Aspire VISA offered a $300 credit limit VISA card as a way for consumers to rebuild their credit. The catch was that Aspire VISA charged consumers a $29 finance charge, a monthly $6.50 maintenance fee, a $150 annual fee all charged against the $300! The consumer received a mere $63 in credit while being charged $257. The plaintiffs in the case alleged this was an advance payment in violation of the credit repair act.

The 9th Circuit Court of Appeals held that the Act did not allow the credit card company to force the consumers into arbitration.

This means one in four consumers cannot get a mortgage loans unless they qualify for some special program. 650 is the cutoff score for Fannie Mae or Freddie Mac to accept mortgage loans. Persons with such scores will have a tough time getting a car loan at a reasonable rate. Landlords may not rent to them. Employers may not hire them.

The case involves the widespread practice of using standard-form contracts to ban class actions. Courts in California and other states have held that class-action bans are unenforceable, however AT&T Mobility has asked the Supreme Court to find that state laws are preempted by the Federal Arbitration Act.

The problem is that class-action bans are often disastrous for consumers and employees. Class-action bans in consumer contracts prevent consumers and employees from ever participating in class proceedings. According to attorney Paul Bland of Public Justice, companies love imposing class-action bans because they dramatically undermine enforcement of consumer- and employee-protection laws. It is no answer to point to government consumer protection agencies which which handle but few cases. Class actions and the threat of such actions in many cases are the only protection against corporations picking the pockets of consumers.

Consumers often pay the fees and end up in a worse position than when they started. The new rules should put these companies out of business. Query--why did it take the FTC so long to make these rules?

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.

During the rise of the housing bubble, reliance on scores grew -- after all they were technological and whiz-bang and fast, compared to the old methods of verifying ability to pay, such as calling lenders on the phone to confirm information in credit reports. Both Fannie and Freddie placed nearly 100% reliance on "automated" underwriting, nearly killing the manual underwriting industry that actually makes phone calls to confirm consumer information.

Meanwhile, the Congress continues to look at credit reporting and scoring issues. Recently the House Financial Services Committee held an important hearing featuring our colleagues Chi Chi Wu of the National Consumer Law Center and medical debt expert Mark Rukavina of the Access Project. If you watch the archived webcast on the hearing page (grab the time bar and scroll forward to the very end at about 2hrs. 50 minutes), you will see a fascinating exchange where Rep. Steve Cohen (D-TN), a reform champion, goes at it with Stuart Pratt, chief credit bureau lobbyist, over whether credit scores derived from Pratt's association members (the Big Three credit bureaus), violate the civil rights laws because, as I have often blogged about, all other things being equal, non-whites have lower scores than whites.

Chairman Barney Frank (D-MA) has scheduled a vote Tuesday on Rep. Mary Jo Kilroy's (D-OH) PIRG-backed HR 4321, the Medical Debt Relief Act, to limit the impact of paid medical debt on credit reports because, from the bill's findings, "according to credit evaluators, medical debt collections are more likely to be in dispute, inconsistently reported, and of questionable value in predicting future payment performance because it is atypical and non-predictive."

While Rep. Kilroy has 104 co-sponsors, we expect Stuart Pratt and his horde of Consumer Data Industry Association (CDIA) lobbyists (word is even Bob Dole was hired by the bureaus against the successful Mark Udall credit score disclosure amendment to the Wall Street Reform and Consumer Protection Act) to offer various gutting amendments.

Rep. Cohen and others have also introduced legislation, HR 3149, the Equal Employment For All Act, backed by U.S. PIRG, NCLC, the NAACP and others to restrict the use of credit reports for employment purposes. In this horrible job market, should a mistake on your credit report deny you a job?

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.

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.

In their sales pitches, the companies omit over the fact that they deduct outrageously high fees, that the accounts rarely get to the point there is enough money to settle any debts in large part because of their fees, and that creditors often sue the consumer while all this is going on. The net result is the consumer ends up worse than when he or she started.

At an industry convention in Palm Beach, FL, those present were warned the new federal Consumer Financial Protection Agency may put them all out of business. Here's hoping.

The NY Times front page article includes comments from state and federal officials and representatives of consumer organizations who agree the industry is a scam. For example, Andrew Pizor of the National Consumer Law Center said that when consumers top paying on their bills collectors start calling the creditors file lawsuits. Another observer, the industry is akin to a Ponzi scheme with consumers paying thousands of dollars with no positive results.

Writing on Politico.com, she points out that when lobbyists for the banks announced last year that they would kill the consumer financial protection agency, observers predicted they would succeed given their money and lobbying. But the dire predictions were wrong and the agency is part of the versions of the bill passed by both houses. Of course, the lobbyists have not given up. They are currently trying to convince the conferees to weaken the agency before it is born.

Prof Warren explains that the reason the lobbyists have not undercut the basic sense behind consolidating seven different consumer protection bureaucracies into one streamlined agency that would be accountable to consumers. Everyone can understand there is a crying need for regulation aimed at making credit card agreements and mortgage documents short and readable.

This week, the 9th Circuit Court of Appeals agreed that an attorney who charged clients $599 to improve their credit had violated the credit repair act.

Consumers are well advised to never pay money to anyone who promises to improve or repair their credit reports or scores.

Some cases involve a friendly theft of services--one person lending his identity to an uninsured friend or relative. A study by the Ponemon Institute estimated a million Americans were victimized in this way in the last two years.

As reported in the San Francisco Chronicle, Mendoza points out that credit checks discriminate against blacks, Latinos and lower income people who tend to have worse credit. Credit history often has nothing to do with job performance.