The announcements earlier this week of the lawsuits against Countrywide, the nations largest lender overshadowed another important legal action pending against credit card issuer CompuCredit by the Federal Trade Commission in Atlanta earlier in the month.
According to the latest Business Week article by Jessica Silver-Greenberg..'Your Lifestyle May Hurt Your Credit.' As Greenberg notes, most borrowers understand that timely payments on their balances are important to maintaining access to credit. But many are unaware that this is NOT the only criteria which may be reviewed to assess their credit worthiness.
Sometimes truth is stranger than fiction! What if the following happened to you? Let's say, you've been having relationship troubles. Your marriage is coming apart at the seams and in an effort to stave off a divorce, you consult with a marriage counselor for several months; paying your bill by credit card. What if the stress of the process causes you to drown your sorrows with a few extra drinks at the local bar after work? You may ask...who cares?
Or here's another scenario. What if instead of getting new tires for your car, you decide to retread them instead; once again paying the mechanic with your credit card. Well, you might be surprised to discover that your banker cares. You see, every single electronic transaction is creating a financial record. What many of us fail to take into account, is that every single electronic notation also in a sense, tells a story. One which may be subject to interpretation.
Of instance, the marriage counsel may NOT be viewed as a positive step by the remote cold calculations of the statistical analysis of a computer aided program. In fact, you might be surprised to be pegged as a potential 'problem borrower' due to statistical analysis which indicates that you are at a higher risk for financial crisis due to the increased probability of a divorce. The extra drinks...well in combination with marital therapy may indicate the potential for instability. Interesting....
While most of us are familiar with the credit scoring model, FICO, this is not the only method used to make decisions which affect a bank's lending decision. In a recent conversation with Ron Bullis, an experienced lender with Platinum One Financial in the Grand Rapids area we discussed the fact that banks have always had at their disposal a number of ways of determining your financial viability. However, by law they have to disclose this to you.
This is the contention that lies at the heart of the Federal Trade Commissions' lawsuit against CompuCredit. It's NOT that issues like retreading a tire or visiting a marriage counselor should not be criteria used to make determinations regarding your credit worthiness. Your bank has the right to make that decision in any way they choose. BUT, they must disclose.
So...is your behavior up to par? As consumers, we will all need to be aware of the fact that it's not just our credit payment history anymore. With increasingly sophisticated systems, your lifestyle patterns may be scrutinized in a manner which you never imagined.
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Lola Audu, is the Designated Broker & Owner of Audu Real Estate. Our company specializes in helping people buy and sell homes in the greater Grand Rapids, West Michigan area. We've had the privilege of helping hundreds of clients succeed in their goals of purchasing and selling property including demonstrated success in the negotiation of Short Sale Transactions. You can contact us via e-mail @ info@auduhomes.com or by phone at 616-791-0511.
Hi Lola, The ability to track and interpret our electronic transactions is a mighty one indeed. So open to misuse and so hard for us to defend against.
Lola- this is terribly alarming- if this is true, than I am a supermarket-a-holic with a gas problem! This is a very important post!
Bill...that's precisely the point. It's not just tracking the data (which is the pertinentto payment history) it's interpreting the data using statistical analysis which presents some interesting moral and ethical issues.
Allison...Thanks for stopping by to read and comment. Supermarket-a-holic...is that a diagnosable condition...LOL
Very interesting Lola. I guess the possibilities are endless. What if you spend $200 a week at the liquor store? This certainly takes"profiling" to the next level. And you are right that the consumer has the right to know. The implications are mind boggling.
Bryant, wouldn't it be somewhat ironic that one of the most troublesome forms of profiling today may have to do with our financial life? I still don't understand why this company didn't disclose according to the allegations by the FTC. It would seem fairly easy to bury within the small print. The implications are mind boggling...
Lola,
I cannot comment on credit card, auto, or pawn shop credit decisions. Mortgage decisioning does not measure such things. If your lifestyle is to max credit cards then your life style impacts your credit rating.
Any non objective determinant that is used is very likely to land the lender in court. The same goes for lender pricing.
Credit evaluation must be based on factors that demonstrably predict payment performance, or the credit evaluation is subject to discrimination. Further those factors must be shown to be applied consistently.
Our state auditors check very closely for any hint of fraud or unfair approval and pricing practices.
My suspension is that the credit decision was based more on a drastic sudden increase in the use of the credit, and not what the increase use was for.
Maybe you have more verified information to the contrary.
Thanks,
Richard
Who would think they care as long as we pay our bills they should keep the information in the report confidential and not affect our credit with this information.
Richard, The press release on the Federal Trade Commission is quite instructive about the issues regarding this case. If you read the statement by the FDIC, it seems unlikely that such a drastic action would have been taken on an arbitrary basis or for actions which did not indicate a pattern. I suppose that as the case plays out in court this will become clearer.
Nevertheless, lenders have never been barred from using any formula they choose to determine credit worthiness. The issues that have warranted investigation have been fair application for lending decisions and proper disclosure. Thank you for adding your perspective to this discussion.
Terry, I think that's a sentiment shared by many of us.
Lola,
In my reading of the FTC press release, I could not find a mention of the alleged discrimination against the types of purchases made. It refers to alleged improper disclosures of the fees involved. The article seems to me to take a good bit of literary license and to make effective use and placement of selective quotes.
There may be a pattern of inadequate disclosure. In fact if their disclosures are inadequate, then probably the trend is 100%. All of the disclosures would be inadequate.
Maybe there is more on this, and we can watch for developments.
My experience in consumer and mortgage lending has not encountered a practice of credit evaluation based on the type of purchases, just the amount and the payment history.
Additionally, the type of credit - bank, car, mortage, major revolving, deparment store revolving, finance company - has an impact.
Thanks,
Richard
Richard, this is the quote from the press release regarding the disclosure of monitoring purchases..."Additionally, CompuCredit failed to disclose that it would monitor consumers' purchases, and potentially reduce their credit limits based on undisclosed "behavioral" scoring models."
Because consumer credit eventually impacts lending decisions regarding housing, this sort of thing can adversly impact mortgage financing. It's a case to be followed. This was surprising to me as well.
My experience with consumer and mortgage lending would not have led me to conclude that anything other than payment history was a part of my evaluation for credit worthiness.
WOW!!!! I did not know this at all!!! Good info to know!
Hi Lola,
You are absolutely accurate! With the electronic world, there are amazing possibilities that we never dreamed would be possible!
Lola,
I did miss that quote in the press release. Thanks for correcting this.
For me it gives the news article more credibility.
My finance experience is not in credit card finance. I do not know what changes in buying patterns predict future delinquency. Do you suppose that certain purchase patterns or changes in purchase patterns tend to predict default patters?
This might be especially critical in the case of borrowers already struggling with credit management issues.
If so, then it is important for consumers to be educated and maybe this suit will bring out this information. Proper disclosure will help us all, including the tax payer who might ultimately be called upon to rescue a failing bank.
Maybe it can be made part of credit counselling, and should be part of the credit restoration process.
Such subjective measures are not part of the credit evaluation for mortgage lending. It is not even known, but credit scores do reflect recent large balance increases, and especially a pattern of large increases.
Am I right in understanding that the suit is about improper disclosure and perhaps about misleading advertising that may border on being predatory towards those who are desperate to restore their credit?
This is not a suit over violation or misuse of privacy information?
Please correct any further misreading that I may be guilty of.
Thanks,
Richard
Lola - thank you for sharing this information. I have to keep getting used to the fact that our lives are open books.