California Mortgage Loan

Today, the 9th Circuit Court of Appeal issued a ruling in a case in which the plaintiffs are accusing Aspire VISA, a subprime credit card, its marketing is a violation of the Credit Repair Organization Act. That Act prohibits companies from seeking advance payments for fixing the consumer’s credit.

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.

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Yesterday, the Wall Street Journal reported that 25% of Americans now have credit scores less than 600. This compares to 15% before the rescission.

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.

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In November of this year, the US Supreme Court hear arguments in AT&T Mobility v. Concepcion, a case that could decide the fate of consumer and employee class actions for years to come.

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.

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By October 2010, new FTC rules will prohibit debt settlement companies from collecting fees on the promise they will reduce or settle a consumer debts. The rules are necessary because the debt settlement companies falsely advertise they can drastically reduce consumers’ debts by negotiating with the consumer’s creditors. The companies demand and get thousands of dollars in fees even though they do not accomplish anything.

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?

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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.

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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.

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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.

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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.

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Some 250 “debt settlement companies” pray on consumers who are overwhelmed by debts. Consumers are lured by Internet and TV ads promising consumers their debt problems will cease if they just sign up. Typically, the companies require the consumer to make payments to the company while not making payments on their debts. The companies promise that once a pot of money accumulates in the consumer’s account, the company will settle the debts with the creditors by paying a percentage of the debt.

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.

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Prof Elizabeth Warren has been the leading advocate for creation of a Consumer Financial Protection Agency. The proposed new agency is part of the financial reform bill currently being debated in a Senate House conference committee.

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.

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Credit repair schemes almost always require payment in advance of any results. Typically, the customer pays the money and then gets no results. To curb this abuse, the federal Credit Repair Organizations Act, 15 U.S.C. Section 1679f, prohibits anyone from offering to improve a customer’s credit to charge money in advance.

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.

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Today, the San Francisco Chronicle reports on the problem of homeowners who get a loan modification and who end up with a ding on their credit reports. The problem is that the banks holding the mortgages report the homeowners are late on their payments or that they are paying less than is owed. Either way, the consumers’ credit scores suffer. This in turn often causes banks to increase credit card interest rates and to reduce credit limits. That in turn may impact consumers’ ability to get credit. There should be a legislative fix for this problem.

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