Sallie Mae Wrecks Credit Scores of One Million Loan Holders

A glitch in the way Sallie Mae – one of the nation's largest student loan firms – reported information to the credit bureaus last week caused the credit scores of approximately one million loan holders to plummet – some by as much as 150 points.

According to an article on msbnc.com, the borrowers affected by the glitch were the ones who used graduated payment plans. These plans assume that former students will make more income as they progress in their careers, and thus allow them to pay back less in the early years of their loan, and more in the later years.

FICO, however, interpreted the new reporting as "arrangements made with credit grantor to make partial payments." This made it seem as though the borrower had negotiated for a reduced payment plan after being delinquent – a big black mark on a credit report. And FICO's scoring algorithms penalize those with top credit scores more than those who are consistently delinquent.

According to Sallie Mae, the glitch affected "roughly 10 percent of our 10 million customers," and only impacted Equifax credit reports and scores. (The reporting error was fixed before TransUnion and Experian updated their files.)

For any affected consumers who were in the process of getting a loan, insurance or a job, this would have had a devastating impact on the rate and terms they were able to get. While Sallie Mae says the problem has been corrected and scores returned to what they should have been prior to the glitch, the only way for borrowers to know for sure is to purchase a copy of their credit report.

Given that credit scores control so much of our lives, this situation exemplifies the concern that a simple error can wreak havoc on the financial health of millions… and reinforces why you should always keep an eye on your credit.

Texas Man Successfully Uses LifeLock CEO's Identity to Get $500

From the annals of "I could have seen that coming" come reports that LifeLock CEO Todd Davis' widely publicized Social Security number has been successfully used by a man in Texas to trick an online payday lender into giving him $500. Davis learned about the fraud when the lender called him to collect.

This was not the first time people have tried to steal Davis' identity. According to a story today on Yahoo news, Davis reported that at least 87 unsuccessful attempts have been made. Of course, Davis pretty much asked for it by plastering his Social Security number on billboards, television ads and in print, practically daring would-be identity thieves and hackers to test his company's ability to prevent identity fraud.

LifeLock, already facing a lawsuit by credit bureau giant Experian, is now facing lawsuits from consumers in Maryland, West Virginia and New Jersey contending that the service did not work as promised. The lead attorney in these cases, David Paris, is trying to obtain class-action status, and claims he uncovered records of other people applying for or receiving driver's licenses at least 20 times using Davis' Social Security number.

Davis stands by his stunt. He told reporters, "There's nothing on my actual credit report about uncollected funds, no outstanding tickets or warrants or anything… There's nothing to indicate my identity has been successfully compromised other than the one instance. I know I'm taking a slightly higher risk. But I'll take my risk for the tremendous benefit we're bringing to society and to consumers."

LifeLock's services include helping consumers set up fraud alerts with the major credit bureaus, which inform them when someone tries to tap into their credit. The fraud in Texas occurred because the payday lender did not go through one of the three major credit bureaus before approving the transaction.

The services, however, can't completely immunize a consumer from identity theft. If a stolen Social Security number is used on a job application, on a form submitted for medical services or during an arrest, the lack of reporting requirements make it impossible for any company to know with certainty that someone's identity has been compromised.

That's not the end of LifeLock's headaches, however. The company is also being sued in Arizona over its $1 million service guarantee. The plaintiffs in the case claim that the guarantee is misleading because it only covers a defect in LifeLock's service.

The question that remains unanswered: when will tighter mechanisms be put in place to deter and report fraud?

Senate Passes "Common Sense Legislation" Regarding Credit Card Receipts

The Credit and Debit Receipt Clarification Act – a bill that says a business that printed an expiration date on a receipt over the past 18 months cannot be found in violation of the Fair Credit Reporting Act as long as the merchant truncated the customer's credit card to no more than the last five digits (and complied with other FCRA requirements) – has passed in the U.S. Senate.

The bill was sponsored as H.R. 4008 in the House by Financial Services Committee member Representative Tim Mahoney, D-Fla., and as S. 2978 in the Senate by Banking, Housing and Urban Affairs Committee member Senator Charles Schumer, D-N.Y.

The decision was hailed by businesses and restaurants and is expected to nullify the more than 300 class action lawsuits that contended that FACTA required merchants to both truncate the credit card number and leave off the expiration date. The lawsuits sought fines as high as $1,000 for each non-compliant receipt and were so potentially damaging that a number of retailers threatened to file bankruptcy. Plaintiffs did not need to demonstrate any real or actual damage caused by the violation or even that the companies had willful intent to cause harm.

Merchants said their interpretation of the law was that they needed to do one or the other, but were not mandated to do both. Most reasoned (and some experts concurred) that the expiration date was of little value without a full credit card number.

According to a release issued by the National Retail Federation and the National Council of Chain Restaurants, the new legislation would protect merchants from lawsuits for expiration dates printed between the time the FACTA rule went into effect and the time the measure is signed into law. But merchants will still be required to both truncate card numbers and leave off expiration dates going forward.

“The continued proliferation of these lawsuits is an unnecessary drain on resources during a time of financial uncertainty in the nation’s economy,” NCCR Vice President Scott Vinson said. “Experts have said truncation of credit card numbers by itself is sufficient to prevent credit card fraud or identity theft regardless of whether the expiration date is printed on a receipt. Retailers and restaurant owners nationwide are delighted that Congress has passed this common sense legislation and look forward to seeing it signed into law as soon as possible.”

President Bush is expected to sign the measure shortly.

Your Turn: FTC Seeks Comments on Credit-Based Insurance Scores

As part of its efforts to fulfill its obligations under the Fair and Accurate Credit Transactions Act of 2003 (FACTA), the Federal Trade Commission and the Federal Reserve Board have been conducting ongoing studies on the effects of credit-based insurance scores on the availability and affordability of financial products such as credit cards, auto loans, mortgages and property insurance.

With the completion of its study on the effects of credit-based insurance scores on consumers of auto insurance, the Federal Trade Commission now is focusing its attention on the effects of credit-based insurance scores on homeowners insurance. A press release issued today seeks public comment on any evidence the FTC and Board should consider in conducting the study.

It's no secret that credit scores have long been used by the insurance industry to calculate what your premiums are for auto or property insurance. Consumer advocates have argued that basing premium costs on credit scores disproportionately affects minorities in a negative way. According to the FTC, the results of their investigation into the use of credit scores in underwriting auto insurance policies showed a correlation between insurance scores and the likelihood of filing an insurance claim. The FTC also stated that the use of credit information did not result in racial or ethnic discrimination. Insurers claim that more than 50 percent of policyholders have a lower premium because of good credit.

A number of states, however, have introduced legislation to ban the use of credit in homeowners and auto insurance underwriting. Rep. Luis Gutierrez (D- IL) introduced a bill in Congress (H.B. 5633) that would amend the Fair Credit Reporting Act (FCRA) to prohibit auto and homeowners insurance companies from using credit information for underwriting if the FTC concludes insurers’ use of credit information results in racial or ethnic discrimination or represents a proxy for race or ethnicity.

If you would like to comment, click here for instructions. The deadline for comment is June 18, 2008.

Capital One Under Fire in California

The credit card giant Capital One, which has been in the crosshairs of consumer advocates for years, is mired in more lawsuits.

Lawsuit #1:

California Attorney General Jerry Brown has been eyeing Capital One for nearly two years, investigating the company for possible violations of the state's unfair business practices and false advertising laws. In November 2006, Brown first requested "books and records… and interviews with employees" due to "substantial concerns about the credit card practices of Capital One," including solicitations for credit card applications mentioning balance transfers and accounting closing practices.

The attorney general made subsequent requests for information as part of its ongoing investigation – to no avail. Capital One's response? They filed a lawsuit this month claiming that as a national bank, only the U.S. Office of the Comptroller of the Currency can examine its records or take any enforcement actions. Never mind the fact that when Brown made his requests, Capital One was NOT a national bank. In fact, according to Reuters, it wasn't until March 2008 – 18 months after the attorney general made his first request - that Capital One converted its Virginia charter to that of a national banking association.

Lawsuit #2:

Former Capital One cardholder James Krider has filed suit in the U.S. District Court, Central District in downtown Los Angeles, against Capital One and the three major credit bureaus over post-bankruptcy false credit reporting. Seems that Capital One continued to report three credit cards that had been discharged in his bankruptcy filings. After months of disputes, Capital One insisted it had the right to continue to report his discharged accounts as "delinquent" on his credit reports even though the debts had been discharged through the bankruptcy.

According to Krider's attorney, Robert Brennan (Brennan, Wiener & Assoc.), "a growing number of banks and credit card companies have quietly been 'pushing the envelope' on credit reporting of bankruptcy-discharged debt, hoping to pressure consumers who have recently been through bankruptcy to pay these debts.

"I admit, I am not proud of having to declare bankruptcy, but the bankruptcy notation on my credit reports is bad enough and that will be there for 10 years," Krider said in a press release issued by his attorney. "Having the credit card companies continue to report my old credit cards as still delinquent is doubly bad and makes it that much tougher for me to get back on my feet."

Krider is seeking money damages as well as a permanent deletion from his credit reports of any delinquent reporting of any accounts included in his bankruptcies.

The case is expected to go to trial in February 2009.

Banks Are Putting Credit Cards on Ice, Too

If you've got a credit card "just for emergencies" that hasn't been used for an extended period of time, you may find that when that emergency does come, your card is no longer good.

According to a report by Smart Money, the soaring number of credit card delinquencies has banks trying to reduce their exposure to risky or unprofitable accounts. And it's been suggested that the Fed's proposed new rules restricting the banks' ability to arbitrarily raise interest rates and give consumers more time to make payments may be triggering an increasing number of credit card closures.

Even if you don't rely financially on your credit cards, closing credit lines can hurt your credit score. That's because your FICO score depends in part on your credit history and the amount of available credit you have compared to the amount of debt. If the card that is closed is the one you have had the longest, your score will certainly drop. And reducing the amount of available credit you have will have a negative impact on your debt-to-available credit ratio, which will decrease your score.

So... use your backup credit cards occasionally. If you've had a card issuer close your account, and you want to keep it open, contact the company and ask them to reconsider.

Warning: Frozen HELOCs Ahead

I recently read about a Hollywood Hills homeowner who had a $60,000 home equity line of credit (HELOC) that he was going to use to remodel his kitchen. He had already begun ripping out the cabinets and appliances when he discovered that his bank had frozen access to his HELOC, citing falling home prices in California. Not only was the remodel work delayed until the homeowner found other bank financing, but he was dismayed that the new interest rate was higher than his approved HELOC rate by more than three percentage points.

Thousands of consumers are receiving notice that their HELOCs are being cancelled. According to Bankrate.com, Countrywide, Bank of America, Washington Mutual and IndyMac Bancorp have frozen about 600,000 equity credit lines nationwide since January. Countrywide alone has already suspended an estimated 122,000 lines of credit where homes fell below appraised values; USAA has frozen or reduced 15,000 accounts. Other big lenders, including Chase and Citibank, are doing the same in an effort to quell the rising number of delinquencies on HELOCs. Economy.com pointed to a 47 percent increase in delinquencies on HELOCs as of September 2007, and predicted that the numbers would be even worse in 2008.

Areas of the country where home values have plummeted by 10 percent or more are at greatest risk for HELOC cancellations, especially affecting those who purchased homes in the past few years with little money down. These cities include Los Angeles, Chicago and Las Vegas. Homeowners in Las Vegas are being hit especially hard - it is estimated that 15,000 people (5 percent of the total homeowner population) have had credit lines suspended.

Missed payments or a decrease in credit score can also trigger a HELOC freeze, although homeowners with credit scores in the upper 700s and lower 800s - considered a very good score - are being affected as well.

If you are in the middle of renovations or are counting on having access to the funds for bills, college tuition, or as an emergency account and you think your line of credit may be at risk because you are in a troubled market, you may want to draw a lump sum and put it into a high-yield savings account. While you will be decreasing your equity and will have to begin paying interest, you will guarantee that the money will be there when you need it.

If your HELOC has already been cancelled, you can try to fight it. A realtor or appraiser can help you bolster your case by showing what houses have been selling for in your neighborhood. Be aware of how the tighter lending standards may affect you – in the hardest hit markets, homeowners can only borrow 60 percent of a home's value. If a drop in credit score is the reason for the cancellation, be sure to pull a copy of your credit reports and review them carefully.

Banks may be willing to compromise by giving you a lower credit line rather than cutting off your funds completely. And you can always shop around with other lenders if you have at least 10 percent equity.

The Fed Proposes Aggressive Restrictions on Abusive Credit Card Practices

In a move that is stunningly pro-consumer, the Federal Reserve Board has proposed tough new policies to curtail the types of abusive credit card practices that have been the subject of recent Congressional hearings.

These practices, which include arbitrary increases in credit card interest rates for existing balances, applying payments only to balances with the lowest interest rate rather than the highest rates and double-cycle billing (charging interest on debt that has already been paid), would be changed under the new, stricter policies. In addition, banks may also be required to give customers advance notices as well as the ability to opt out of overdraft programs.

The rules could go into effect by the end of this year.

The banks are already in an uproar over the proposed rules, which could affect more than 10,000 financial institutions. Industry representatives have begun threatening exhorbitant annual fees, elimination of balance transfers and increased interest rates. According to lobbyists, the restrictions would eliminate credit or make it more expensive to get credit.

The biggest source of angst for banks is the issue of universal default, which allows banks to increase a customer's interest rate for any reason, including defaults on other credit cards or loans, slight drops in credit scores or an increase in banks' cost of funds.

Eliminating universal default, known in bank lingo as "risk-based repricing," is a key component of a number of bills on Capitol Hill. The Fed's proposal would allow banks to raise rates when a consumer defaults on that account, and to consider "outside factors" to raise rates for new transactions. However, banks would not be allowed to use such factors to raise rates on existing balances.

According to On Wall Street, Citigroup and JPMorgan Chase & Co. announced they would no longer do universal default; however, Bank of America still uses risk-based repricing, and Capital One reprices its customers when their cost of funds rate increases.

Consumer advocates are applauding the Fed's aggressive stance. A vote is expected today.

"Arbitration Coalition" Heads Back to Court

Last Friday, the U.S. Court of Appeals in New York breathed new life into a class action lawsuit that has been languishing since 2005. At issue: alleged anti-competitive practices involving mandatory arbitration clauses in credit card agreements.

The lawsuit claims that banking giants Bank of America Corp. Capital One, Discover, Citigroup and Washington Mutual worked together to draft and institute mandatory arbitration clauses, which would ensure that customers that have a dispute with them could not take them to court to resolve their issues – they would have to file claims with an arbitration board instead.

The suit alleges that this "Arbitration Coalition" successfully eliminated all non-arbitration credit cards from the market, and as a result, hurt consumers by limiting their rights. The plaintiffs tried to show that the banks colluded by sharing tips on how to write enforceable agreements and agreeing to impose the same terms in each of their credit card contracts… all of which deprived "the cardholders of meaningful choice in the area of credit card services, and [diminished] the overall quality of credit services offered to consumers."

The case seemed to die in the U.S. District Court for the Southern District of New York when the court ruled that because the plaintiffs could not prove they had suffered actual harm, there was no case.

But the U.S. Court of Appeals in New York agreed that cardholders could have been harmed through a lack of competition and sent the case back to the lower court. After all, if all credit cards require mandatory arbitration, then consumers do not have a choice of using a credit card that does not mandate it – they only have the choice not to use credit cards at all.

While this matter is likely to be debated for a while, it is just one more credit card-related issue that is raising the ire of consumers and capturing the attention of legislators.