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FTC files “piggybacking” charges against credit repair operation
On March 9, the FTC filed a complaint against a Colorado-based credit repair company and its owner for allegedly making false representations to consumers regarding their ability to improve credit scores and increase access to mortgages, personal loans, and other credit products in violation of the Credit Repair Organizations Act, the FTC Act, and the Telemarketing Sales Rule. In its complaint, the FTC alleged that the defendants charged consumers illegal, upfront fees ranging from $325 to $4,000 per tradeline with the deceptive promise that they could “piggyback” on a stranger’s good credit, thereby artificially inflating their own credit score in the process. As the FTC explained, “piggybacking” occurs when a consumer pays to be registered as an “additional authorized user” on a credit card held by an unrelated account holder with positive payment histories. The FTC alleged that the defendants’ practices did not, in fact, significantly improve consumers’ credit scores as promised, and that while the defendants claimed on their website that their piggybacking services were legal, the FTC “has never determined that credit piggybacking is legal” and the practice does not fall within the protections of the Equal Credit Opportunity Act. Under the terms of the proposed settlement, the defendants will be banned from selling access to another consumer’s credit as an authorized user and from collecting advance fees for credit repair services. The defendants will also be required to pay a $6.6 million monetary judgment, which be partially suspended due to the defendants’ inability to pay.
CFPB issues semi-annual report to Congress
On February 3, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2019, through September 30, 2019. The report, which is required by the Dodd-Frank Act, addresses, among other things, problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau. In her opening letter, Director Kathy Kraninger reported that she has focused, “whenever appropriate and possible” on two areas: (i) encouraging saving, by establishing a program called “Start Small, Save Up”; and (ii) unleashing innovation by reducing regulatory constraints and revising innovation policies and promoting cooperation between state and federal regulators, as demonstrated with the launch of the American Consumer Financial Innovation Network last year.
Among other things, the report highlights credit scores, credit reporting, and the consumer credit card market as areas in which consumers face significant problems. The report notes that credit reports and credit scores greatly affect credit available to consumers. With respect to the availability of general purpose credit cards the report cites Bureau findings that in 2018, consumers with high credit scores had an 83 percent approval rate, whereas consumers with subprime credit scores had only a 17 percent approval rate. In addition to these areas of focus, the report notes the issuance of one significant final rule—Payday, Vehicle Title, and Certain High-Cost Installment Loans; Delay of Compliance Date; Correction Amendments—last year. (Covered by InfoBytes here.) Several less significant rules were also finalized, including (i) Technical Specifications for Submissions to the Prepaid Account Agreements Database; (ii) Availability of Funds and Collection of Checks (Regulation CC); and (iii) Home Mortgage Disclosure (Regulation C)–2019 Final Rule.
District Court’s reversal of jury verdict in FDCPA case overturned
On December 12, the U.S. Court of Appeals for the Fifth Circuit reversed the district court’s ruling overturning a jury verdict in favor of the consumer for a debt collection company’s (company) violation of the FDCPA and the Texas Fair Debt Collection Practices Act (Texas Act). The consumer sued the company claiming that after she sent the company a letter disputing a debt, the company failed to report to the credit bureaus that the debt was “disputed.” At trial, the jury awarded the consumer $61,000 for the company’s alleged FDCPA and Texas Act violations. Afterwards, the district court granted the company’s post-trial motion for judgment as a matter of law, overturned the jury’s verdict, and dismissed the case, ruling that the consumer failed to provide evidence that the disputed debt was a consumer debt.
On appeal, the 5th Circuit held that it is within the jury’s discretion to make credibility determinations and that it was permissible for the jury to credit the consumer’s testimony about the consumer nature of the debt—a determination which cannot be disturbed unless it is impossible that the testimony is true. In addition, the appellate court noted that the jury has discretion to draw inferences and that it reasonably inferred that the disputed debt was, in fact, a consumer debt, as the consumer claimed.
CFPB reexamines the effect of NCAP on credit scores and credit performance
On December 10, the CFPB released the latest quarterly consumer credit trends report, which evaluated the extent to which removal of public records from credit reports affects consumer credit scores and credit performance. As previously covered by InfoBytes, the three major U.S. credit reporting agencies began using stricter guidelines when considering consumer public records, such as tax liens and civil judgments, to be included in consumer credit reports as a result of the National Consumer Assistance Plan (NCAP). The NCAP, among other things, imposed restrictions on medical debt reporting and civil public records such as tax liens, civil judgments, and bankruptcies. Observing that the “NCAP public records provision resulted in the removal of all civil judgments and almost half of tax liens from credit reports by the end of July 2017,” this report compared consumer credit scores and credit performance for consumers that had public records removed from their credit report and consumers who did not. According to the report, “there was only a slight increase in credit scores following the NCAP,” and “the NCAP did not seem to have a large effect on the relationship between credit scores and consumers’ credit performance for consumers whose credit report included a lien or judgment compared with consumers whose credit report did not.”
New York blocks use of social networks in credit decisions
On November 25, the Governor of New York signed S2302, a measure which prohibits entities that are “licensed lenders” in New York, as well as consumer reporting agencies (CRAs), from including a consumer’s social network information in credit decisions. S2302 amends New York’s general business law and the banking law to prohibit licensed lenders and CRAs from considering “the credit worthiness, credit standing, or credit capacity of members of the consumer’s social network” or “the average credit worthiness, credit standing, or credit capacity of members of the consumer’s social network or any group score that is not the [consumer’s] own credit” information. Specifically, the amendment prohibits licensed lenders and CRAs from collecting, evaluating, reporting, or maintaining the information in a file. Additionally, the consumer’s internet viewing history also may not be factored into the licensed lender’s or agency’s “credit scoring formulas.”
CFPB report examines bankruptcy trends
On September 25, the CFPB released the latest quarterly consumer credit trends report, which examines how the volume and types of bankruptcy filings have changed from 2001 to 2018. The report focuses on consumers who filed for Chapter 7 or Chapter 13 bankruptcy during the reported timeframe. Key findings of the report include: (i) in 2005, there was a rush to file for bankruptcy before the income limits of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect, increasing the share of Chapter 7 filings to 80 percent of all personal bankruptcy filings that year; (ii) from 2015 to 2018, with the effects of the recession fading, Chapter 7 filings appear to have stabilized at about 63 percent; (iii) Chapter 7 and 13 filers, on average, had more than twice the mortgage debt during the recession than in the periods before and after; and (iv) median credit scores increase steadily from year-to-year after consumers file a bankruptcy petition, with Chapter 7 filers’ scores increasing more quickly than Chapter 13, on average.
FHFA issues final rule on new credit score models
On August 13, the FHFA announced its final rule on the validation and approval of third-party credit score model(s) that can be used by Fannie Mae and Freddie Mac (the GSEs), implementing Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule defines a four-phase process for a GSE to validate and approve credit score models: (i) solicitation of applications from credit score model developers; (ii) submission and review of applications; (iii) credit score assessment; and (iv) business assessment, which, among other things, evaluates the impact of using the credit score model on industry operations and mortgage market liquidity. Additionally, the final rule lays out timing and notices for GSE decisions under the process. After a GSE approves or disapproves of an application, within 45 days the FHFA must approve or disapprove of the GSE’s proposed determination. If any applications are approved, the credit score solicitation will be made publicly available. The rule will take effect 60 days after it is published in the Federal Register.
FTC halts operations of credit-repair company
On June 21, the FTC announced that the U.S. District Court for the District of Connecticut temporarily halted the operation of an alleged credit repair scheme based on allegations the company charged illegal upfront fees and falsely claimed to substantially improve consumers’ credit scores in violation of the FTC Act, the Credit Repair Organizations Act, the Telemarketing Sales Rule (TSR), the Consumer Review Fairness Act, TILA, and the EFTA. According to the complaint, since 2014, the company, among other things, (i) claims they can improve consumers’ credit scores by removing negative items and hard inquiries from credit reports; (ii) charges advance fees for their services; (iii) does not provide the required disclosures for its services, including credit transaction disclosures related to the financing of the service fees; (iv) engages in electronic funds transfers from consumers’ bank accounts without proper authorization; and (v) threatens consumers with legal action after consumers complain about the lack of results. The court order requires the company to temporarily cease its operations and ensures the company’s assets are frozen.
CFPB report explores ties between credit score fluctuations and credit applications
On May 30, the CFPB released the latest quarterly consumer credit trends report, which examines the fluctuations in consumers’ credit scores and the timing of consumers’ applications for credit. The report analyzes consumers whose credit scores showed large increases or decreases between 2009 and 2017. Key findings of the report include, (i) consumers with large credit score changes, in either direction, tend to be younger and have considerably lower credit scores on average; (ii) application rates drop sharply as credit scores reach their minimums, and then, after hitting bottom application rates trend steadily upward; and (iii) patterns in application rates generally hold regardless of the levels of minimum and maximum credit scores.
The report notes that while the Bureau did not perform “a full accounting of the underlying mechanism” that leads to the observed patterns, there are a few possible explanations, including (i) consumers are more aware of their credit scores due to the wider availability of them, which would influence timing of applications; (ii) hard inquiries and results from hard inquiries may contribute to the observed peaks and troughs in the scores; (iii) marketing practices by card issuers may contribute to increased applications after a consumer’s credit score qualifies the consumer for a prescreened offer.
FHFA pauses credit score initiative, will use formal rulemaking to create new credit score model
On July 23, the Federal Housing Finance Agency (FHFA) announced that it will not decide this year whether to update the credit score model used by Fannie Mae and Freddie Mac (the Enterprises), as previously announced. Instead, FHFA will focus on implementing Section 310: Credit Score Competition, of the Economic Growth, Regulatory Relief, and Consumer Protection Act (Public Law 115-174) (the Act). Section 310 requires FHFA to establish, through the rulemaking process, standards and criteria to govern the verification and validation of credit score models used by the Enterprises. According to the press release, prior to Section 310 becoming law, FHFA and the Enterprises had been engaged in an ongoing initiative to evaluate a new credit score model’s potential impact on “access to credit, safety and soundness, operations in the mortgage finance industry, and competition in the credit score market.” However, after Section 310 was enacted in May, FHFA “determined that proceeding with efforts to reach a decision based on our [initiative] and timetable would be duplicative of, and in some respects inconsistent with, the work we are mandated to do under Section 310 of the Act. In light of that, we are communicating to Congress that we are transferring our full efforts to working with the Enterprises to implement the steps required under Section 310.” FHFA will release a proposed rule open for public comment in the future to govern the verification of credit score models.