Credit Scores and Credit Reports, by Evan Hendricks

Chapter 17

Special Challenges

When it comes to identity theft or credit report accuracy, some groups face special challenges. In this chapter, we'll briefly examine emerging issues for minorities and other people with little or no documented credit history, Spanish-speakers, students, divorcees, filers for bankruptcy, and the elderly.

Minorities

Among some of America's largest minority populations, including African-Americans and Hispanic, there traditionally has been a "low-trust" level in the banking system. According to one survey, as recently as 2003, 87% of African-Americans believed that lending institutions discriminated against borrowers, and 42% had no relationship with a bank.

Similarly, 40% of Hispanics had no relation with a bank, according to this financial survey. In terms of credit reports, this translates into what's known as "thin files." If a consumer doesn't have credit or there is insufficient activity in his or her credit report, a credit score cannot be generated.

The survey estimated that 30% of the Hispanic U.S. population and 20% of the Asian population lacked a credit score. Overall, 26% of the U.S. population lacked a credit score. A study by the University of North Carolina's Center For Community Capitalism found that 22% of Hispanics had no credit score.²⁷⁴

"Thin Files" mean that millions of people, who quite possibly are financially responsible, face difficulties in buying a home or getting a car loan because their payment history is not documented by the credit bureaus.

The irony is that the financial services industry sees the traditionally underserved minority populations as one of the better opportunities for growth. Minorities accounted for nearly 40% of home ownership growth from 1994 to 2000 and will contribute 64% of household growth over the next 10 years, with 67% being first-time homebuyers, and 33% being renters. One out of ten Americans was born in another country. It is projected that the number of all immigrant homeowners will increase to 6.8 million people by 2010.

A Response To 'Thin Files'

Many people who do not have credit scores actually have credit histories, but they are not documented by Equifax, Experian, and Trans Union, the "Big 3" consumer reporting agencies (CRAs). Those payment histories can include payments for rent, utilities, and phone service.

Seeking to serve the underserved, Michael Nathans in 2004 launched a new kind of credit bureau, "Pay Rent, Build Credit, Inc." The service allows renters and others to register at its Web site²⁷⁵ so that their on-time rent and other payments are recorded and the renter is able to build a credit history.

²⁷⁴ Stegman, Michael A., et al., "Automated Underwriting: Getting to 'Yes' for More Low-Income Applicants," presented at the 2001 Conference For Housing Opportunity
²⁷⁵ www.payrentbuildcredit.com

Nathans told the Washington Post's Kenneth Harney that when his Maryland-based bureau became fully operational, it would be seen as a "supplement" to standard credit reports, allowing creditors to "fill in the blanks," and permit the data to be factored into credit scoring models.²⁷⁶

CitiMortgage signed a three-year contract with Nathans' company. "We see this as very important in providing mortgages to customers with nontraditional credit," CitiMortgage's Jeffery Polkinghorne told the Post's Michelle Singletary.²⁷⁷

Only time will tell whether Nathans' ambitious plan will accomplish its goals. The company will be subject to the Fair Credit Reporting Act.

Spanish

The Hispanic population in the United States is extremely diverse.²⁷⁸ The majority are fluent in English. But for a significant percentage of Latinos in the U.S., Spanish is their first language. For example, in 2000, of the 7.8 million Latino students enrolled in U.S. public schools, 3.6 million were Spanish-speaking students enrolled in "English Language Learners" (ELL) programs. Thus, the National Council of La Raza estimates that 46% of Latino students are ELLs.²⁷⁹ The parents of these children presumably consider Spanish their first language.

As most American telephone users realize, a wide array of U.S. firms, including banks, credit card companies, phone companies, and utilities, voluntarily provide Spanish-language options.

²⁷⁶ Harney, Kenneth, "Renters Soon Get A Chance To Boost Credit Records," Washington Post, January 10, 2004
²⁷⁷ Singletary, Michelle, "Earning Credit For Paying Rent," Washington Post, February 22, 2004
²⁷⁸ The terms "Hispanic" and "Latino" are used interchangeably to refer collectively to Mexicans, Puerto Ricans, Central and South Americans, Cubans, Dominicans and others of Spanish and Latin American descent. Hispanics can be of any race.
²⁷⁹ Yzaguirre, Raul, "State of Hispanic America 2004," National Council of La Raza

However, the three major credit reporting agencies (CRAs) — Equifax, Experian, and Trans Union — did not offer Spanish-language options (as of early 2005, when this book went to press).²⁸⁰

This creates immediate challenges for significant portions of the U.S. population who are fluent in Spanish but not English. The credit reporting system is complicated enough for Americans whose first language is English. Moreover, the "Centralized Source" for obtaining free credit reports, beginning December 4, 2004, will include assistance features in Spanish or other languages. The FTC's proposed rules for the Centralized Source, which was mandated by the 2003 Amendments to the FCRA, are silent on the issue.²⁸¹ It's possible that public comments could persuade the FTC to change its mind.

Several organizations offer guides and assistance in Spanish. Consumer Action, a California-based group, has published booklets on credit and credit reports, fraud, and a host of other issues in Spanish,²⁸² Chinese, Vietnamese, Korean, Russian, and Japanese.²⁸³

Other organizations offering Spanish-language information on credit reports and identity theft include the California State Office of Privacy Protection,²⁸⁴ and as mentioned previously, the Privacy Rights Clearinghouse²⁸⁵ and the Identity Theft Resource Center.<sup>286

280</sup> Linda Foley, of the Identity Theft Resource Center, has pressed the CRAs to provide Spanish language assistance, but to no avail.
²⁸¹ FTC Seeks Comments On Proposed "Free Credit Report" Regulation, March 16, 2004, www.ftc.gov/opa/2004/03/facta.htm
²⁸² http://www.consumer-action.org/English/library/privacy_rights/index.php
²⁸³ www.consumer-action.org/OtherLang/library/index.php
²⁸⁴ www.privacyprotection.ca.gov - (866) 785-9663
²⁸⁵ www.privacyrights.org
²⁸⁶ www.idtheftcenter.org

Individual Taxpayer Identification Numbers

Since 1996, the Internal Revenue Service has issued 6.9 million Individual Taxpayer Identification Numbers (ITINs), mainly to recent immigrants who were not eligible for Social Security numbers. According to National Council of La Raza (NCLR), not all CRAs treat consumers with ITINs equally, which can lead to significant discrepancies in information reported and in FICO scores.²⁸⁷

Identity Theft & Hispanics

While mainly anecdotal, there was growing evidence that identity theft is hitting Hispanics particularly hard. Some observers were not surprised. A larger percentage of the Latino population in the United States share common names — Garcia, Gomez, Perez, Ramirez, Rodriguez, Sanchez, and Torres, to name a few.

Los Angeles Police Detective Lyle Barnes regularly investigated identity theft cases involving Hispanic names. "I've seen it where somebody connected with one of the credit bureaus will look up a name and then get information on, say, 10 people with the name Juan Perez. Then they'll sell it to somebody who will use the stolen IDs in stores," he told the Associated Press.²⁸⁸

In 2002, Barnes said he started to see an uptick in the trend of Hispanic-on-Hispanic ID thefts for the purpose of stealing credit cards and opening bogus lines of credit. He attributed the increase to thieves who branched out from other crime to the white-collar arena. "The criminal has probably already been a criminal... and now this is an easier way for him to make money," he said.

²⁸⁷ NCLR has asked the FTC to examine this issue as part of the accuracy study mandated by the 2003 FACTA (FCRA) amendments.
²⁸⁸ Bryan, Dave, "Investigators Say ID Theft Rising Among Common Hispanic Names," Associated Press, Dec. 7, 2003 in the Bradenton Herald (Florida) http://www.bradenton.com/mld/bradenton/7437684.htm

The Federal Trade Commission, which tracks identity theft nationally, does not compile ID theft data based on the ethnicity of the criminal, according to Naomi Lefkovitz, an FTC attorney.

Linda and Jay Foley, co-executive directors of Identity Theft Resource Center in San Diego, were convinced that the number of Hispanic victims was growing. Jay Foley said that in 2003 there were at least two active cases in Southern California in which thieves stole computers from an office and took them across the border to Mexico. Once in Mexico, the thieves took all the Hispanic names out of the computer and sold the personal information to Mexican nationals, who in turn used the data to create IDs for crossing the border into the United States.

Linda Foley said another problem was that Equifax, Experian, and Trans Union did not include Spanish-language instructions or assistance on their Web sites or telephone recordings. She repeatedly has urged the Big Three to add special-language assistance for Hispanics and other sizeable second-language groups in the U.S., but to no avail.

Sgt. Tim Crews, chief of the Orlando, Fla., police department's economic crimes unit, told the AP that stolen common Latino last names had always been part of the larger pool of ID theft. The crime was easier to carry out for the criminal who already had a legitimate driver's license with the same last name as the victim, Crews said. When the thief went to buy a car using someone else's identity, for example, an unsuspecting salesperson might be more willing to overlook discrepancies.²⁸⁹

Crews said the victims were not always wealthy Hispanics with a long history of good credit. He had seen cases in which a Latino couple of modest means labored for years and saved their money only to realize that their IDs had been stolen and their credit ruined when they applied for their first mortgage.

²⁸⁹ Id.

"They finally are making a decent wage and are on their feet and, lo and behold, somebody in Texas has stolen their ID," Crews said.

Officials said the theft of personal information that ended up in the hands of undocumented workers had been a facet of identity theft in the United States for years. The demand for Social Security numbers continued to be at a premium among illegal immigrants who used the numbers to get employment.

The AP reported the case of Adriana Sanchez who actually had to pass a credit history check to get hired as a Los Angeles police officer. When Sanchez applied for a car loan, her credit report showed several open accounts that had been turned over to collections agencies. Someone living in the Atlanta area with almost the same name had stolen her identity and run up $70,000 in debt.

Sanchez's research uncovered the addresses of the Georgia accounts. She contacted Gwinnett County investigators, who tracked down and arrested 33-year-old Adriana Sanchez-Palacios of Sugar Hill, charging her in September 2003 with identity theft and fraud.²⁹⁰

"Everything was compromised, from my date of birth and my mother's maiden name," she said in a telephone interview. "You feel like you're being violated... She even had my mom's address."

Lupe Rodriguez, a detective with the Chula Vista, California police department said cleaning up the mess left by identity theft is especially difficult for people for whom English is a second language. "It's a paper nightmare," he said. "Victims have to make a lot of calls, and it consumes a lot of time."²⁹¹

One dramatic example was "Carlos," who according to computer records, has racked up $68,000 in debt, owed $4,700 in child support and had three warrants out for his arrest for failing to appear at DUI hearings. But Carlos was six years old.

²⁹⁰ Id.
²⁹¹ http://www.privacyrights.org/spanish/pi17a.htm

Jay Foley, of the ID Theft Resource Center said Carlos' father was divorced and was expelled from the U.S. "He's been living and working as his son for four-and-a-half years," he said. Foley withheld the last name because the case was ongoing.

The Identity Theft Resource Center and the Privacy Rights Clearinghouse both offer guidance in Spanish for identity theft and other issues.

http://www.idtheftcenter.org/aiuda.shtml

http://www.privacyrights.org/spanish/PaginasInformativas.htm

Students

The challenges faced by college students and recent graduates stem from two sources: student loans and credit cards.

Because of the exorbitant cost of college, many students graduate owing anywhere between $5,000 and $70,000 in student loans. It is important that students realize that any late payments will stay on their credit report for seven years. Late payments will lower credit scores and disadvantage graduates when they want to buy a car or home.

It is doubly important that students check their credit history because student loans can complicate a credit report. This is because student loans are often sold by the originator, and often are resold after that. The problem is that the credit report often records the "sold" student loan as a new "student loan," making it look like the student has doubled her debt load. For some graduates, the sale and re-sale of their student loans can make it look like they have four outstanding loans instead of one. That in itself can damage a credit score.

Accordingly, the damage can escalate if there are late payments, as the loose reporting practices of lenders could make it look like you are tardy on multiple accounts when you truly are only late on one.

Sallie Mae's Quiet Move

In 2003, a separate controversy arose involving Sallie Mae, formally known as the Student Loan Marketing (SLM) Corporation, which oversees the student loan program.²⁹²

In 2002, Sallie Mae quietly decided to report loan information on more than 7 million of its borrowers only to Equifax and to Innovis Data Solutions, a small credit bureau, and to halt all reporting to Experian and Trans Union. Sallie Mae said the move was intended to protect privacy, as only Equifax agreed not to sell lists to credit card companies for pre-approved offers. Critics accused Sallie Mae of trying to hide its borrowers from competitors who might offer better loan deals.

But Sallie Mae never told anyone. It came to light in the Autumn of 2003 when Chris Neuswanger, a Colorado mortgage broker, noticed that a young home-buying client had been pushed into a high-rate loan solely because two of his three credit bureau reports omitted his large, on-time student loan payments with Sallie Mae, depressing his credit score by 40 points. Eric Borgeson, a 31-year old architect, said Sallie Mae's less-than-full reporting practice cost him $200 a month more than it should have, plus higher closing costs and a $5,000 prepayment penalty. "I got shafted by Sallie Mae," said Borgeson, who reportedly was considering legal action. Kenneth Harney of the Washington Post broke the story.²⁹³

Caroline Wright, a 34-year-old student from Virginia, told the Post's Michelle Singletary that a mortgage broker told Wright she would have trouble getting a good interest rate on a home loan if her on-time payments to Sallie Mae were missing from her Experian and Trans Union reports files.

²⁹² www.salliemae.com
²⁹³ Harney, Kenneth, "Sallie Mae's History Lesson," Washington Post, November 15, 2003, pg. F1

"They weren't protecting me," Wright said. "They were doing exactly the opposite."²⁹⁴

The controversy came in the latter stages of Congress's consideration of amendments to the Fair Credit Reporting Act. Once the story broke, Senator Richard Durbin (D-IL) prepared legislation to require Sallie Mae to resume reporting to all three credit bureaus. Soon thereafter, Sallie Mae sent a letter, promising to continue reporting to Experian and Trans Union. Undeterred, Durbin said he would offer his amendment as part of the Higher Education Act, instead of the FCRA.

Students & Credit Cards

Another challenge facing graduates is a high level of credit card debt, often at high interest rates.

Prof. Robert Manning of Rochester Institute of Technology, and author of Credit Card Nation,²⁹⁵ told Congress, "What is striking in the acknowledgement of the credit card industry is that college students are a desirable market because of their ignorance of personal finance and their lack of consumer debt."²⁹⁶

"The marketing of credit cards has shifted rapidly over the last five years from college upperclassmen to college freshmen and high school seniors. More significantly is the recognition that student consumption has a large debt component that is increasingly financed by family loans, federally subsidized student loans, summer earnings, and part-time employment during the academic year, and even with other credit cards."

²⁹⁴ Singletary, Michelle, "Giving Students Due Credit for History," Washington Post, Nov. 6, 2003, pg. E3
²⁹⁵ Credit Card Nation: America's Dangerous Addiction to Consumer Credit (Basic Books, 2001).
²⁹⁶ Statement of Prof. Robert Manning before the House Financial Services Subcommittee on Consumer Credit, June 12, 2003. http://financialservices.house.gov/media/pdf/061203rm.pdf

"Three out of five students with credit cards in our survey had already maxed them out during their freshmen year and, three out of five freshmen with multiple credit cards were already using bank cards to pay for other revolving credit accounts. Furthermore, this survey reveals that nearly three-fourths of students use their student loans to pay for their credit cards. Not incidentally, recent studies indicate that this indiscriminate marketing to college students has led to high incidences of fraud and identity theft among this young adult population," Manning testified.²⁹⁷

Not surprisingly, Manning recommends that students check their credit reports.

Clearly, today's graduates face greater challenges in managing their finances so as not to jeopardize their finances. The National Consumers League has a page on its Web site dedicated to student debt issues.²⁹⁸

Divorce

Divorce can have a dramatic impact on the divorcee's credit score and credit report. A major problem is that divorcees often don't realize the extent to which their credit relationships can continue to entangle each other's lives well after divorce. Or, they are so overwhelmed with the emotional and logistical difficulties of separation that there is little time left for separating and straightening out credit relationships. But that is precisely what you need to do: ensure that your name is no longer on accounts for which you are not responsible for paying. During the divorce, the husband and wife usually work out a division of debts that receives final approval from the judge. Divorcees often think that any debt assigned to their ex-spouse by the court frees them from that debt for ever after.

²⁹⁷ Id.
²⁹⁸ www.nclnet.org/moneyandcredit/index.htm

The problem is that your creditors usually don't know about your divorce. In terms of the credit report, problems arise when the ex-spouse who is responsible for paying an account, fails to, and the other spouse, according to the creditor's records, is still a co-signer or joint user or otherwise associated with the account. The failure to pay goes on the credit report of the innocent spouse, creating a fresh derogatory that slams that spouse's credit score.

Thus, it is vital that divorcees identify all of their accounts and separate them completely. This includes mortgages, credit cards, bank loans, debit cards, store charge cards, lines of credit, and overdraft checking. Some authors suggest that spouses begin separating accounts as soon as they consider separating.²⁹⁹

Of course, it's also crucial that divorcees obtain their credit reports to check the accuracy of information.

Bankruptcy

Bankruptcy is the most derogatory item that can appear on your credit report. Under the Fair Credit Reporting Act, a bankruptcy can stay on your report for 10 years.

But that does not mean you can no longer get credit. As Gerri Detweiler, a renowned expert on credit explains in her 1997 book, The Ultimate Credit Handbook, (Plume) people can rebuild their credit after bankruptcy or other traumas. It requires patience and a plan. It starts with checking the credit report to see where you stand. If you still have open accounts, try to negotiate with creditors to improve the way they report on you to the credit bureaus, Detweiler advises. Try to catch up on any accounts for which there might be late payments.

²⁹⁹ Ventura, John The Credit Repair Kit (Dearborn 1998 3rd Edition); or see Sember, Brette McWhorter, Repair Your Own Credit and Deal With Debt (Sphinx 2003 2nd Edition)

Next, try to re-establish positive lines of credit. A bank card, paid on time over time, is one of the stronger credit references you can add. In the beginning, she says, you might need to get a "secured" credit card, which requires you to deposit money so use of the card is secured against those deposits.³⁰⁰ But be careful: both Detweiler and the FTC warn there are a lot of scam artists offering secured credit cards. The BankCard Holders of America (BHA) provides a list of institutions offering secured cards.³⁰¹

Perhaps the best scholarship on bankruptcy is found in the books of Harvard Law Professor Elizabeth Warren.³⁰² Warren has pointed out that of the 1.66 million bankruptcies filed in fiscal year 2003, nearly 40% were by husband-wife couples, meaning that the number of people who actually filed for bankruptcy in that year was 2.14 million.³⁰³

Warren said that women were both the fastest growing and largest demographic group in bankruptcy.

There were 1,661,996 bankruptcies filed in fiscal year 2003, up 7.4% from the 1,547,669 filings in fiscal year 2002. Since 1994, when filings totaled 837,797, bankruptcies in federal courts have increased 98%. From 1991-95, annual bankruptcy filings hovered around 870,000. The biggest noticeable jump occurred in 1995-1996, when they went from 874,642 to 1,125,006.³⁰⁴ Interestingly, that is when credit card companies sharply escalated their use of direct marketing solicitations offering pre-approved credit card offers. It is estimated that the industry now sends out five billion unsolicited credit card applications annually.

³⁰⁰ Detweiler continues to advise consumers and publish, see www.ultimatecredit.com, and www.DebtConsolidationRX.com, or for her new E-Book, www.stopdebtcollectorscold.com
³⁰¹ Send a check or money order for $4.00 to: "Secured Credit Card List" BHA Customer Service, 524 Branch Drive Salem, VA 24153. Also see http://www.ftc.gov/bcp/conline/pubs/credit/secured.htm
³⁰² Warren, Elizabeth, Bankruptcy (West 2002), and, Warren and Amelia Warren Tyagi, The Two-Income Trap, (Basic Books 2003)
³⁰³ http://www.bankruptcyaction.com/USbankstats.htm
³⁰⁴ http://www.abiworld.org/stats/1980annual.html

Many consumers who complete a bankruptcy find that bad debts that were supposed to be discharged as part of the bankruptcy are later erroneously included on credit reports. Robert Weed, an Alexandria, Virginia attorney, said he regularly must file motions in federal bankruptcy court in order to get creditors to stop reporting discharged debts and to get the credit reporting agencies to remove them.

Included In Bankruptcy

A special problem arises for individuals who are co-signers, or are otherwise legally obligated for credit cards or loans, when the other co-signer files for bankruptcy. For many years, the CRAs would report such accounts as "Included In Bankruptcy" — even if the non-bankrupt co-signer met his or her obligation and paid the bill on time. This had an adverse impact on the creditworthiness of non-bankrupt consumers. Not only did it seem to have a negative impact on their credit scores, but also major institutions like Freddie Mac, Fannie Mae, and insurance companies do an automated scan of credit reports for serious derogatory items like bankruptcy, "foreclosure," or "judgment." This meant that a co-signer could be denied credit for an account that he or she in fact paid responsibly.

A class action lawsuit was filed over the issue in federal court in South Carolina. U.S. District Judge Cameron Currie had given preliminary approval to a settlement with all three CRAs that if adopted, would stop them from reporting the term "bankruptcy" to the credit reports of consumers who have not filed for bankruptcy.<sup>305

305</sup> Franklin E. Clark, et al. v. Experian Information Solutions, Inc.: C/A No. 8:00-1217-22; www.fcraclassaction.com; Equifax had proposed allowing it to continue reporting "included in the bankruptcy of another," but the proposal was abandoned after additional attorneys entered the case to object. The objectors were led by Michael Caddell, of Caddell and Chapman, Houston Texas.

Seniors

Because it recognized years ago that a host of credit reporting issues affected its members, the American Association of Retired Persons (AARP) has closely followed the FCRA and produced research and surveys on various aspects of it, and on identity theft.

In his June 2003 testimony before the Senate Banking Committee, Michael W. Naylor, AARP's Director of Advocacy said, "Our research does indicate a greater vulnerability of older Americans, based on the higher proportion of those age 50 years and older who report being victimized by identity theft, compared to the proportion of all age groups making such reports."³⁰⁶

Among the myriad of problems identified by Naylor was inaccuracy caused by debt collectors. "Inaccuracies can also occur when a creditor sells a delinquent account to a debt collector. Once the original creditor sells the account to a debt collector, the debt collector becomes the furnisher of information on this account to the CRAs. The main source of inaccuracy in this case results from incorrect reporting of the date of initial delinquency on the account."³⁰⁷

In a footnote to his prepared statement, Naylor added, "One concern is that debt collectors may report the date they purchased or received the account as the date of initial delinquency, even though the actual date of initial delinquency was likely much earlier. Because the FCRA stipulates that most negative information remains on a consumer credit report for seven years from the date of initial delinquency, establishing this date is important to consumers attempting to restore their credit."

³⁰⁶ Statement of Michael Naylor, "The Growing Problem of Identity Theft and Its Relationship to the Fair Credit Reporting Act," Senate Banking Committee, June 19, 2003
³⁰⁷ Id.

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