California Credit Law Blog

NY Time' columinist Joe Nocera's report on the tyranny of credit scores is right on the money. He points out that Fannie, Freddie and the banks that write mortgages depending on one thing--the applicant's credit score. Nocera gives examples of perfectly credit-worthy consumes whose credit scores are low for odd and irrelevant reasons. For example, a consumer's "credit utilization may be high on only one credit card. Using FICO's formula, this adversely affects the credit score,

But Nocera notes that it is not FICO that comes up with a borrower’s score — it just sells the algorithms. The three national credit bureaus, TransUnion, Equifax and Experian, gather input about the prospective borrower’s lending history from various lenders like credit card companies and auto dealers, plug them into a formula and derive a credit score.

Nocera writes that you would think, given the critical importance of an accurate score, that there would be rules about the information that is submitted to them. But there are no rules. "Lenders can submit information about your credit history to one of the bureaus, all of them or none of them. Some of them turn over information right away; some take months; some don’t do it at all. Some are sticklers for accuracy; others are sloppy. The point is that the credit score is derived after an information-gathering process that is anything but rigorous.

He adds that FICO scores are not even the best predictor whether someone will default. The amount of equity a person has in his home, his debt-to-income ratio, his job stability and his cash reserves are all better predictors than credit scores according to the chief executive of Primary Residential Mortgage, a leading mortgage lender.

Moreover, lenders don’t take into account the many, mistakes that are found in credit reports. He mentions a number of errors on his own credit reports. TransUnion is reporting that Nocera works for Rite Aid!

Ed Mierzwinski, who is with PIRG in Washington, D.C., tracks Fair Credit issues. His equally interesting report on credit scores and some pending legislation is below the fold.

Continue reading "Joe Nocera's Terrific Report on the Tyranny of Credit Scores" »

Prof Elizabeth Warren is a leading candidate to head the new Consumer Financial Protection Agency that Pres Obama signed into law today. She explains how she envisions the new agency will fulfill its duties in an interesting interview on the PBS website.

Today, the Senate voted to move forward with the Dodd-Frank Wall Street Reform and Consumer Protection Act, 60-38. The bill is now on the way to the President to be signed into law.

Today's vote is a victory for consumers. The legislation came about despite the enormous opposition from the financial industry, which spent $1.4 million a day to kill the bill.

The bill creates the Consumer Financial Protection Bureau to guard against unfair, deceptive and abusive practices. Consumers will have a single agency that will put consumers' wellbeing first. The Consumer Financial Protection Bureau will write and enforce rules regarding mortgages, credit cards, financial loans (including student loans and payday loans), debt collection, and consumer reporting agencies.

The law will require companies that deny credit or insurance or take any other adverse action against a consumer based on the consumer's credit score to disclose the credit score used. In most cases, people turned down for credit will see their FICO score.

An offical of the US Treasury Department has issued a statement pointing to the sections dealing with the problem of inaccurate credit reports and consumers' inability to easily get the inaccuracies removed.

The official notes that credit reports are sometimes riddled with errors. And those errors can have a real effect on your financial future. Something as simple as having the same name as another individual who failed to pay their bills on time can prevent you from receiving a loan or the lower interest rate for which you’re eligible.

The official states that consumers have filed almost 150,000 complaints about their credit reports in the last four years, and even conservative estimates suggest that 6 million Americans have errors on their reports serious enough to result in a denial of credit.

The Dodd-Frank financial reform bill seeks to empower consumers and address these issues through stronger oversight and regulation:

The new Consumer Financial Protection Bureau that the Dodd-Frank bill creates would have authority to conduct regular examinations of large credit bureaus to evaluate their compliance with basic federal laws such as the Fair Credit Reporting Act.

Consumers will have the right to get their credit scores for free if they are turned down or charged a significantly higher price for credit than most other consumers because of their scores. This is on top of existing federal law that allows consumers to obtain their detailed consumer reports for free each year to check for inaccurate items and to purchase their credit scores at a reasonable price.

The Consumer Financial Protection Bureau is required to perform a study and report to Congress on variations in the credit scores that are sold to creditors and to consumers by the three large national consumer reporting agencies to determine whether such variations disadvantage consumers.