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Tuesday, September 29, 2009

Credit Agency Fraud

Yes, credit agencies and the scores and ratings they put out are fraud.  Why?  Because they do not accurately reflect an individual's  credit worthiness nor the credit worthiness of an institution and/or the securities they may issue.

There are two different types of credit rating agencies.  For consumer credit and credit scoring they are TransUnion, Equfax and Experian.  For the commercial world they are Fitch, Moody's and Standard and Poors.

Each of them plays a role much to important when it comes to the consumer - large and small.
I will talk first about consumer credit and consumer credit scores then about the commercial credit rating agencies.

In our haste to speed everything up in our lives Fair Issac Company (FICO) created a numeric system of calculating - and more important determining - a persons credit worthiness, kind of like an exam in grade school but not even close to being as accurate as an exam.

You see, if you get an "A" on an exam it means you have learned the material and deserve the grade and the ability to  move forward.  If you get an "F" well, you did not study or learn the material and therefore should fail or be left behind to correct your issues and try to pass again.

With the advent of FICO - a private company that has created a computer program that all bureaus use - the real test of a persons credit worthiness disappeared.  While each of the three major consumer credit bureaus have a name for their credit scores, "FICO" has become a generic term for scores much like Kleenex has for tissues.

In days past - and I can go back over 42 years - we actually talked to the borrower, taqlked to their creditors. got the creditors own report on how they felt the borrower was in terms of credit risk.

A small story here from when I worked for an auto finance company way back then.  I had a customer, I will never forget her name - Mrs. McArdell - who always made her car payment 30 days late but paid the late charge each and every time.  I called her one day and said that since she has been making a payment every month for several years (various auto loans but always 30 days late), I offerred to extend her payments one month, bring her current and save her from paying a late charge each and every month.

To my surprise, she got furious with me.  She said she pays the late charge each month and therefore she pays for the right to make her payment late.  I was stunned for a moment, repeated that I was willing at no charge to extend her payments and save her all those late charges and again she NO(!) and hung up the phone.

A few month later we got a call from a car dealer.  Mrs. McArdell was buying a new car and wanted us to finance it again.  We did.  Since I was young and new on the job I asked my boss why we would do this again.  Each month she became one of my collection accounts but admittedly I had to do nothing to collect from her.  My manager told me that she had excellent credit with us and others and that he would love to have more accounts just like her who faithfully make a payment each and every month for the past seven years she had been a customer.  She was not a credit risk she was just a little (?) quirky.

If Mrs McArdell or anyone like her would apply for an auto loan today, the first thing the the auto dealer would do would be to check her credit score.  With a string of 30 day lates like she had, her credit score would indicate that she was a high profile credit risk.  Two things could happen.  One, she would not get financed at all and could not buy a new car or two, if she did get financed she would pay a much higher interest rate.

The credit score does not reflect "qurikiness" in this case.  It does not recognize that she made a payment each and every month on the due date plus paid a late charge each time without any collection effort at all.  Actually, her score should be as high or maybe even higher then someone who pays on time each and every month and pays no late charge.  You see, the late charges are pure profit to the finance company so Mrs. McArdell is a more profitable "good" customer.

Here are some of the problems with credit scores.

There are three major credit bureaus and litterallly hundreds of "credit reporting agencies".  The best way to describe this is to say that the three major credit bureauls are the wholesalers and that the "credit reporting agencies" are the retailers.  The "credit reporting agency" buys the credit information and credit score from one of the three wholesalers and resells it to the public.  To be fair, the "wholesalers" also sell their reports retail direct to the consumer.

So why do the credit scores differ from different sources?  If they are all using the program created by Fair Issac Company (FICO)  - even though they use different names for their scores - should not all the scores be the same?

You would think so but not.  The reason being like with all software there are different versions and each reporting agency is using a different version.  It is kind of like MS Windows.  Some people are still lusing Windows 98 which we all know does much less then the newer versions of today.  In other words if Windows was a credit scoring system, Windows 98 would give us a much different and probably lower score then Windows XP.. Windows Vista - with all its bugs - would also give us different scores then XP, maybe higher or maybe lower.  You see, there just is no standardization of how credit scores are created and reported.

Another issue is that some creditors report to all three bureaus, some do not.  Which means that for those creditors that do not report to certain bureaus, good or bad credit could be missing which does change the scores drastically.

Your credit score however, determines most financial transactions in your life right down to your car insurance premium.  In my example above, Mrs. McArdell today would pay a much higher car insurance premium just because her score would be lower even though she had good credit in the eyes of the auto finance company.

In the old days, someone - like the car insurance compnay -  would have called us about Mrs. McArdell and to get a credit reference.  We would have told the truth but indicated that she was an excellent credit risk based on our payment history and experience with her over the years.

Your credit worthness is not a black and white situation.  There are many factors that should go into a credit profile but cannot when using a numeric grading system.   I have seen all to often in the thousands and thousands of credit reports I have evaluated over the years that people with bad pay history actually had better scores then those with good pay history.

Often times, I had to turn a good paying customer down for a mortgage because they did not have the "right" score to qualify but was able to qualify and get approved a person showing bad pay habits but enjoying a very high score.  I said then and I say it now - THIS IS JUST NOT FAIR - Fair Issac - and is just plain WRONG.

One last comment on credit scores.  A major deciding factor in determining a credit score is the ratio of available credit to used credit.  This is a major issue today which I again believe to be fraudulent.

A quick example and overview.  If you have a credit limit of $1000 and have only used $499 of it then your credit score would reflect positively and give you a higher score.  Conversely, if you had used all $1,000 of the available credit this would be a very large negative and lower you score tremendously.

This is important to know as today most all of lthe credit card companies are lowering their credit limits on people to what ever amount has been used.  In the example above, if you have only used $499 of the original credit limit the bank/credit card compnay would now lower you available credit to $499 which automatically "maxes" you out and tremendously lowers your score even if you have always made your payments on time.  This I say is fraud and not a true reflection of credit worthiness.  This practice however, has caused a new cycle of issues for consumers and has created a new large source of revenue from the "banksters".

For Immediate Release:                               
September 29, 2009                                                 
Kanjorski to Examine Reforming Credit Rating Agencies

Washington, DC – Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today announced that the Subcommittee will hold a hearing to examine reforming the regulation of credit rating agencies. 

Who:               Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises
What:              Subcommittee hearing entitled “Reforming Credit Rating Agencies”
When:              September 30, 2009
                        2:00 p.m.
Where:            2128 Rayburn House Office Building

Witness List

·           Mr. Daniel M. Gallagher, Co-Acting Director, Division of Trading and Markets, U.S. Securities and Exchange Commission
·           Mr. Raymond McDaniel, Chairman and Chief Executive Officer, Moody's Corporation
·           Mr. Deven Sharma, President, Standard & Poor's
·           Mr. Stephen W. Joynt, President and Chief Operating Officer, Fitch Inc.
·           Mr. Robert Dobilas, President and Chief Executive Officer, RealPoint LLC
·           Mr. James H. Gellert, President and Chief Executive Officer, Rapid Ratings International Inc.
·           Mr. Kurt Schacht, Managing Director, CFA Centre for Financial Market Integrity

It appears that the House Subcommittee on Finacial Services is holding hearings on reforming credit agencies as the reprint of the email notice I received above.  This however, does not address consumer credit.  What this subcommittee is hearing is testimony on how the commercial credit "rating" reporting agencies function.

The agencies, Moodies, Fitch and Standard and Poors, are the ones who gave "fraudulent" triple "A" ratings to all of those mortgage backed securiteis (MBS), credit debt obligations (CDO) and the other derivitives  that allowed Wall Street to sell trillions of dollars worth of bad investiments to the world causing most of the world economic disaster.

Here again, three private agencies that offer an opinion of credit worthiness that lures everyday people, retired people and even sophisticated companies and governments to invest in securites they believe are almost risk free but turn out to be at the high end of the risk scale.

What Congress should be doing is prosecuting for fraud as fraud is still against the law in this country and having disclaimers put on all credit ratings - consumer or institutional.  The disclaimer should read something like the Surgeon General's warning on each pack of cigarettes.

"CAUTION:  The score and ratings contained herein can be hazardous to your health.  They contain toxins and ingredients harmful to the credit nature and worthiness of individuals and institutional well being.  This information should be used only for amusement purposes undue harm can be caused by its improper use."

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