Fannie and Freddie are Looking at Your Credit Score

The latest numbers released by RealtyTrac, a realty research group, show that more than twice as many homes were headed into foreclosure in the first quarter of 2008 – that's one in every 194 households nationwide. In some states, the numbers are even higher – for example, in Nevada, one in 54 homes received a foreclosure notice.

That trend is expected to continue throughout the year as mortgages continue to adjust throughout the summer and fall. The continued pressure has Fannie Mae and Freddie Mac – who purchase mortgages and bundle them into securities to sell to investors – looking for ways to mitigate their risk.

Once upon a time, just about anyone with a 620 score or better could get a loan with minimal down payment. But new fees are now being imposed on buyers – fees that directly correlate with the buyers' credit score and the amount of money being put down.

These "Loan Level Price Adjustments" (LLPAs) are upfront penalties that cannot be negotiated away by your lender. (They do not impact FHA or VA loans.)

In order to escape these additional upfront costs, your credit score will need to be 720 or better if you are putting down less than a 30 percent deposit on the home.

Here's an example:

If you buy a $250,000 house, putting down $50,000 and borrowing $200,000:

• If your credit score is 720 or higher, there's no fee.
• If your credit score is 680 to 719, you pay 0.5 percent, or $1,000.
• If your credit score is 660 to 679, you pay 1.25 percent, or $2,500.
• If your credit score is 619 or lower, you pay 2.75 percent, or $5,500.

The FICO credit score used by Fannie and Freddie is the middle score generated by the three national credit bureaus. If there is more than one borrower, they will look at the middle score of the borrower that earns the highest income.

The stricter requirements have mortgage lenders calling this the new "predatory lending" formula that will escalate the number of deals that fall through in today's shaky market. Sal Bernadas, president of the Louisiana Mortgage Lenders Association, told the New Orleans Business Journal, "The fact that they're charging new fees to people with 20 percent down and a 680 credit score – there is no statistical reason they need to do that to protect that particular loan from losses."

Bankrate.com says that lenders have the option of converting the fees into higher rates for customers who don't want to pay the cash upfront; however, the end result could mean significantly higher monthly payments.

If you are thinking about getting a mortgage in the upcoming year, you will want to order your FICO credit report and review it carefully. Even small changes can make a big impact on the amount of mandatory fees you will be required to pay. And whether you decide to repair your credit yourself or use a professional agency to optimize your credit, keep in mind that it may take six months or more to get your credit score to the point where you don't have to pay the expensive fees.

View the LLPAs for loans issued after June 1, 2008 with terms of more than 15 years (based on loan-to-value and credit score)

LendingTree.com: "When Banks Compete, Your Identity May Be at Risk…"

LendingTree, an online leads company that purports to help consumers shop around for the best mortgage deals, recently admitted in a letter to customers that some of their former employees helped unauthorized mortgage lenders hack into their databases. Customer information collected between 2006 and 2008 – including personal data often used to conduct identity theft, such as name, address, Social Security number, income and employment information – was stolen.

While they say the information was merely used to market mortgage loans, not to commit identity theft, the fact remains that LendingTree's lax security measures contributed to a significant data breach that may very well increase the likelihood that their customers will become identity theft victims.

According to the letter, LendingTree did not disable the passwords of their former employees, some of whom shared the confidential login information with unauthorized lenders who then tapped into the databases to "access LendingTree's customer loan request forms."

LendingTree's Response

LendingTree would not confirm the number of customers affected, and is not offering much in the way of compensation or solutions. They recommended that their customers use their "free annual credit report" benefit to check their credit report for any suspicious activity and monitor their credit reports for the next 24 months.

LendingTree also has filed lawsuits against three small home loan companies based in California in connection with the data breach.

Criticism of LendingTree Practices

Much criticism has been leveled against the leads company for the way it conducts business. Some customers claim that when they selected to have four lenders review their application, LendingTree actually sent it to 10… or more.

Other consumers reported that they started the application process, but changed their minds mid-way. Yet LendingTree sold their incomplete applications – and they started getting bombarded with calls.

"I have worked for 2 big mortgage companies and a broker," wrote one mortgage broker. "I've learned that LendingTree not only sells your information to 2 or 3 lenders, they sell it to other small lenders and broker shops. And then after a while, they resell your information again so they can have continuous profit. If you ever applied with LendingTree, make sure that you have read the Terms & Agreement. They sell it to anyone that can possibly help you."

Some complained that they had so many inquiries generated on their credit reports that their credit score dropped by 60-100 points. Hard inquiries are inquiries where a potential lender is reviewing your credit because you've applied for credit with them. These include credit checks when you've applied for an auto loan, mortgage or credit card. Each of these types of credit checks count as a single inquiry. One exception occurs when you are "rate shopping". That's a smart thing to do, and your FICO score considers all inquiries within a 2 week period for an auto or mortgage as a single inquiry.

However, because LendingTree doesn't just sell information to a handful of lenders one time – they sell them repeatedly over a long period of time – this can, in fact, contribute to a decreased credit score.

Jackie Story – Are You Out There?

For four years, your Credit Mama has fielded phone calls from mortgage brokers and call centers all over the world looking for "Jackie Story." Apparently Jackie Story used to have my cell phone number. It didn't take long for me to figure out that she used LendingTree to apply for a mortgage or refinance. What did surprise me, though, was the sheer number of phone calls I received long after the first few rolled in.

At some point I finally started telling the callers that they had wasted their money by purchasing very old, very useless leads. I still wonder, though, if Jackie Story ever got that low interest rate she was looking for, and if her credit has been negatively impacted by all of the people who received her original application and tried to process it.

It's Not Just LendingTree

What many people don't know is that your information can also be purchased from the credit bureaus. "Trigger leads" – leads generated when you apply for a mortgage – plague mortgage brokers. When you apply for a mortgage, your phone number and address are sold by the credit bureaus to other mortgage companies. That's why many applicants begin receiving volumes of solicitations from companies they have never heard of.

Be wary of any lead company, such as LendingTree.com or LowerMyBills.com. And if you do not wish to receive pre-approved or pre-screened offers for credit or insurance, the Fair Credit Reporting Act allows you to "opt out" of receiving them. To opt-out, call toll free to 1-888-567-8688 or visit optoutprescreen.com.

Beware of Advance Fee Loan Scams

The increasing number of unsolicited e-mails ("spam") advertising mortgage refinancing, debt consolidation and limitation, small business loans, and special loan programs for veterans and minorities has caught the watchful eye of the Federal Deposit Insurance Corporation (FDIC), which has issued a special alert about advance fee loan scams.

While some of these e-mails may advertise legitimate loan programs and lenders, advance fee loan scams are becoming more prevalent as the credit crunch squeezes consumers.

According to the FDIC, advance fee loan scams prey on consumers who may be under financial duress and may be seeking quick and easy loan approval and funding. The scam typically involves the lender making false promises to arrange for a loan in return for fees paid upfront by the loan applicant. Scam artists may even design Web sites and online loan applications giving the appearance that the company is legitimate.

Fraudulent logos and letterhead of legitimate financial institutions or government agencies may also appear on documents that are faxed to the loan applicant. Potential borrowers may be asked to provide information through a Web site or be contacted by phone or e-mail by a "representative" who guarantees loan approval as soon as the borrower pays a required fee. The loan applicant may be told that the fees will be used to pay a third party for loan insurance or application processing, or to make the first month's loan payment. The loan applicant may also be told to send or wire transfer money to an individual overseas before receiving the loan proceeds.

In some cases, the loan applicant has been falsely directed to a legitimate financial institution with no knowledge of the transaction. In other cases, the loan applicant is told that the loan request was declined and is asked to forward additional money to qualify for a different loan program.

Warning Signs
The following are warning signs that may indicate a loan offer is not legitimate:

• The loan approval is "guaranteed." Lenders do not typically guarantee loans before analyzing the applicant's financial condition, credit history and ability to repay. Ads that say “Bad credit? No problem” or “We don’t care about your past. You deserve a loan” or “Get money fast” or even “No hassle — guaranteed” often indicate a scam.
• The loan applicant is required to pay upfront fees to a third party or individual. Loan fees are normally paid to a business after the loan has been approved. Any up-front fee that the lender wants to collect before granting the loan is a cue to walk away, especially if you’re told it’s for “insurance,” “processing,” or just “paperwork.” Legitimate lenders often charge application, appraisal, or credit report fees. The difference is that they disclose their fees clearly and prominently; they take their fees from the amount you borrow; and the fees usually are paid to the lender or broker after the loan is approved.
• They don't want to check your credit history, but they ask for personal information. It’s a warning sign if a lender asks for your personal information, such as your Social Security number or bank account number, especially if they aren't checking your credit history. They may use your information to debit your bank account to pay a fee they’re hiding.
• The lender or loan processor may be located outside of the United States.
• Fees are requested using a retail wire transfer system. A password is sometimes used by the overseas receiver to pick up the funds in an attempt to hide the true identity of the criminals and make funds more difficult to trace.

Victims of online advance loan fee scams should report the crimes to the Internet Crime Complaint Center at http://www.ic3.gov/.

Consumers Silenced in Testimony on Unfair Credit Card Practices

On March 13, registered Republican Steven Autry had planned to share his experience with Capital One before the House Financial Services Committee's hearings on H.R. 5244, a proposal to ban unfair and deceptive credit card practices:

"My relationship with Capital One goes back to 1999, when I was solicited with an offer for a Visa card with a "fixed" 9.9% rate card. I applied over the phone, and was approved. The card was used for both purchases and balance transfers in a positive relationship with Capital One for eight years until July, 2007. That's when Capital One advised me in a billing insert that my "fixed" rate of 9.9% was being raised to 16.9%. No reason or explanation was given – I was not late on payment, and had not utilized the entire credit limit. This was a unilateral change to the terms of our agreement.

"In August, of 2007, I wrote a letter to Mr. Richard D. Fairbank, Chairman, President, and CEO of Capital One, at the McLean, Virginia home office. My written statement will contain a copy of Capital One's response which includes the line, 'Unfortunately, changes in the interest-rate environment or other business circumstances may require us to increase rates, even for fixed-rate accounts in good standing.'"

Neither Steven nor the other three credit card victims who were invited to testify actually did. Congressman Spencer Bauchus (R-AL) and the credit card companies led the rally to muzzle the consumers by demanding they agree to publicly release all of their private financial records – or not be able to testify. (Bauchus, not surprisingly, has been generously funded by the financial services industry.)

The bully tactic worked. Representatives from Capital One, Chase and Bank of America spoke for hours about how fair and consumer-friendly their practices were, citing "facts" without any supporting data. Yet the consumers who flew in to testify were silenced by the threat of the financial institutions being able to expose anything they wanted about the consumers or smear them after the hearings were over.

Rep. Mark Udall (D-CO) railed on behalf of his constituent Susan Wones, who traveled to D.C. to tell lawmakers about how her credit card company doubled her interest rate to 25 percent without notice and despite her record of paying her bills on time. Susan holds a high credit score rating, pays her bills on time and doesn't exceed her credit card limit.

"None of the consumer witnesses objected to signing releases that would allow the committee to verify the facts concerning their individual stories, and I must say that I found the Financial Services Committee’s insistence on a broad waiver of privacy rights to be both unnecessary and counter-productive," Udall said in a release. "Narrowly drawn waivers could have been drafted by Committee staff weeks ago, instead of waiting until the eleventh hour to prevent consumer testimony. What happened today is emblematic of why so many Americans are fed up with Washington."

Rep. Maloney has promised to hear the voices of these consumers. Time will tell if that does indeed happen.

For now, we have Steven's written testimony, which holds this analogy:

"The NFL does not allow one team, in the midst of the fourth quarter, to unilaterally move their end zone 20 yards in their favor just because they don't like the point spread. The rules are laid out before the kickoff, and the umpires enforce the same rules for both home and visiting teams for the whole contest. It's time for legislation at the federal level that tells the credit card industry, 'Game Over' to unilateral, one-sided, rule changes."

View the archived webcast and read the prepared testimony of the witnesses who appeared before the Subcommittee on Financial Institutions and Consumer Credit.

Should I Pay Off My Car Loan or Credit Cards First?

I had a reader write in to tell me he was going to use his economic stimulous tax rebate check to pay down some of his debt. As a married father of four, he is expecting to receive a fairly sizeable rebate.

"I am so close to paying off my car loan, but I have some debt on my credit cards, too," he wrote. "I was fortunate to get a fairly low interest rate on my credit cards, so I'm torn between trying to pay off my car loan or pay down my credit card debt."

Your Credit Mama recommends paying down your credit card debt first, for a couple of reasons.

1. First, we all know how capricious credit card lenders are. Just look at Bank of America's recent move to increase interest rates on credit cardholders for no apparent reason. Because so many credit card agreements contain clauses such as any time-any reason rate changes and universal default (where a drop in credit score - even if inaccurate and/or unrelated to the account - will trigger a rate increase), carrying balances on credit cards is becoming a dangerous gamble.

2. Paying off credit cards improves your score more than paying off the other loans. The FICO scoring algorithm places a higher importance on your credit card balances. Your score will increase as your debt ratio on your credit cards decreases, while your score may not increase much at all by paying off your car loan, or student loan, or other type of installment loan.

Your goal should be to get your credit card balances to less than 30 percent of your total credit limits. So if you have a $1,000 credit limit, you should charge no more than $300. If you have several credit cards with balances, rather than paying off one card entirely, you may want to pay enough toward each card in order to get all of the balances down to 30 percent or less.

Get a CLUE About Your Insurance Score

A reader e-mailed me to voice her distress over her auto insurance rates. Prior to her divorce, she and her husband had been able to obtain reasonable rates for their two cars. But the divorce was messy. Their house fell into foreclosure as it languished in the stagnant real estate market. Bills that were supposed to be paid by her (now ex-) husband went into collections. Her credit score began dive. She eventually filed for bankruptcy. As things went from bad to worse, she was stunned to learn that her application for new auto insurance coverage was denied.

"I've never filed a claim or gotten a ticket for anything!" she wailed. "My husband and I always paid our insurance on time, and my driving record is totally clean!"

One thing that may have impacted her ability to get insurance for her car is her credit history and public records information. Insurance rates for homes and cars are often linked to credit scores. Insurers justify increased rates by relying on statistical analyses that purportedly show a correlation between an insured's credit history and likelihood of filing a claim.

This means if your credit file shows a history of late payments, foreclosure, tax liens, garnishments, bankruptcies, lawsuits and judgments, you may be smacked with high insurance rates or even be denied coverage.

This data - plus any information on claims you have filed (and sometimes even inquiries about your coverage that do NOT result in a claim) - is entered into a little-known database called CLUE (Comprehensive Loss Underwriting Exchange) or its smaller competitor, A-Plus. These national databases are used by insurers to determine whether you get new insurance. Insurers may also look at your claims history and "insurance score" when deciding whether to renew your coverage or how much to charge for your premiums. Because it is a national database, other insurance companies can review your claims history for five years. This may include losses for a property before you even owned it.

Some home buyers learned this the hard way, with deals falling through because of inquiries - not necessarily claims - that cause the property to be "blacklisted." The previous owner may have inquired about coverage for water damage; even though the owner may never have filed a claim, the information is posted into the database, and insurers will assume that there is a problem.

Consumer advocates have been pushing hard for reforms. As a result, some states have passed legislation to prohibit the inclusion of inquiries that did not result in a paid claim. Other states have begun passing laws to limit or prohibit the use of credit scores as the sole determining factor in deciding insurability or rates (see if your state has such laws); however, many insurance companies still rely on them to some degree.

Given the fact that 79% of credit reports contain errors, it may be concluded that rates may be artificially inflated or insurance unfairly denied when determined - in whole or in part - by credit history.

The good news is that this specialty report is governed by FCRA. Under the FACT act, you have the right to obtain a copy of your CLUE or A-Plus report each year, and the right to dispute inaccurate or incomplete information on those reports. If you have been denied coverage, had your policy cancelled or your premiums have increased, the insurer must notify you in writing; in addition, you are entitled to a free copy of your report (in addition to the free report you are allowed each year).

To get a copy of your CLUE report, visit ChoicePoint's Web site or call toll free: 1-866-312-8076. To get a copy of your A-Plus report, call toll free: 800-627-3487.

You will not get your actual insurance "score" - just the history of claims. Because your credit score is factored into whether you are insurable and what your rate will be, you should also purchase your credit score as well in order to get a complete picture of what your insurance company is seeing.

You May "Discover" New Fees in Your Credit Card Bills

Discover is introducing another way to enforce fiscal responsibility – or, as others may see it, another way to collect additional fees from its customers.

Beginning May 1, Discover will penalize its card holders for exceeding their credit limit twice by imposing the "penalty interest rate" (which, not surprisingly, is being raised from 29% to 31%). This action is in addition to the $39 over-the-limit fee Discover already charges.

Discover is not the only card issuer that is instituting rate increases for exceeding credit lines – Chase and Bank of America are including similar clauses in their member agreements.

According to calculations by The Red Tape Chronicles, affected customers will pay heavily for going over their limit:

A consumer with a $10,000 balance and a 15 percent interest rate who pays the minimum payment each month would pay $2,800 in a year and still owe $8,598 on that balance.

A consumer with a $10,000 balance and a 31 percent interest rate who pays the minimum payment each month would pay $4,047 in a year and still owe $8,891.54 on that balance.

If you are a regular user of credit cards, you should know that credit card issuers generally allow you to exceed your credit limit by 10 percent or more without warning. Credit card companies say they do this to prevent embarrassment or inconvenience in the check-out line. But with these stiff new penalties in place, you will pay for years for the privilege of using more credit than you have.

To maximize your credit score, you should not be charging more than 10 percent of your credit limit anyway, because of the negative impact of a debt utilization ratio. Know your credit limit. Stay below 50 percent of your limit (10 percent if possible). And if your credit card company offers e-mail warnings to let you know that you are approaching your credit limit, sign up today.

Identity Theft Protection or Legal Extortion?

If you've ever examined your credit card receipts, you've probably noticed that your credit card number has been reduced to a series of Xs with no more than four or five digits visible, and no other identifying information, such as expiration date.

That is, unless you've shopped at Costco, FedEx Kinko's, Toys 'R Us, IKEA, StubHub, Coffee Bean Tea & Leaf, or Jewell Food Stores, eaten at big Burrito Group eateries such as Mad Mex, purchased flowers at 1-800-FLOWERS or watched a movie at AMC Theaters.

These companies, among many others, have been targeted with class action lawsuits for violating a 16-month federal law designed to protect consumers' credit card information. The Fair and Accurate Credit Transaction Act (FACTA) prohibits companies from printing more than five digits of a credit card number or the expiration date on receipts to reduce the threat of identity theft.

Lawsuits have been flooding the legal system as consumers strike back against what they say is flagrant unresponsiveness to the FACTA statute. More than 300 class actions have been filed since the law went into effect in December 2006.

At stake is the livelihood of businesses across the country, from big box retailers and restaurants to small businesses such as parking garages and newsstands. With every noncompliant receipt assessed at anywhere from $100 to $1,000, companies are facing potential damages in the billions of dollars. The lawsuits are so financially damaging that retailers are threatening to file bankruptcy.

At issue is the fact that the plaintiffs don't need to demonstrate any real or actual damage caused by the violation or even that the companies had willful intent to cause harm. All they need is a receipt to claim statutory damages because a company has "flouted the law." Warehouse-club giant Costco is liable for as much as $17 billion – 15 times the company's 2007 profit – despite the fact that there are no claims of actual harm.

"In 22 years, I have never had a plaintiff sit across the table from me and say, 'I have no damages. My identity hasn't been stolen. I'm just bringing this lawsuit because I can,'" said David Block, a lawyer with Jackson Lewis, in a recent Law.com article. "There's something inherently wrong with a lawsuit where the plaintiff has no injury."

Defense lawyers are characterizing the lawsuits as "legal extortion," since the defendants did not profit from the infraction and plaintiffs have not shown evidence of actual harm. And some judges are paying attention – 12 have refused to certify some of these cases as class actions.

Many companies facing massive damage claims are quietly settling. Earlier this year, a class action lawsuit against big Burrito Group eateries was settled for FACTA violations. According to the settlement, customers who used a credit or debit card at various times at various big Burrito Group eateries last year are entitled to a $7 "settlement relief card." The cards can be used only at the company's Mad Mex restaurants under various restrictions. The settlement also calls for the company to pay for $105,000 in legal fees. Coffee Bean Tea & Leaf agreed to give customers free drinks and pay plaintiffs' lawyer fees. StubHub settled for undisclosed terms.

Should companies be compliant with the law? Heck yes. Should they be punished to the full extent of the law? Well, that depends. Bankrupting businesses or imposing maximum financial penalties will ultimately have a lasting negative impact on the quality and price of retail and online services. What price are we willing to pay to punish companies that were slow to comply with the law?

Thin is In with Experian's New Credit Scoring Tool

According the Federal Deposit Insurance Corp., there are nearly 73 million consumers in the United States with "thin" or no credit files – that is, they have little or no credit in their name. This segment of the population – typically students, young people, minorities, recent immigrants and those with low incomes – is traditionally underserved because lenders favor borrowers with more "meat" in their credit files, which allows them to better assess loan risks.

As a result, most "unscoreable" consumers pay bills and make purchases using cash, checks or debit cards – none of which is tracked by credit reporting agencies. And as the housing market continues to implode, more people will continue to rent instead of purchase, which means they won't have an established mortgage loan history for lenders to evaluate.

With profit margins eroding, financial institutions are looking to create new revenue opportunities by tapping into the billions of dollars in annual income represented by this currently underserved population.

Experian has launched a new credit scoring tool called Emerging Credit Score to help lenders "capitalize on missed opportunities" to "create new revenue opportunities" by factoring more than 25,000 attributes to measure thin or no-file consumers. It uses data from eBureau to track:

• Demographics
• Internet, catalog and direct-marketing purchases and payments
• Trades, inquiries and public records
• Property and asset records
• Telecommunications and utility data
• Industry specific and custom scores

Do Lenders Really Care?

While innovative ways of creating credit scores appear to be a boon for thin- or no-file consumers and financial institutions alike, the difficulty lies in having such scoring tools adopted by the banking industry. There already are a number of scoring models that purport to open the doors to this target population, including FICO's Expansion Score (released in 2004) and PBRC. Until banks use these tools on a regular basis to evaluate their prospects – something that has not been done industry-wide – the underserved population will not see much of a change. And if you have a traditional credit score from the Big 3, an expansion score will not be used in its place, which may seem particularly unfair if your credit history is rife with errors due to reporting mistakes or identity theft.

FICO Says… You Can't Have Too Much Credit

Once upon a time, not so long ago, having lots of available credit meant that you were "inevitably" doomed to go on a massive spending spree of epic proportions. Each unused dollar was a ticking debt time bomb, because even responsible users of credit would surely be lured into the vortex of temptation caused by those shiny cards with winking holographs.

But while conventional wisdom held that excessive credit – even unused – was a liability, Fair Isaac says there is no such thing as too much available credit when it comes to how they score credit. In fact, Fair Isaac's Barry Paperno states, "There really is never any good reason to close an account."

Three reasons why NOT to close an account:

1. The FICO score does not penalize you for having too much available credit. (Opening a bunch of new accounts may be a problem, but by itself, available credit is not a factor.)

2. While closing an account does not immediately eliminate all of the history associated for that account, the bureaus will automatically remove a closed account in 10 years (or less, if the credit card issuer decides to remove it). History – or how long you've had credit – accounts for 15% of your score. If you close an account that you've had for a long time, and your only remaining credit history is from credit cards or loans that were opened recently, it will negatively impact your score once that account falls off your report.

3. Closing an open account with a good history may negatively impact your ratio of balances-to-limits. Say, for example, that you have four cards with credit limits of $2,000 each, for a total available credit limit of $8,000. If you owe $1,000 on three cards, and you close the fourth, your debt ratio will increase from $3,000:$8,000 (37.5%) to $3,000:$6,000 (50%). This ratio accounts for 30% of your credit score. The higher the debt ratio, the lower your score.