December 10, 2012

There's a Chance Your Credit Report Is Wrong and the New Consumer Agency Is Hamstrung

What do you regard as the most infuriating experience you ever endured -- dealing with the cranky Patty/Selma clerks at the Department of Motor Vehicles? Driving behind slow-driving geezers? Watching Fox News?

How about discovering you have a less-than-stellar credit reports despite having a stellar credit history?

After I learned that a relative had been declined for a credit card I urged him to look up his credit reports and then decided to check mine, which I assumed were top-notch, since I have a nearly three-decade history of paying bills on time. I was flabbergasted to find that I'm only rated 722 by Equifax and 709 by TransUnion. Despite the fact that scores in the 700 range are closer to the 850 top score these are considered merely "average" by the rating agencies as opposed to very good or great.

What's my problem? Along with totally false information that I have a "short credit history" and "high revolving balances" -- I have zero revolving balances -- I have a collection on my record that I never knew I had. I never received a letter from a collection agency for a bill I paid but mistakenly didn't pay the entire balance -- $86 instead of $91. So a puny $5 debt I didn't realize I had downgrades my nearly three decades of prompt bill payment. Let's face it, if you have a single car accident following a 30-year accident-free driving record your insurance company likely won't jack up your premiums because they're afraid that doing so might lead you to switch to Geico. For example, Allstate's Gold Protection option package allows a policyholder to waive any premium increase due to an accident in a three year period.

What's more, credit reporting agencies punish you with lower scores for having only one or two cards and for not having any current car loans or mortgages even if you have a two decade history of paying them. Bottom line: they reward you not for being prudent but for being up to your eyeballs in debt.

While I can't prove that these reports are deliberately manipulated, a much-cited study by the National Association of State Public Interest Research Groups found that almost 79 percent of all credit reports had some type of error. Unfortunately, the credit rating agencies could care less how you react to an inaccurate score/report because it won't affect their business -- the banks and credit card companies are their customers -- not you.

A significant number of mortgage lenders apparently use these inaccurate scores to treat prime borrowers as subprime in order to increase profits by charging higher interest rates. A 2007 study commissioned by the Wall Street Journal of more than $2.5 trillion in subprime loans made between 2000 and 2007 showed that in 2005 borrowers with high credit scores got more than half -- 55 percent -- of all subprime mortgages, a proportion that rose to 61 percent of loans by the end of 2006. And if you wind up changing the terms of your mortgage because you've lost your job and have to take a lower-paying job you can expect your score to plummet as much as 100 points since banks such as Citigroup, JPMorgan Chase and Bank of America report loan modifications to credit bureaus, according to an article in Bloomberg News: "Loan modification can lead to a drop in credit scores."

Why don't we have tougher laws that prohibit banks and credit card companies from fabricating negative credit scores so that they can charge higher interest rates and laugh all the way to the bank? As always, bribes from the financial dis-services industry matter more to too many members of Congress than doing right by their constituents.

For example, as an article in the Hartford Courant observed in 2003: "Critics charge lending law toothless" in 1996 Congress enacted sweeping changes to the Fair Credit Reporting Act that required credit reporting agencies to adopt "reasonable procedures to assure maximum possible accuracy." But most likely as a result of lobbying by the credit card industry the amendments also made it difficult for consumers to collect significant damages when the agencies fail to meet those standards along with forbidding states from passing laws that provided broader consumer protection, except in limited circumstances.

Not surprisingly the industry refutes the fact that its reports are riddled with errors. "The U.S. PIRG study you cite concerning errors in credit reports has been discounted by both the Federal Reserve Board and the Government Accountability Office in separate studies done several years ago. In fact, the most scientifically-based and statistically valid study done on the subject shows that there are few errors in credit reports and where they do occur, less than one percent of the time do they have a negative impact on a consumers creditworthiness."

Edmund Mierzwinski, Consumer Program Director of U.S. PIRG, couldn't disagree more. "The industry has attempted to rebut these statistics by claiming that fewer than 3 percent of credit reports are inaccurate; however, it reached this statistic by counting only those credit reports in which the consumer: (1) was denied credit; (2) requested a copy of their credit report; (3) filed a dispute; and (4) the dispute resulted in a reversal of the original decision to deny credit."

The good news is that the brainchild of Senator-elect Elizabeth Warren, the Consumer Financial Protection Bureau, will be investigating inaccurate information on credit reports, as Michelle Singletary of the Washington Post reported. I would highly recommend clicking on the link to get more information on ordering your report and disputing any errors that you find.

The problem is that even if you find errors, my experience is that it's a nightmare to try to dispute them. Either nobody answered the agencies' toll free numbers or when I went online I couldn't find options to dispute reports. Can the CFPB rein them in? Mierzwinski says that unlike the Federal Trade Commission the CFPB can write rules about the bureaus, supervise or examine them and won't have to wait to fine them after they first violated an administrative order (consent decree).

That's good news but my concern is that compromised members of Congress will still find ways to render the agency toothless at it has in the past. As I pointed out in a previous post, the three bills passed by the House Financial Services Committee in May of 2011 that were designed to weaken the CFPB were all introduced by politicians who get big bucks from finance. For example, committee head Rep. Spencer Bachus, who introduced a bill that would have a five-person commission run the agency instead of a director is the U.S. House of Representative's third biggest recipient of donations from the Finance, Insurance and Real Estate industries, or FIRE, totaling $7.1 million over time, according to Bloomberg Businessweek. Rep. Sean Duffy's bill that would make it easier for CFPB's decisions to be reversed by the Financial Oversight Stability Council was no doubt "inspired" by the $173,125 he received from FIRE in the 2010 election cycle.

So what's the point of this Financial Stability Oversight Council, an agency few people have even heard of? It appears that it's creation was a deal Congress made to render financial reform fairly toothless -- along with rendering the CFPB fairly powerless. For example, their voting members include: the Secretary of the Treasury, the Chairman of the SEC and the Comptroller of the FDIC -- three agencies that are notorious for revolving door activities. A recent article in the Texas Law Review points out that most of Oversight Council's members have a long history of favoring the industries they are charged with regulating, making the threat of veto a real one. In addition, even if the Council doesn't have enough votes to veto the CFPB, any single member of this Council may stay the CFPB's regulations for up to 90 days.

Bottom line: Even if Sen. Warren had wound up being named head of the Consumer Financial Protection Bureau there's a good chance that the FSOB could hamper its ability to bring about genuine reform. When I asked a spokesperson for the bureau for a response she referred me to the Treasury Department. What's the solution? Stay tuned for Part II.

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