Credit bureau move creates 'secret' scores

Credit bureau Experian's recent move means lenders can see FICO scores that you can't. That's just wrong, and the law needs to catch up with today's credit scoring practices.

Experian wants to keep you in the dark.

There's really no other way to characterize the credit bureau's decision to stop selling FICO credit scores to individuals as of Feb. 14. Experian pulled out of its agreement with myFICO.com, which had been the only place where consumers could buy their FICO scores from all three bureaus.

Experian will continue to sell FICOs to lenders. That's big business, because the FICO is the leading credit scoring formula and the one used by most lenders.

But to consumers, Experian is pretending the FICO is no big deal.

"There is no one credit score that all financial institutions use to make decisions, and there is also no one credit score that consumers must use to help them understand and manage their credit," Experian spokeswoman Susan Hensen wrote me in an e-mail. "There are many reputable credit scores on the market that consumers can use to evaluate their creditworthiness before making financial decisions."

• Experian has been reciting this line for years. When consumers buy credit scores directly from Experian, they're sold what the bureau calls "educational" scores, Experian's PLUS or the VantageScore, a formula cooked up with the other two major bureaus that's gone over like a lead balloon with lenders.

So many consumers have been fooled by this gambit, thinking they're getting FICOs when they're not, that some consumer advocates refer to these other credit scores as "FAKO scores."

Why a FICO matters most

Experian's position is that a credit score is a credit score. But these non-FICOs have consequences:

• Mortgage brokers and other lending professionals have long complained -- even before the VantageScore was introduced -- that the bureaus' educational scores are often 30 to 100 points higher than consumers' FICO scores.

• The VantageScore's scale is so different from FICO's -- 501 to 990, compared with FICO's 300 to 850 -- that the same number means vastly different things. A 760 would be an excellent FICO score, for example, but a mediocre rating on VantageScore.

• The result is that would-be borrowers who bought something other than a FICO may think they're in a position to get a great rate, when they might not have a high enough score to get any loan.

Mortgages are also a prime example of why you need to see all three of your FICO scores, not just the two that are still available at myFICO.com.

That's because mortgage lenders typically pull all three of your FICO scores and use the middle one to determine your interest rate. If your FICO scores are 740 from Experian, 680 from TransUnion and 715 from Equifax, for example, most lenders will use the 715 score to set your rate.

If one of those scores is missing, you have no way of knowing what your middle score is or what rate you deserve. You're walking blind into one of the most important financial transactions of your life.

That's just scary.

No right to face your accuser?

In this particular case, consumers are the grass being trampled in a fight among the elephants: one of the credit bureaus and Fair Isaac, the company that created the FICO formula.

Experian Executive Vice President Peg Smith said the bureau didn't set out to cut consumers off from their FICO scores and in fact wanted to expand access to the scores by selling FICOs from Experian.com, something its agreement with Fair Isaac hadn't allowed.

But the terms of the new contract Fair Isaac proposed were "so unreasonable," Smith said, that Experian ended negotiations and decided to rethink its relationship with the scoring formula provider.

• Video: What Experian's pullout means

"This was never intended to disenfranchise consumers," Smith said. "They've been caught in the middle."

But what led to Experian's move isn't as important is that it happened.

And I say: Enough already. It's time that we stopped allowing our personal data to be seen solely as a profit center for big, faceless corporations. Your access to the information that's critical to your financial life shouldn't be left to the whims of credit bureaus or lenders or anyone else.

If anyone uses a score to evaluate you -- any score -- you should have the right to see that score and challenge the data that go into creating it.

Because FICOs aren't the only scores being used these days. Increasingly, lenders use all manner of proprietary formulas to judge you, as I wrote in "8 secret scores that lenders keep." Two of these secret scores are particularly important these days:

Bankruptcy scores purport to predict the likelihood that you'll throw in the towel on your debt. That's different from a credit score, which predicts the risk of default -- essentially, of missing one payment. As bankruptcies once again mount-- U.S. consumer bankruptcy filings rose 34.4% in January, after topping 1 million last year -- you can bet that every credit card issuer you have is applying its version of a bankruptcy score to your account.

If you don't score well, you can expect the consequences to be more drastic than if the issuer was concerned you'd merely default. You might face a much higher interest rate or even a frozen account as your issuers try to limit their losses.

But you have no right to see this number, know the calculations that went into it or challenge any errors in the data used.

Transactions scores, meanwhile, are applied every time you use your plastic. They're designed to predict the likelihood a transaction might be fraudulent, but they can also be applied to your spending patterns to hunt for signs you might be a growing risk. If you go from shopping at Saks and dining at Per Se to charging groceries at Wal-Mart and taking cash advances, you could be singled out for punitive action.

American Express apparently used transaction scores when it recently told customers it was cutting their credit limits in part because of where they shopped.

But once again, you have no right to see your transaction scores, even when they're used to take adverse action against you.

It's your score, and it's time to claim it

Clearly, federal law needs to catch up with lender practices.

Federal law has long guaranteed your right to see your credit reports. Companies that use your reports against you -- to deny your application for credit, insurance or employment, for example, or to take any other adverse action against you -- are supposed to explicitly tell you that's what has happened. They're also supposed to tell you which bureaus provided the reports and give you contact information so you can review your files and dispute any errors.

In 2003, you were also given the right to buy your credit scores from the bureaus. But the law doesn't specify you have to be given the same scores lenders use.

It's time to fix that and extend consumer protections to the other scores that are being used to evaluate you.

Simply put: If a score is used against you for any reason, you should have a right to see that score, know how it was calculated and protest any errors in the data used to calculate it.

If you agree, tell your lawmakers. This link will help you find your House representative, and you can find your senators here. Send them a link to this column, and let them know the days of consumers being kept in the dark about their scores must end.

By: Liz Pulliam Weston, MSN Money, Author of  Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future, 2nd Edition

Liz's latest Book:  Easy Money: How to Simplify Your Finances and Get What You Want out of Life" (Liz Pulliam Weston)

Columns by Weston, the Web's most-read personal-finance writer and winner of a Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money.

Shilling Says: Fix Housing, Fix the Economy

If policymakers succeed in containing the mortgage mess and bailing out financial crises, the recession may well end at the end of 2009 as massive fiscal stimulus begins to take hold, says Gary Shilling. If not, it probably will extend well into 2010 and perhaps beyond. The economist and investment advisor says four things need to happen in order for this recession to end: eliminating excess housing inventory, recapitalizing financial institutions, subsidizing mortgages for underwater homeowners, and bailing out bad loans altogether. "For now at least, all that money from central banks and governments isn't getting outside financial institutions," Shilling writes in his latest Insight newsletter. "We're in a liquidity trap." "The horse isn't drinking, thank you very much. And if lenders do start to lend, central bankers, with their congenital fear of inflation, will no doubt reel in all that extra credit." Shilling sees a consumer "savings spree" coming, one that will increase the saving rate by an average of one percentage point per year for the next decade. "That would generate a cumulative $5.5 trillion and go a long way to offsetting the intervening fiscal stimuli, and then some," Shilling says. The bailout doesn't appear to have had much effect, says economic forecaster Donald Grimes. "It's hard to see how things could have been a whole lot worse than they have been in the last couple months," Grimes told mlive.com. By: Julie Crawshaw © 2008 Newsmax - MoneyNews

The Rest of the Meltdown Story

What in the world is going on here?

You’ve seen the headlines, and you heard of the failures and buyouts. Lehman Brothers, Bear Stearns, Merrill Lynch, AIG; all big names and all in big trouble. Then those mysterious quasi-government agencies with names like Freddie and Fannie become wards of the state and you learn that you and your fellow taxpayers are potentially on the hook for tens of billions of dollars. At the end of the week Washington Mutual is looking for a buyer, and you start to wonder about the security of your own bank and your own savings account. Let’s change that ad copy to WaMu -- boo hoo.

Somewhere in the back of your mind you understand that this is all tied somehow to bad mortgages. If you start reading a bit further to enhance your understanding you run into terms like Mortgage Backed Securities (MBS) and credit-default swaps, whatever in the world those are. Read further and you find out that a combination of falling home prices and mortgage defaults have put many investment banks and other financial institutions in deep puddin’. All this reading, all this watching the talking heads on TV, and you still don’t really know what in the world is going on here.

Fear not. I’m here to help. I know … I’m just another talk show host; but the fact is that when the stage was being set for the problems we’re seeing today I was making most of my money as a real estate lawyer .. closing loans for some of the very institutions that are the tank today. This rather unique combination – closing lawyer and radio talk show host – gave me a front row seat to the politicization of mortgage loans that led us to today’s headlines.

OK .. so we all know that a lot of really bad real estate loans were made. The political class would sure love for us to believe that the blame here rests squarely on “greedy” (try to define that word) mortgage brokers and lenders. The truth is that most of the blame rests on political meddling in the credit decisions of these mortgage lenders.

Twenty years ago the buzz-word in the media was “redlining.” Newspapers across the country were filled with hard-hitting investigative reports about evil and racist mortgage lenders refusing to make real estate loans to various minorities and to applicants who lived in lower-income neighborhoods. There I was closing these loans in the afternoons, and in the mornings offering a counter-argument on the radio to these absurd “redlining” claims. Frankly, the claims that evil mortgage lenders were systematically denying loans to blacks and other minorities were a lot sexier on the radio than my claims that when credit histories, job stability, loan-to-value ratios and income levels were considered there was no evident racial discrimination.

Political correctness won the day. Washington made it clear to banks and other lending institutions that if they did not do something .. and fast .. to bring more minorities and low-income Americans into the world of home ownership there would be a heavy price to pay. Congress set up processes (Research the Community Redevelopment Act) whereby community activist groups and organizers could effectively stop a bank’s efforts to grow if that bank didn’t make loans to unqualified borrowers. Enter, stage left, the “subprime” mortgage. These lenders knew that a very high percentage of these loans would turn to garbage – but it was a price that had to be paid if the bank was to expand and grow. We should note that among the community groups browbeating banks into making these bad loans was an outfit called ACORN. There is one certain presidential candidate that did a lot of community organizing for ACORN. I won’t mention his name so as to avoid politicizing this column.

These garbage loans to unqualified borrowers were then bundled up and sold. The expectation was that the loans would be eventually paid off when rising home values led some borrowers to access their equity through re-financing and others to sell and move on up the ladder. Oops.

Right now this crisis is being sold to the American public by the left as evidence the failure of the free market and capitalism. Not so. What we’re seeing is the inevitable result of political interference in free market economics. Acme bank didn’t want to loan money to Joe Homebuyer because Joe had a spotty job history, owed too much money on his credit cards, and wasn’t all that good at making payments on time. The politicians told Acme Bank to figure out a way to make that loan, because, after all, Joe is a bona-fide minority-American, or forget about opening that new branch office on the Southside. The loan was made under political pressure; the loan, with millions like it, failed – and now we are left to enjoy today’s headlines.

So … why aren’t you reading the whole story in the mainstream media? Come on, are you kidding me? Do you really expect the media to blame this mess on deadbeat borrowers and political interference in the free market when it is so easy to put the blame on greedy lenders and evil capitalists? Remember … there’s an election going on. One candidate is decidedly anti-capitalist. Do the math.

by Neal Boortz, talk show host and columnist for Townhall.com as well as co-author of The FairTax Book

For those of you that don't want to do the digging...

Inside Obama’s Acorn
By their fruits ye shall know them.
By Stanley Kurtz

What if Barack Obama’s most important radical connection has been hiding in plain sight all along? Obama has had an intimate and long-term association with the Association of Community Organizations for Reform Now (Acorn), the largest radical group in America. If I told you Obama had close ties with MoveOn.org or Code Pink, you’d know what I was talking about. Acorn is at least as radical as these better-known groups, arguably more so. Yet because Acorn works locally, in carefully selected urban areas, its national profile is lower. Acorn likes it that way. And so, I’d wager, does Barack Obama. 

This is a story we’ve largely missed. While Obama’s Acorn connection has not gone entirely unreported, its depth, extent, and significance have been poorly understood. Typically, media background pieces note that, on behalf of Acorn, Obama and a team of Chicago attorneys won a 1995 suit forcing the state of Illinois to implement the federal “motor-voter” bill. In fact, Obama’s Acorn connection is far more extensive. In the few stories where Obama’s role as an Acorn “leadership trainer” is noted, or his seats on the boards of foundations that may have supported Acorn are discussed, there is little follow-up. Even these more extensive reports miss many aspects of Obama’s ties to Acorn.

AN ANTI-CAPITALISM AGENDA

To understand the nature and extent of Acorn’s radicalism, an excellent place to begin is Sol Stern’s 2003 City Journal article, “ACORN’s Nutty Regime for Cities.” (For a shorter but helpful piece, try Steven Malanga’s “Acorn Squash.”)

Sol Stern explains that Acorn is the key modern successor of the radical 1960’s “New Left,” with a “1960’s-bred agenda of anti-capitalism” to match. Acorn, says Stern, grew out of “one of the New Left’s silliest and most destructive groups, the National Welfare Rights Organization.” In the 1960’s, NWRO launched a campaign of sit-ins and disruptions at welfare offices. The goal was to remove eligibility restrictions, and thus effectively flood welfare rolls with so many clients that the system would burst. The theory, explains Stern, was that an impossibly overburdened welfare system would force “a radical reconstruction of America’s unjust capitalist economy.” Instead of a socialist utopia, however, we got the culture of dependency and family breakdown that ate away at America’s inner cities — until welfare reform began to turn the tide.

While Acorn holds to NWRO’s radical economic framework and its confrontational 1960’s-style tactics, the targets and strategy have changed. Acorn prefers to fly under the national radar, organizing locally in liberal urban areas — where, Stern observes, local legislators and reporters are often “slow to grasp how radical Acorn’s positions really are.” Acorn’s new goals are municipal “living wage” laws targeting “big-box” stores like Wal-Mart, rolling back welfare reform, and regulating banks — efforts styled as combating “predatory lending.” Unfortunately, instead of helping workers, Acorn’s living-wage campaigns drive businesses out of the very neighborhoods where jobs are needed most. Acorn’s opposition to welfare reform only threatens to worsen the self-reinforcing cycle of urban poverty and family breakdown. Perhaps most mischievously, says Stern, Acorn uses banking regulations to pressure financial institutions into massive “donations” that it uses to finance supposedly non-partisan voter turn-out drives.
According to Stern, Acorn’s radical agenda sometimes shifts toward “undisguised authoritarian socialism.” Fully aware of its living-wage campaign’s tendency to drive businesses out of cities, Acorn hopes to force companies that want to move to obtain “exit visas.” “How much longer before Acorn calls for exit visas for wealthy or middle-class individuals before they can leave a city?” asks Stern, adding, “This is the road to serfdom indeed.”

IN YOUR FACE

Acorn’s tactics are famously “in your face.” Just think of Code Pink’s well-known operations (threatening to occupy congressional offices, interrupting the testimony of General David Petraeus) and you’ll get the idea. Acorn protesters have disrupted Federal Reserve hearings, but mostly deploy their aggressive tactics locally. Chicago is home to one of its strongest chapters, and Acorn has burst into a closed city council meeting there. Acorn protestors in Baltimore disrupted a bankers’ dinner and sent four busloads of profanity-screaming protestors against the mayor’s home, terrifying his wife and kids. Even a Baltimore city council member who generally supports Acorn said their intimidation tactics had crossed the line.

Read Full Story

Source:  National Review/Posted:  Townhall.com