lie, it's not reputable.

3) Before the consumer signs a contract, the company fails to provide them with a copy of the FTC's "Consumer Credit File Rights Under State and Federal Law," which outlines what ithe company can and cannot do.

4) The company tells the consumer not to directly contact the credit-reporting agencies. Sometimes this is the most efficient way to clear inaccurate information from consumer credit reports.

5) The company tells the consumer that it can get them a new credit identity by applying for an employer identification number (EIN) from the Internal Revenue Service. If the consumer doesn't own a business, this is not a legitimate way to repair the consumer's personal credit history. It is a federal crime to obtain an EIN under false pretenses.

Posted by Carol McLean Brewer | Permalink | Email This Post

Posted In: Correcting Errors on Your Credit Reports

Bookmark: