Consumer Law & Policy Blog

More on Credit Bureau VIPs: Senator Blumenthal Writes to Equifax, Experian, and TransUnion

Yesterday we blogged about the Times article that credit bureaus give special treatment to VIPs.  Today  Senator Blumenthal asked the credit bureaus to confirm or deny the Times claim that VIPS reporting errors errors are treated differently than other consumers.  He also posed the following queries:

• Please describe your process for resolving consumer disputes.
• Does your company maintain a V.I.P. list of consumers who receive special consideration, or are all consumers treated equally?
• If your company does offer a V.I.P. list, how do the services offered to these consumers differ from the services offered to the majority of consumers?
• If your company does offer a V.I.P. list, how does your company determine whether a consumer should receive preferential treatment?
• If your company does offer a V.I.P. list, are consumers on that list aware of placement on such list?
• What percentage of your company’s reports contain potential errors? What percentage contain serious errors?
• On average, how long does it take your company to resolve an error once a consumer has disputed an item on the consumer’s credit report? If your company maintains a V.I.P. list, please list the average time for a consumer on that list, as well.

The responses should make for interesting reading.

Credit Bureau VIP Lists and the Fair Credit Reporting Act

by Jeff Sovern

Today's Times reports that credit bureaus give VIPs special treatment.  When VIPs complain about errors in their credit reports, they "get special help from workers in the United States in fixing mistakes on their credit reports. Any errors are usually corrected immediately, one lawyer said."  The article explains:

For everyone else, disputes are herded into a largely automated system. Their complaints are often electronically ferried to a subcontractor overseas, where a worker spends, on average, about two minutes figuring out the gist of the matter, boiling it down to a one-to-three-digit computer code that signifies the problem — “account not his/hers,” for example — and sending a dispute form to the creditor to investigate. Many times, consumer advocates say, the investigation translates to a perfunctory check of its records.

This is troublesome for several reasons, but one that jumps out derives from section 1681e(b) of the Fair Credit Reporting Act, which provides "Whenever a consumer reporting agency prepares a consumer report, it shall follow reasonable procedures to assure maximum possible accuracy of the information . . . ."  If the bureaus can provide such procedures for VIPs, it's hard to believe that it is reasonable for them not to provide them for everyone.  Hoist by their own petard.

You Have to Admire the Cleverness of the Deception

by Jeff Sovern

   The letters arrive every January and February with "Important Tax Information Enclosed" written on the envelopes.  W-2s and 1099s.  The one I'm looking at bears the return address "Processing Headquarters."  Only it's not a tax form.  When you open it up, it includes what looks like a check in the amount of $2,750.00.  At the top of the apparent check appear the words "This document has a blue background and microprinting."  But the "check" contains some small print: "Not a check."   The letter explains that the addressee has "been selected to receive a special tax related incentive of up to $2,750 . . .  ."  Unfortunately, the only "designated site" for the tax incentive program is a particular car dealership.  So much for the Processing Center return address.  The dealership promises to match the addressee's tax return check or W-2 up to $2,750 when the addressee buys a car. 

Now here's an interesting question: just how special is this offer?  Any employee who earned at least $2,750 in 2010 should have received a W-2 reflecting that fact.  The self-employed might feel left out, except that if they file a tax return of at least $2,750, they can still qualify.  Oh and by the way, this solicitation was the product of pre-screening, meaning that the dealer has to make a "firm offer."  I wonder if the requirement that the consumer submit the required documents prevents this from being a "firm offer."  Why do I feel this offers another argument about the wisdom of Congress in largely excluding car dealers from the Consumer Financial Protection Bureau's jurisdiction? 

Paper on the History of Credit Reporting

Kenneth Lipartito of Florida International University has written The Narrative and the Algorithm: Genres of Credit Reporting from the Nineteenth Century to Today.  Here's the abstract:

Credit reporting is a contested process whereby parties with distinct interests (borrowers, lenders, and intermediaries) jointly construct the form, method, and style of credit assessment. In contrast to theories that argue information should grow more secure and credit relationships more transparent over time, the conflicted struggle over representation produces different styles or “genres” of credit evaluation that are compromises between the interests of the different parties. Thus, in the United States, trade credit reporting in the nineteenth century evolved an enduring narrative reporting style, incorporating heterogeneous forms of information not easily reducible to a single quantitative score. Lack of institutions for sharing information between creditors, legal precedents, and strong resistance among borrowers to overly intrusive surveillance made the narrative report the best means to handle the diverse business credit market. By contrast, lenders in the consumer credit market established information sharing capabilities, which were enhanced after World War II when banks developed the credit card and card verification systems. Fair credit laws in the 1960s and 70s actually reinforced the move to quantitative scoring based on information shared among creditors, eventually institutionalizing the FICO score as the prime method of consumer credit evaluation.

Does Credit Scoring Produce a Disparate Impact?

That's the title of a paper by Robert B. Avery, Kenneth P. Brevoort , and Glenn B. Canner, all of the Fed. They answer the question in the negative as to race.  Here's the abstract:

The widespread use of credit scoring in the underwriting and pricing of mortgage and consumer credit has raised concerns that the use of these scores may unfairly disadvantage minority populations. A specific concern has been that the independent variables that comprise these models may have a disparate impact on these demographic groups. By "disparate impact" we mean that a variable's predictive power might arise not from its ability to predict future performance within any demographic group, but rather from acting as a surrogate for group membership. Using a unique source of data that combines a nationally representative sample of credit bureau records with demographic information from the Social Security Administration and a demographic information company, we examine the extent to which credit history scores may have such a disparate impact. Our examination yields no evidence of disparate impact by race (or ethnicity) or gender. However, we do find evidence of limited disparate impact by age, in which the use of variables related to an individual's credit history appear to lower the credit scores of older individuals and increase them for the young.

But does everyone in the government agree?  The EEOC recently sued Kaplan, the test prep service, for using credit reports in hiring, which, the EEOC claims, produces a disparate impact on African-Americans.  True, credit scores and credit histories are different, but the scores are based at least in part on the histories.

Misidentification of consumer results in $150,000 judgment.

by Richard Alderman

In an interesting case, the Third Circuit has upheld a $150,000 verdict against Trans Union for misidentifying a consumer as being included on an “OFAC (Office of Foreign Assets Control) Advisory” compiled by the Treasury Department. Trans Union argued that the advisory was not part of the consumer’s file, it was not subject to the Fair Credit Reporting Act, and that it did not violate the Act. In a 91-page opinion, the court affirmed the judgment, including $50,000 in compensatory damages and $100,000 in punitive damages, against Trans Union.

Not Everyone is Happy that the New CFPB Bill Will Give Denied Credit Applicants a Right to See Their Credit Score

by Jeff Sovern

Berin Michael Szoka of The Progress & Freedom Foundation has written The Dangerous Implications of a 'Right' to Free Credit Scores .  Here's the abstract:

Under the Fair Credit Reporting Act of 2003, every American has a right to a free credit report once a year from each of the three major credit bureaus - Experian, TransUnion, and Equifax. A search on any major search engine for "credit report" will lead the user (via the top search result) to AnnualCreditReport.com, which guides the user through getting these free reports after verifying their identity - a process that takes about 15 minutes. Having these reports empowers us all to take responsibility for verifying the accuracy of the borrowing history used to make assessments about our credit-worthiness, and also to detect fraud or identity theft. But for some lawmakers, this freebie isn't enough.

I was a little perplexed that the abstract doesn't provide any reason why free credit scores are a bad idea, so I had a quick look at the paper.  Szoka is concerned about something called "information socialism," which is the name Szoka gives to the idea that someone can create a score or algorithm or some such thing and the government can force them to turn it over to others without charge, thereby reducing the incentive to create new similar inventions that depend on information.  Szoka fears that this provision is the slippery slope bringing us closer to such a state generally.  Personally, I'm not persuaded that free credit scores will have the effects Szoka fears.  Even assuming that information socialism is a problem, the information here has already been paid for by the creditor who purchased it and used it to turn down the consumer's application. I would have been more worried that making credit scores available would facilitate gaming them to produce higher scores that don't actually reflect that someone is more creditworthy--except that since you've been able to buy your credit score for years from Fair Isaac, that bird has flown. 

Karikari Paper on CRA and Subprime Lending

John A. Karikari of the US Government Accountability Office (GAO) has written The CRA and Subprime Lending in Neighborhoods: Myth or Reality?  Here's the abstract:

I examine the CRA’s impact on approvals of non-prime loans for riskier borrowers largely responsible for the current mortgage crisis in the United States. Using loan applications data for several major metropolitan cities, and recognizing the existing CRA regulations on assessment areas and affiliate lending, I find that while CRA lenders were likely to disproportionately approve subprime loans than FHA loans in most cities, these lenders were not more or less likely to approve subprime loans in low and moderate income (LMI) communities. Thus, the CRA may have played a role in proliferation of subprime lending across communities, but not disproportionately in LMI communities - the areas receiving the most intense CRA scrutiny.

Carol Necole Brown Paper on Reverse Redlining Issues

Carol Necole Brown of North Carolina has written Intent and Empirics: Race to the Subprime.  Here's the abstract:

The United States’ history of racially discriminatory banking, housing, and property policies created a community of black Americans accustomed to exploitative financial services and vulnerable to victimization by subprime lenders. My thesis is that black borrowers are experiencing a new iteration of intentional housing discrimination in the twentieth and twenty-first centuries; lenders identified a vulnerable 'emerging market' of black homeowners and borrowers and knowingly targeted them to receive subprime or predatory loan products when equally situated white borrowers were given superior, prime mortgage products. This Article explores how disparate lending practices coupled with banking deregulation undermined the Congressional push for increased minority homeownership and widened the already burgeoning wealth divide. Millions of borrowers who accepted subprime loans between 1998 and 2006 already have or will lose their homes to foreclosure, resulting in a net loss in homeownership for nearly one million families. Blacks are disproportionately represented among the subprime victims, especially black women. The lending and financial services structure that caused this crisis is complicated by evidence of redlining and of steering blacks into subprime loans, all of which contributed to the present foreclosure crisis. This subprime dilemma merely adds new terminology to a long history of racial discrimination in housing in America. In the end, this Article argues that the search for an understanding of the cumulative events that facilitated the exploitation of blacks by subprime lenders illuminates the institutional and national impediments to reversing the present and future harm of the subprime crisis and to ensuring blacks equal access to one of the benefits of full citizenship - property. First, in Part II, I contend that the disparities in subprime lending experienced by black borrowers and especially by black women result from intentional reverse-redlining and steering by lending institutions, their loan officers, and brokers. Next, in Part III, I consider why blacks and black women are disproportionately victims of subprime mortgages and of predatory lending. Finally, Part IV concludes by discussing the after-effects of subprime and predatory lending and offers possible solutions for rethinking how blacks are to overcome this deeply profound experience with housing discrimination which I suggest made blacks prime subprime victims. It focuses on the property dilemma or rather the dilemma of the landless.

SCOTUS Takes Arbitration Case, Justice Department to Increase Fair Credit Enforcement, and Repoed Toddler

by Jeff Sovern

A few recent consumer law reports: The SCOTUS Blog has reported that the Supreme Court has granted cert in what could be an important arbitration case.  Here's their description:

Docket: 09-497
Title: Rent-A-Car, West, Inc. v. Jackson
Issue: Whether the district court is in all cases required to determine claims that an arbitration agreement subject to the Federal Arbitration Act (“FAA”) is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this “gateway” issue to the arbitrator for decision.

• Opinion below (9^th Circuit)
• Petition for certiorari
• Brief in opposition
• Amicus brief of the Pacific Legal Foundation

One reason this may be significant is that arbitrators have an incentive to rule that such a contract is not unconscionable, since if the arbitrator finds the contract unconscionable the arbitrator would have to terminate the arbitration, thus eliminating the possibility of additional fees from the case, while if the arbitrator denies the unconscionability defense, the arbitrator can continue hearing the matter, and reap additional fees.  Consequently, a ruling that arbitrators can decide such matters is likely to reduce the number of contracts found unconscionable even in cases where such a finding would be warranted. 

The Times reports that the federal Department of Justice is creating a new unit to focus on unfair lending practices and especially reverse-redlining.  Among the reasons this seems like a particularly good move: First, it is difficult for private plaintiffs to bring successful actions under the Equal Credit Opportunity Act, and second, the subprime crisis has lent credence to claims that reverse redlining is common.

From time to time a car is repossessed with a child inside.  Here's another report on such an act.  Imagine how frightened the child must have been.  The UCC forbids self-help repossessions that breach the peace; this one, with a police helicopter search and chase involved, sounds like it qualified.