Credit Checks Are Kicking the Jobless When They're Down

Most people have figured out that a bad credit report makes it hard to get a loan. What might come as a wider surprise is that, nowadays, bad credit can also keep you from getting a job.

Credit checks have become a routine part of the hiring process. Nearly half of all companies run them on potential employees, according to the Society for Human Resources Management. One in four Americans say they have been told that they missed out on a job because of their credit history (this from polling cited in a recent report by Demos).

And yet, as Richard Tonowski, chief psychologist for the Equal Employment Opportunity Commission, testified a few years ago, there is “very little evidence that credit history is indicative of who can do the job better.”

Indeed, credit problems are more a symptom of bad luck than of bad character nowadays. Many people were propelled into unmanageable debt by the housing bubble , the subprime mortgage boom or the surging unemployment of the Great Recession. “Millions of people stumbled financially when shrinking home prices left them unable to refinance or to sell a home,” Sen. Elizabeth Warren, D-Mass., pointed out in a recent floor speech about a bill she has introduced to prohibit the use of credit checks in employment decisions.

Warren was talking about a category of misfortune, moreover, that has fallen disproportionately on African-Americans and Latinos, who were unusually likely to be steered into needlessly expensive and tricky loans during the bubble years.

Young adults are also more prone to debt trouble; that’s partly because many people made student-loan decisions in good times, only to emerge into the labor force in not-so-good times. Among older Americans, the road to unmanageable debt began in many cases with the one-two punch of job loss followed by health insurance loss. Medical bills account for about half of all the debts reported by collection agencies to the credit reporting companies, or credit “bureaus,” as they are known.

In short, when employers make hiring decisions based on credit checks, it’s an institutionalized form of kicking people who are already down. It’s also a practice that compounds the enormous damage already inflicted on millions of Americans by a reckless financial industry.

So the case for Warren’s “Equal Employment for All” bill would be a strong one, even if it rested entirely on the injustice of assuming a correlation between work ability and the ability to pay one’s debts. But credit reports are also a highly unreliable guide to credit-worthiness, because the credit bureaus get the facts wrong way too often.

While there are many smaller, “specialized” credit bureaus, we’re mainly talking about the so-called Big Three – Equifax, Experian and TransUnion. Together, they collect an estimated 4 billion pieces of information a month on the financial activities of more than 200 million Americans; then they turn around and sell their data to creditors, debt collectors, insurers and landlords, as well as employers.

Despite their critical importance to the financial lives of Americans, credit reports contain unacceptable numbers of errors, which can be exhaustingly hard to correct. According to a 2013 study by the Federal Trade Commission, the reports of more than 20 percent of U.S. consumers include confirmed mistakes, while 5 percent of reports (covering 10 million people) have errors serious enough to make future credit costlier or more elusive.

Why do the credit bureaus appear seem be so untroubled by inaccuracy? Because their principal clients are companies, including lenders and debt collectors, that care more about having every last ounce of adverse information than about whether a few untruths slip in. This is an industry, in other words, that competes on its ability to dig up dirt, not to get the full, fair story.

How biased in favor of creditors and debt collectors over consumers are the Big 3 credit bureaus? One indicator is the common practice of matching information from a lender into a consumer’s credit report based only on seven out of nine digits of a Social Security number, as long as the names are similar. This can result in identity mixups in which information on two different people gets mushed together into a credit report that damages the person whose credit record is actually just fine.

Consider, also, the obstacle course facing those who discover a mistake and set out to correct it. An Oregon woman, Julie Miller, made nine futile attempts over a span of two years to get Equifax to fix her credit report, which had become mixed up with another woman with the same name. A jury awarded Ms. Miller $18.6 million in actual and punitive damages. (The award is on appeal.)

Under existing federal law, the credit bureaus must conduct a “reasonable” investigation whenever a consumer complains about an error. In practice, what they commonly do is forward an inquiry to the credit “furnishers” from whom the disputed information came, and then parrot back to the consumer whatever the furnishers say in their own defense. They spend woefully little on this process. By the mid-2000s, one credit bureau, which outsources its investigations to foreign affiliates and vendors, had reportedly whittled the cost down to 57 cents per letter of complaint, even with letters that raised multiple issues.

— Jim Lardner and Chi Chi Wu

Originally published on USNews.com

 

As the CFPB's Database Grows, the Complaint Picture Gets Clearer

The Dodd-Frank Act charged the Consumer Financial Protection Bureau with protecting consumers, and one piece of this protection involves taking consumer complaints. Thus was born the CFPB consumer complaint system and public database, which takes complaints from the general public on everything from mortgages and debt collection to student loans, money transfers, and more. How is it working so far? U.S. PIRG has issued a series of reports analyzing the complaints submitted to this relatively new  database, and their fourth and most recent report is “Credit Cards, Consumer Complaints: The CFPB’s Consumer Complaint Database Gets Real Results for Credit Card Holders.”

The report finds that nearly 40 percent of credit card complaints made to the CFPB have resulted in tangible relief to the consumer, with a median relief amount of $128. Additionally, non-monetary relief provided by the CFPB has included such actions as adjusting someone’s interest rates or correcting the records of a credit reporting agency. The CFPB has helped nearly 10,000 consumers get some relief on their credit card issues. PIRG also found that consumers were most likely to complain about billing disputes, with the next most popular complaints involving difficulties with APR or interest rates and trouble with identify theft, fraud, and embezzlement.

The CFPB has been collecting credit-card complaints since July 2011, and has expanded its complaint system to include additional financial products and services since then. PIRG’s past reports on the complaint database have analyzed complaints dealing with bank accounts, private student loans, and credit reporting. In Big Banks, Big Complaints, a report focused on complaints relating to bank accounts, PIRG found that 28 percent of such complaints resulted in monetary relief to consumers, and that the banks that generated the most complaints were also the biggest—Wells Fargo, Bank of America, and JP Morgan Chase. The report focused on private student loan complaints, Private Loans, Public Complaints, found that the most complained-about lender in every state was Sallie Mae—not too surprising since the company dominates the private student lending market. Here, the CFPB was able to help a smaller proportion of borrowers than in other categories; about 8 percent of those who submitted complaints on student loans – some 330 consumers – got monetary compensation. Others received non-monetary relief, such as help modifying collections proceedings and assistance with documentation.  Beyond helping individual consumers, the CFPBs complaint database is a tool that can help the agency identify trends and spot problems that should be addressed through guidance, rulemaking, or other means. Even unsolved complaints, in other words, can have practical value.

Finally, in Big Credit Bureaus, Big Mistakes, the report focused on the credit reporting industry, PIRG found that the three big nationwide credit bureaus (Equifax, TransUnion, and Experian) varied significantly in how they responded to complaints, with Equifax providing relief (both monetary and non-monetary) nearly three times as often as TransUnion and more than 10 times as often as Experian. The most common complaint involved incorrect information on a credit report. The CFPB was able to help almost 3,000 consumers, or just under 30 percent of those who complained.

The PIRG reports also suggest ways in which the CFPB can make its database more user-friendly by, for example, publishing the actual narratives of consumer complaints, adding clearer definitions of terms and instructions, and providing more detailed complaint categories and subcategories.

Why You Should Pay Attention To Senator Brown's Hearing On Bank Bailouts

Today the Senate Banking Committee’s Subcommittee on Financial Institutions is holding a hearing on a central question of financial reform – the progress (or lack of it) that has been made on rationalizing the public safety net to ensure that the financial sector doesn’t benefit from inappropriate taxpayer support.

Senator Brown’s hearing deserves wide attention. Considering the trillions of dollars in public support provided by the Federal Reserve to Wall Street and foreign banks over the 2008-2009 period, it’s notable that many Dodd Frank rules designed to limit such support in the future have not gotten much public scrutiny. As the General Accounting Office report to be discussed at the hearing points out, many of these rules have not been completed and their effectiveness remains uncertain. For example, regulators have not even proposed rules for the ‘swaps push out’ provision limiting the public backstop for derivatives dealing at major Wall Street banks, and they have also granted Wall Street a two year extension on any compliance with the law.

Serious questions also remain about whether regulators will be able to limit taxpayer exposure when exercising Dodd-Frank’s proposed new resolution authority for banks of the size and complexity of the largest U.S. ‘too big to fail’ mega-banks. And the Federal Reserve’s proposed implementation of Dodd-Frank limitations on its emergency lending authority – the authority used to distribute those trillions of dollars to global banks during the crisis – would seem to permit a repetition of the kind of indiscriminate public support to Wall Street we saw in response to the financial crisis.

A key lesson of the financial crisis is that the public safety net for the financial system is deeply flawed. Not only did it create inappropriate taxpayer exposure, but the ad hoc bailouts of institutions and individuals responsible for the crisis created dysfunctional incentives for the future.  The GAO report highlights how far we still have to go in addressing this problem within the existing framework of the Dodd Frank Act. Senators Brown and Vitter have also suggested another possible next step in their bipartisan TBTF Act – stronger statutory limitations on regulators’ ability to provide safety net assistance to Wall Street.

CashCall Case Sends a Message: Online Lenders Can't Collect on Loans that Break State Laws

Just before the holidays, the Consumer Financial Protection Bureau (CFPB) took an important action against CashCall Inc., an online loan servicer, along with its owner, J. Paul Reddam; a subsidiary, WS Funding LLC; and an affiliated company, Delbert Services.  The CFPB found that CashCall and its affiliate were working with an online lending agency called Western Sky, and collecting on loans made by Western Sky that were void because they violated various state interest rate caps or licensing requirements.

The CFPB’s action was important in clarifying that it is against federal law to collect debts that consumers do not owe because the loans are void under state laws. And this in turn is particularly important because absent such decisions, online lenders could undermine abusive-lending laws enacted by state legislatures and/or directly by the voters through ballot measures.

Western Sky, which has suspended operations “as it seeks to resolve the issues it faces in court,” operated out of a Cheyenne Sioux reservation in South Dakota. The company asserted that state laws did not apply to its business because it was based on a reservation and owned by a tribe member. The CFPB affirmed that this relationship “does not exempt Western Sky from having to comply with state laws when it makes loans over the Internet to consumers in various states.” The specific states where the CFPB investigation found violations of licensing requirements and/or interest rate caps were Arizona, Arkansas, Colorado, Indiana, Massachusetts, New Hampshire, New York, and North Carolina. Many such laws include language that specifically declares noncompliant loans to be void; thus, a company like CashCall does not have a legal right to collect on them.

The CFPB asserts that CashCall’s conduct was in violation of federal law, specifically the Consumer Financial Protection Act’s prohibition against unfair, deceptive, and abusive acts and practices. The bureau is seeking monetary relief, damages, and civil penalties from CashCall, while calling on the company to “adhere to all federal consumer financial protection laws, including prohibitions on unfair, deceptive, and abusive acts and practices.”

As CFPB Director Cordray stated in his remarks on the action, “It is unfair to collect money that consumers do not owe on loans that do not legally exist. It is deceptive to trick consumers into repaying illegal loans that state law has nullified in part or in whole. And it is abusive to take unreasonable advantage of a lay person’s lack of understanding when it comes to the application of state and tribal laws.”

— Rebecca Thiess