Purty Cards . . .

Credit-Card Appeal: A New Look, Smell
Cool Designs Vie for ‘Top of Wallet’ Position, More-Frequent Use
By ROBIN SIDEL
November 15, 2006; Page C1

http://online.wsj.com/article/SB1163…nd_ investing

Forget about low interest rates, rewards points and free balance transfers. To attract new customers in a crowded market, the nation’s credit-card issuers are pitching cards with sleek features, including a hefty one that its promoters say has “plunk factor.”

Inspired by consumer interest in eye-catching products like retro toasters and fashionable can openers that have moved from the cupboard to the countertop, credit-card companies are creating unique cards aimed at winning the coveted “top of wallet” position — the card pulled out the most often.

American Express Co. is testing a “Butterfly” card that folds in half and pops out of a silver case attached to a key ring. Other issuers and card makers are experimenting with cards that feature various textures, light and sound, as well as high-tech security features.
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“There is a lot of conversation about how to introduce innovation into the credit-card market and design is part of that,” says Peter Vaughn, vice president of brand management at American Express.

There is good reason for it. After years of double-digit balance growth, the card industry is maturing. Financial institutions that issue cards can now count on only single-digit growth in balances, an important industry metric (also called receivables).

To combat the slowdown, card companies are working aggressively to steal customers from competitors. They also are trying to get consumers to put more small payments on plastic, taking market share away from cash and checks. To do both, they need to breathe new life into a nation that is awash in 1.5 billion credit, debit and gift cards, according to CardWeb.com, an online publisher of payment-card information.

Although good-looking cards might not translate into low interest rates or juicy rewards, industry executives say that internal research shows consumers care about card appearance. In the 1990s, MBNA Corp., now part of Bank of America Corp., helped transform the industry by tapping customer emotions with credit cards that were splashed with pictures of their favorite universities, hobbies and sports teams. The increased popularity of gift cards has also sparked a slew of designs.

Taking that concept to the realm of science fiction, J.P. Morgan Chase & Co., one of the nation’s largest issuers, is offering “Battlestar Galactica” fans a fiery red, outer-space-themed card. Tied to the revival of the cult science-fiction television series, the card features an embossed tagline that identifies the cardholder as a “Galactica Fleet Member.”

“It’s one of the very few financial-services products that is tangible and very visible to others,” says Monish Kumar, a director in the financial-services practice at the Boston Consulting Group in New York.

The card-design boom recently got a boost when American Express licensed the technology used to create its popular transparent credit card, Blue. The clear card’s unusual look received a wave of attention when it was first issued in 2001. Company executives say that Blue cardholders hang onto the card longer than some other versions and consumers use it more often than the other cards in their wallets.

“Everyone wanted a Blue card because it was sexy and neat to have in your wallet,” says Nicholas Cooney, president of Versatile Card Technology Inc., the closely held firm that acquired the rights to the technology American Express used to create the card. Based in Downers Grove, Ill., VCT is hustling to develop sample designs that it can pitch to banks, retailers and direct-mail companies.

The company has manufactured dozens of unusual cards in the past several years. Some ideas, though, might have limited appeal. VCT makes a scratch-and-sniff model that smells like coffee, as well as about 90 other aromas. It is in discussions with a retailer for a perfume-scented card.

The race to develop card designs was apparent on a recent afternoon at a VCT plant in South Plainfield, N.J. In a series of locked rooms that can be opened only with a magnetic card, workers — wearing pocket-free smocks as a security measure — put the finishing touches on two big card orders from clients in a rush to develop innovative designs. About 100 security cameras recorded movements throughout the facility.

Both batches of cards were coated with a new type of plastic that can be used to create texture and depth, such as the feltlike feel of a tennis ball or the grooved seam of a football. The company is bound by confidentiality agreements with clients and wasn’t permitted to identify the card issuers or other details about them.

“These cards are a piece of art to the customer,” said Merrill Martin, VCT’s chief operating officer, stroking a pile stacked in an office at the South Plainfield facility.

The newfangled cards can cost as much as 25% more to produce than traditional cards, depending on the size of the order, Mr. Martin says. The price can be even higher when there are more bells and whistles.

Companies are willing to pay more for production of the cards in the hopes that the unique designs lure customers who will use the cards often. Frequent use translates into more profits for the card issuers.

American Express is replacing its high-end Centurion plastic cards with hand-crafted versions made of titanium. The new cards weigh 0.53 ounce compared with 0.17 ounce for a typical plastic card, prompting company executives to describe the heft as providing “plunk factor” when tossed onto a table. American Express wouldn’t disclose the cost of the titanium cards, but it isn’t charging customers more for them. The Centurion card is offered to those who charge at least $250,000 a year.

Down the road, these unique cards may also have snazzy functions. Innovative Card Technologies, a closely held firm based in Los Angeles, has developed a card that displays a one-time numeric password similar to security tokens used by companies and banks. The card contains a chip that changes the numeric password with the touch of a button on the back. Alan Finkelstein, president, wants to build on that technology to create credit cards that can display the most-recent transaction processed.

Mr. Cooney of VCT says, “Our clients don’t want to see us unless we have something new to offer. Pretty soon, there will be cards that can do everything but get up and walk away.”

Don’t Close Your Cards

Cancel a card, hurt your credit score
By Gregory Taggart • Bankrate.com

Everyone knows that your credit score is important to your financial life, affecting the rates you get for mortgages, credit cards and insurance. Improving your score may save you thousands of dollars in interest. So would it help your score if you got rid of a credit card?

“Pay your bills on time and keep your credit expenditures under control, and you won’t have to worry about your credit rating,” says Craig Watts, spokesman for Fair Isaac Corp., which calculates the FICO score for consumers. “If you’re having trouble doing that, sometimes canceling a credit card in an effort to get your credit behavior under control is more important than your credit score.”

That’s the short answer. But since virtually everything that makes up your credit score depends on something else — depends on your credit mix, the number of cards you carry, the length of your credit history, your rate of credit utilization and myriad other things — there is a longer answer.

In most cases, canceling a credit card won’t help your credit score. In fact, it may actually hurt your score. You see, your credit score depends on how you shake out in five different credit-scoring categories, each weighted differently when calculating that score.

What counts in a credit score?

This chart shows how Fair Isaac Corp. values the various parts of your credit management to determine your credit score. Source: Fair Isaac Corp.

According to Evan Hendricks, author of the book “Credit Scores and Credit Reports,” canceling a credit card potentially can hurt you in at least two of the five categories — and maybe even a third.

Credit-utilization ratio is key:
First, canceling a card could upset your credit-utilization ratio, the second most heavily weighted category in Fair Isaac’s credit scoring algorithms. For example, assume you have three cards with total available credit of $20,000. Assume further that your outstanding balances total no more than $6,000 of that available credit at any one time. Since creditors like to see a credit-utilization ratio of 30 percent to 35 percent or less, you’re in good shape. Now, assume that you cancel a card with a zero balance and a $10,000 credit limit. Suddenly, your utilization ratio jumps to 60 percent, and your credit score drops.

As counterintuitive as that seems, that could happen. Impersonal credit-scoring systems aren’t concerned so much with how much available credit you have but with how you manage that credit. And in the credit-scoring world, a 30 percent utilization rate is much better than a 60 percent one. “That’s what scoring models want to see, a good utilization rate,” Hendricks says.

Furthermore, he says, canceling that card could result in a double whammy to your credit score, “because each card is scored individually, and then all your cards are scored together. (If) you’ve just canceled the card with a zero balance, (you’ve) lost a great individual score.” Regardless, if you still want to cancel a card, he says, “make sure to pay down your other balances to keep that rate in line.”

Arbitration Headline

Appellate Panel Reveals Proper Procedure For Determining Arbitrability Nov. 1, 2006

WASHINGTON, D.C. — The Federal Circuit U.S. Court of Appeals on Oct 20 laid out the procedures lower courts should use when deciding whether a dispute is subject to arbitration where an agreement between the parties contains an arbitration clause, holding that the first inquiry is who has the primary power to decide arbitrability under the agreement (Qualcomm Incorporated and SnapTrac, Inc. v. Nokia Corporation and Nokia, Inc., No. 06-1317, Fed. Cir.).   The U.S. District Court for the Southern District of California denied Nokia Corp.’s motion to stay litigation brought by Qualcomm Inc. pending arbitration in a dispute involving wireless telecommunications technology. It found that the allegedly infringing products are not covered by a 2001 licensing agreement or its arbitration clause. However, the court stayed trial pending appeal. The Federal Circuit panel termed the case as raising the question of how to reconcile an agreement to delegate arbitrability decisions to an arbitrator with Section 3 of the Federal Arbitration Act. “We conclude that in order to be ‘satisfied’ of the arbitrability of an issue pursuant to section 3 of the FAA, the district court should first inquire as to who has the primary power to decide arbitrability under the parties’ agreement. If the court concludes that the parties did not clearly and unmistakably intend to delegate arbitrability decisions to an arbitrator, the general rule that the ‘question of arbitrability . . . is . . . for judicial determination’ applies and the court should undertake a full arbitrability inquiry in order to be ‘satisfied’ that the issue involved is referable to arbitration,” the panel said, quoting AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 649 (1986). “If, however, the court concludes that the parties to the agreement did clearly and unmistakably intend to delegate the power to decide arbitrability to an arbitrator, then the court should perform a second, more limited inquiry to determine whether the assertion of arbitrability is ‘wholly groundless.’ If the court finds that the assertion of arbitrability is not ‘wholly groundless,’ then it should stay the trial of the action pending a ruling on arbitrability by an arbitrator. If the district court finds that the assertion of arbitrability is ‘wholly groundless,’ then it may conclude that it is not ‘satisfied’ under section 3, and deny the moving party’s request for a stay.” The court further said that the lower court has not determined whether Nokia’s assertions are wholly groundless and remanded for the court to consider the scope of the arbitration clause and the precise issues that Nokia asserts are subject to arbitration. Copyright 2006, LexisNexis, Division of Reed Elsevier Inc. All rights reserved

Experian Under Investigation

The Florida state attorney general’s office has opened an investigation into potentially misleading advertising by FreeCreditReport.com.

The Web site, owned by credit bureau Experian Group Ltd, offers consumers a chance to obtain their credit reports and credit score by signing up for a paid subscription service.

In response to a public record inquiry by MSNBC.com, the office of Florida Attorney General Charlie Crist issued a statement indicating it had opened an investigation to determine whether Experian has violated Florida’s Deceptive and Unfair Trade Practices Act.

The investigation will cover several entities owned by Experian, including Consumerinfo.com, Inc., Experian Consumer Direct; Qspace, Inc.; Iplace, Inc.; and the Web sites Consumerinfo.com; Creditexpert.com; and Creditmatters.com.

Full article here: http://redtape.msnbc.com/2006/11/florida_ag_inve.html

Authorized User’s

Piggybacking on a Credit History
By JACLYNE BADAL
October 1, 2006

Establishing a strong credit history typically takes years of using debt responsibly. But some Internet sites offer to expedite the process — for fees that can run into thousands of dollars.

These operations take advantage of a little-known quirk in the credit-rating system — and thereby highlight a strategy that individuals can similarly use to assist someone, such as a child recently graduated from college, to beef up his or her credit record.

Sites including Seasonedtrades.com and Creditlaunchers.com benefit from the way that an “authorized user” added to a credit-card account is treated in the credit-rating system: That new user inherits the card’s entire history as part of his or her record. If the credit account has a long history of low balances and timely payments, the information can improve the authorized user’s FICO score, a number that lenders use in determining if someone is a good credit risk.

Fees Charged

The sites charge fees such as $1,000 to $3,000 to add a person as an authorized user on one or more existing accounts with clean credit records — without giving the purchaser the account number or actual card to ring up charges for which a total stranger would be responsible. And why do cardholders participate? A companion site to Seasonedtrades.com offers people $50 to $150 each time they add an authorized user.

Some lenders and real-estate experts question the propriety of the authorized-user stratagem, since it’s designed to mislead banks about a person’s creditworthiness. The Federal Trade Commission warns consumers that there’s never any reason to pay for “credit repair”; if people’s credit scores have been hurt by incorrect information in their files, for instance, they can request removal themselves. The FTC declined to comment specifically on the authorized-user services.

Steve DeJesus, owner of Seasoned Trade Lines in Largo, Fla., says his Seasonedtrades.com site is a legal and ethical way to help people get the credit they want. Mr. DeJesus adds that his site does not count as a credit-repair firm, since the service doesn’t include removing negative items from someone’s credit report. Creditlaunchers.com’s founder, Ed Hanes, says his company is “100% legal” and ethical.

A Boost From Mom and Dad

The sites are a commercial twist on what some parents have long been doing — giving young adults with no credit or poor credit a leg up in the financial world. It’s different than the commercial version, however, because the authorized users usually get cards and can charge against the accounts.

George Porter, a graduate student at the University of California, says his parents added him as an authorized user to their credit card when he started college. That card and four secured paid loans were the only items on his credit report when he graduated. Still, he qualified for a Visa card with an interest rate of 8.5%, a rate that’s usually reserved for people with a long track record of managing credit wisely.

Mary Beth Pinto, a professor at Pennsylvania State University, Erie, and director of that school’s Center for Credit and Consumer Research, says parents should think twice before allowing children to benefit from their credit history. “I think you’re doing a kid an injustice,” she says, explaining that people can get into trouble if a misleading FICO score allows them to get more credit than they can manage or afford.

Fair Isaac, the company that developed the FICO scoring method, occasionally gets questions from lenders who similarly worry that authorized users will manipulate their scores to snag lower interest rates or larger loans than they deserve, says spokesman Craig Watts. Mr. Watts says Fair Isaac considers all such questions carefully, but so few people try to game the system that it doesn’t warrant change.

Fair Isaac weighs an authorized-user account the same as any other credit-card account, Mr. Watts says. He adds that the company isn’t likely to change the practice unless the data show the scores are losing their integrity due to consumer abuse.

Meanwhile, lenders have incentives to make it easy for cardholders to add additional people to their accounts. If the users actually use the accounts to make purchases, that could boost balances on which lenders collect interest. Lenders also see a chance to woo new customers, since authorized users are often young adults getting their first chance to use a card.

Curtis Arnold, founder of Web site Cardratings.com, says he added his wife as a user on his cards shortly after they married a few years ago. Partly as a result, her FICO score climbed from the low 600s to around 700, he says.

“This is one way you can jumpstart your credit or rebuild” a poor credit history, but it’s not a panacea, Mr. Arnold says. He and his wife also had to pay down her balances and make timely payments on all her accounts.

No ‘Get Out of Jail Free’

If you have a long history of late payments, one or two good cards on your credit report won’t do much to impress a bank. “A lot of borrowers look at this as their ‘Get out of jail free’ card, but it’s not,” says Greg McBride, senior financial analyst at Bankrate.com.

Some lenders will disregard any account history with authorized-user status, even if the FICO score is strong, he notes.

There’s also the possibility that the strategy could backfire for the authorized user or the cardholder. If the cardholder gets into a financial scrape and fails to make timely payments on the card, for instance, that would be reported on the user’s record as well. Authorized users can check the card’s credit history on their own credit report.

Nothing from the authorized user’s credit history is noted on the cardholder’s report. But if the authorized user can actually charge against the account, say in the instance of a child or spouse, that user could affect the cardholder’s credit by running up high balances and saddling the cardholder with debts he or she can’t afford to repay. Moreover, authorized users aren’t legally responsible for the bill.

Capital One’s Predatory Lending Practices

Cap One’s Credit Trap By offering multiple cards, the lender helps land some subprime borrowers in a deep hole and boosts its earnings with fee income. When Brad Kehn received his first credit card from Capital One Financial Corp. (COF ) in 2004, it took him only three months to exceed its $300 credit limit and get socked with a $35 over-limit fee. But what surprised the Plankinton (S.D.) resident more was that Cap One then offered him another card even though he was over the limit — and another and another. By early 2006, he and his wife had six Cap One Visa and MasterCards. They were in over their heads. The couple was late and over the limit on all six cards, despite occasionally borrowing from one to pay the other. Every month they chalked up $70 in late and over-limit fees on each card, for a total of $420, in addition to paying penalty interest rates. The couple fell further behind as their Cap One balances soared. Even so, they still received mail offers for more Cap One cards until they sought relief at a credit counseling agency this May. “I didn’t open them,” says Kehn, 33, who manages a truck stop and runs a carpet-cleaning business on the side. “I owe these people that much damn money and they are willing to give me another credit card? This is nuts.” Credit card experts and counselors who help overextended debtors say there’s nothing crazy about it. Cap One, they contend, is simply aiming to maximize fee income from debtors who may be less sophisticated and who may not have many options because of their credit history. By offering several cards with low limits, instead of one with a larger limit, the odds are increased that cardholders will exceed their limits, garnering over-limit fees. Juggling several cards also increases the chance consumers may be late on a payment, incurring an additional fee. And if cardholders fall behind, they pile up over-limit and late fees on several cards instead of just one. “How many more ways can I fool you?” says Elizabeth Warren, a Harvard Law School professor who has written extensively on the card industry. “That is all this is about.” Consumers may not be the only ones who are unaware of Cap One’s ways. Its practice of issuing multiple cards to some borrowers with low credit ratings doesn’t appear well-known in the investment community. And just how much Cap One relies on fee income, vs. interest, is a mystery, since, like most lenders, it doesn’t disclose that. All credit card companies have become more reliant on fee income in recent years, but in a report issued in 2002, William Ryan, an investment analyst at Portales Partners, warned that Cap One’s earnings could be “devastated” if regulators cracked down on multiple cards or fees. That hasn’t happened. For now, Cap One’s approach looks pretty savvy, however onerous it may be for some customers. Ronald Mann, a card-industry expert, says that by generating so much revenue from late and over-limit fees, as well as interest, Cap One likely more than offsets for the risk of card holders filing for bankruptcy. “The premise is to make money even if [Cap One] never gets fully repaid,” says Mann, a law professor at the University of Texas in Austin. (Mann has been retained by a party suing Cap One in a business dispute.) In a written response to questions, Cap One acknowledges that it offers multiple cards. “Our goal is to offer products that meet our customers’ needs and appropriately reflect their ability to pay,” it says. The company also stated: “Within our current U.S. portfolio, the vast majority of Capital One customers have only one Capital One credit card with a very small percentage choosing to have three or more cards.” Spokeswoman Tatiana Stead declined to offer precise numbers or to say whether households with three or more cards were concentrated among “subprime” borrowers, who have low credit ratings. UNDER THE RADAR The nation’s fifth-largest credit card issuer, with $49 billion in U.S. credit card receivables as of the end of June, McLean (Va.)-based Cap One is a major lender to the subprime market. According to Cap One’s regulatory filings, 30% of its credit card loans are subprime. Representatives of 32 credit counseling agencies contacted by BusinessWeek say that Cap One has long stood out for the number of cards it’s willing to give to subprime borrowers. “In the higher-risk market, no lender is more aggressive in offering multiple cards,” says Kathryn Crumpton, manager of Consumer Credit Counseling Service of Greater Milwaukee. Other big card-industry players that do subprime lending include Bank of America, Chase, and Citigroup. Representatives for Chase and Citigroup say they do not offer multiple cards to subprime customers. (BofA did not respond to inquiries.) Last year, West Virginia Attorney General Darrell V. McGraw Jr. filed an action in state court seeking documents from Cap One related to its issuance of multiple cards, as well as other credit practices. Other than that, however, Cap One’s practices do not appear to have drawn regulatory scrutiny. A spokesman for the Federal Reserve, Cap One’s primary federal overseer, declined to comment about Cap One, but said that in general the regulator doesn’t object to multiple cards. Still, Fed guidelines warn multiple-card lenders to analyze the credit risk tied to all the cards before offering additional ones. If consumers were using one Cap One card to make payments on another, it could artificially hold down the company’s delinquency and charge-off rates, metrics investors closely watch because they affect earnings, says Allen Puwalski, senior financial analyst at the Center for Financial Research & Analysis in Rockville, Md. In filings with the U.S. Securities and Exchange Commission, Cap One says its delinquency and charge-off rates as of Sept. 30 were 3.6% and 2.5%, respectively, about middle of the pack for major card lenders. In an e-mail, Cap One’s Stead says: “It is not our practice — nor our intention — to offer an additional card to customers who are currently delinquent or over limit on a Capital One card.” But Daniel Carvajal believes that’s just what Cap One tried to get him to do. Carvajal, 38, who is confined to a wheelchair with cerebral palsy and lives with his mother in Miami, says he exceeded his $1,500 Cap One credit limit last Christmas by several hundred dollars and was late on payments in January and February. In March, he says, a Cap One representative offered him a second card, which he refused. Using the new card to catch up with his first, he suspects, “is what they wanted me do to.” Some overextended Cap One customers admit using one card to pay another. In mid-2005, Kehn, the South Dakota truck-stop manager, already over the limit on three Cap One cards with $300 to $500 limits, received an offer from Cap One for another card with a $500 limit. He transferred part of the balances from the first three cards to get them under the credit limit. When his wife got a second card in early 2006 with a $1,500 cap, the couple took expensive cash advances on it to try to help make payments on the five other Cap One cards. “I robbed Peter to pay Paul,” Kehn says. Christine Garcia, 41, of Orange, Calif., said she and her husband did the same when stretched with five Cap One cards between them. So did Bernice Thompson, 46, of Fort Smith, Ark., who, along with her husband, had seven Cap One cards. “We got caught in a circle, and couldn’t get out,” says Thompson. These examples bring into question Cap One’s public stance on its subprime lending. Analysts, including Carl Neff, ratings director on card securitizations for Standard & Poor’s, say Cap One tells investors that it carefully controls risk by giving such borrowers only small lines of credit. Indeed, the largest percentage of Cap One’s 28 million credit-card accounts, 43%, have balances of $1,500 or less, according to its SEC filings. But if many borrowers had larger aggregate balances because they have multiple accounts, that percentage would be lower, and Cap One’s “underwriting wouldn’t appear as conservative as it looks,” says the Financial Research Center’s Puwalski. Like other big card companies, Cap One securitizes most of its card receivables as bonds, which are rated by credit agencies such as Standard & Poor’s (S&P) is a unit of The McGraw-Hill Companies (MHP ), publisher of BusinessWeek). Cap One’s ratings are strong, allowing it to command a higher price for the bonds. But Neff of S&P says he is surprised Cap One would offer riskier borrowers multiple, low-limit accounts given what it has told the market. “If it was a very prevalent practice, that would lower [Cap One's credit] quality in our eyes,” Neff says. A sampling of credit counseling agencies across the country indicates that about a third of the troubled debtors they see with Cap One cards have two or more Cap One accounts. Ron Nesbitt, 37, a Macon (Ga.) truck driver, and his wife sought credit counseling last year. By the second half of 2004, Nesbitt says, the couple had become consistently late and over limit on six Cap One cards, generating $348 in fees alone each month. “It was out of control,” he says.

New Credit Scoring Model Ruffles Feathers

Fair Isaac Corp. (FIC.N: Quote, Profile, Research), which provides the “FICO” scores widely used to U.S. gauge consumer creditworthiness, on Thursday said it filed an antitrust lawsuit against three major credit reporting agencies for developing a competing credit score.

The lawsuit accuses Equifax Inc. (EFX.N: Quote, Profile, Research), TransUnion LLC and Britain’s Experian Plc (EXPN.L: Quote, Profile, Research) of undermining the FICO brand by creating VantageScore, and using false and misleading marketing claims to convince people to use it.

These agencies launched VantageScore in March, saying it would simplify the process by which millions of Americans obtain loans. Fair Isaac said the agencies have distributed its FICO scores to lenders for more than 15 years.

“The recent agreement between the three powerhouse agencies unfairly threatens our ability to compete,” Fair Isaac Chief Executive Tom Grudnowski said in a statement. “The credit agencies are using their position to drive adoption of their own score to the detriment of our competing FICO score product and in conflict with their obligations to distribute our product.” if(!CMSB_ID){var CMSB_ID=”"} CMSB_ID+=”midarticle_warandconflict_targeted,”;document.write(”);

Equifax, Experian and TransUnion did not immediately return calls seeking comment.

Fair Isaac filed its lawsuit Wednesday in the U.S. District Court in Minneapolis, spokesman Brian Kane said. A copy of the complaint was not immediately available. Fair Isaac said its lawsuit should not impair lenders’ or consumers’ access to FICO scores.

FICO scores range from 300 to 850, while VantageScores range from 501 to 990. Higher scores indicate greater levels of creditworthiness, possibly leading to lower interest rates and better borrowing terms.

Fair Isaac shares rose 8 cents to $36.61 in morning trading on the New York Stock Exchange.

Read Your Credit Card Agreement

National Arbitration Forum’s Wall of Secrecy Begins to Crumble

While very few of them actually know it, courts would say that tens if not hundreds of millions of Americans have “agreed” that if they ever have a dispute against various powerful corporations, that their dispute will be decided by an organization named The National Arbitration Forum (or “NAF”). Who is the NAF? What is its background? Is it really a neutral organization, or is it likely to favor one side or the other in disputes?

Let me put my own “biases” on the table at the outset. Based upon extensive investigation and interviews with literally hundreds of people, my law firm, Trial Lawyers for Public Justice, has argued vociferously in several different court cases around the nation that the NAF is not a truly neutral organization. Instead, we have argued, NAF has conducted itself in ways that suggest that it in disputes between consumers and large corporations (and particularly banks and other lenders), that the NAF as an institution is pre-disposed to favor the corporations and lenders.

A great deal of background about this organization is set forth in a legal brief that we filed in a case in North Carolina called McQuillan v. Check N Go. A copy of this brief is posted on the website of my law firm, www.tlpj.org, along with hundreds of pages of evidence, that anyone can download for free. You can find affidavits from consumers who swear that they had terrible experiences with the NAF, an expert affidavit from a law professor who studied the way NAF conducted arbitrations in a certain category of non-consumer cases and concluded that NAF has a systematic tendency to favor the more powerful party in those disputes, a series of advertisements and solicitations that NAF has used to try to get banks and other large corporations to write it into their standard form agreements where the NAF has made statements that we argue show a pre-disposition to favor the corporations, and other similar evidence. I should make clear that the trial court in the McQuillan case did not agree with our challenge to the NAF as biased, holding in essence that a consumer can’t challenge an arbitration company as biased in advance, but must instead wait until after the arbitration is complete to raise that question, and also holding that some of our evidence was hearsay and not admissible. That ruling is on appeal, and our brief in the appeal is also available on TLPJ’s website.

It has been very difficult to gather much information about the NAF, though. It is a closely held corporation that vigorously resists answering questions about itself in court. In a series of cases where individuals have sought to challenge the NAF’s status as a neutral (consumers and employees in these cases have had mixed results, winning some challenges and losing others), NAF has refused to respond to subpoenas and has gone to court seeking court orders quashing the consumers’ discovery requests. In a number of cases where consumers have been able to get past these obfuscations, courts (mostly state courts in Minnesota, where the NAF is based, and where a consumer must generally go to fight for information about the secretive organization) have only allowed the consumers to learn key facts under stringent gag orders that make it impossible for other persons to find out what those consumers had learned.

There is something ironic about the fact that NAF seeks to replace the court system and the jury system, while being so secretive. Think about how open our court system generally is – trials are open to the general public, most courts write out opinions setting out the reasons for their decisions in important cases, and those opinions are publicly available in published volumes or can be searched through various data bases. By contrast, the NAF has sought to make itself as much of a “black box” as possible.

Until this month! Two major cracks have appeared in the wall of NAF secrecy, that offer disturbing insights into the way that this organization operates. The first comes in the form of an article entitled “Arbitration and the Godless Bloodsuckers” written by Richard Neely, a former justice of the West Virginia Supreme Court in the September/October issue of “The West Virginia Lawyer.” After retiring from the bench, Justice Neely was approached by the NAF to serve as one of their independent-contractor arbitrators, and he agreed to do so. His experience turned out to be very different from what he expected, though. He concludes that “banks have converted apparently neutral arbitration forums into collection agencies to exact the last drop of blood from desperate debtors.” Among other things, he tells that NAF “sends the arbitrator a judgment form already filled out so that all the arbitrator need do is check the appropriate box and sign his or her name. It looks like a collection agency to me!” He also reports that when he did not award a bank the full amount of attorneys’ fees it asked for, that he found himself barred from handling anymore cases involving that bank. He explains that banks, as “professional litigants,” can make use their superior knowledge to help make sure that their cases are heard by NAF arbitrators who will rule on them.

The second crack in the wall comes in a deposition of Harvard Law Professor Elizabeth Bartholet, taken on September 26, 2006, by a lawyer challenging the NAF as being biased in a consumer case against Gateway Computers. Professor Bartholet had also served as an independent contractor arbitrator for the NAF, until she resigned. Her February 8l, 2005 resignation letter expressed her concern that NAF’s system is biased in favor of lenders and against individuals. NAF fought hard to block Professor Bartholet from testifying in the Gateway case, but after a lot of back and forth, a court basically ruled that she would be permitted to testify so long as she did not give the names of particular parties whose cases she had handled as an arbitrator. Her deposition describes how she was also blackballed by a credit card company after she ruled against it in a single arbitration. At the time that the credit card company decided to block her from hearing any more cases involving itself, she was scheduled to hear a number of other consumer cases. NAF sent out letters to the consumers falsely stating that she would no longer be the arbitrator in their cases, because she supposedly had a scheduling conflict. The professor did not have a scheduling conflict, however, but the NAF sent out this explanation rather than the true one that she had been blackballed by a lender who didn’t like how she had ruled in a past case. Professor Bartholet has testified eloquently about how NAF operates a systematically unfair system that is biased against credit card companies.

Consumers or consumer advocates who would like to see these documents should contact me at pbland@tlpj.org.

Much about the way that the NAF operates, and how it makes key decisions, and how it makes its money, remains unknown. Nonetheless, there are now some new cracks in the wall of secrecy it has erected around itself, and what we can see through those cracks is not at all pretty. The NAF bills itself as offering a (a) private (b) neutral (c) justice (d) system, but from here, it looks like it only meets the promises of (a) and (d).

New FDCPA Amendments Harmful

FDCPA Amendments

by Richard Alderman
Changes in the Fair Debt Collection Practices Act (FDCPA) have been approved by the U.S. Congress and sent to the President to sign into law. The amendments were part of the Financial Services Regulatory Relief bill, which was passed this weekend.

Some of the key changes include clarification around “mini-Miranda” disclosures and legal codification that allows agencies to collect during the 30-day validation period.

The mini-Miranda clarification comes in updating protocol for legal pleadings and other communications, such as IRS 1099-C (cancellation of debt) forms. One of the new amendments states, “A communication in the form of a formal pleading in a civil action shall not be treated as an initial communication.” Also, communications that do not seek the payment of a debt, like 1099-C forms or Gramm-Leach-Bliley Act privacy notices, will no longer be considered an initial communication and will not require mini-Mirandas.

The FDCPA was also specifically amended to allow for the collection of a debt during the 30-day violation period, unless the consumer has an active written dispute regarding the debt.

The new amendments also include a provision that certain bad check enforcement firms, such as companies that run pretrial diversion programs for bad check offenders, will not be legally defined as debt collectors for purposes of the FDCPA.

Capital One Bank Admits FCRA Violations

Please find hereunder a record of the transcript in question:

page 533
Chairman SHELBY. Thank you.
Ms. St. John, just a quick question here, and then I will move on. Would it be fair to say that FICO scores can only be as good as the baseline information used to develop them, that is, accuracy is everything here, is it not?

Ms. ST. JOHN. Yes. The FICO scores use all of the factors proven predictive of credit risk based on the credit reports information.

Chairman SHELBY. You need accuracy. You need the information in the report to do it right, don’t you?

Ms. ST. JOHN. Well, you certainly need a base level of informa-tion for those scores to be predictive, definitely.

Chairman SHELBY. Right.
Mr. Hildebrand, I assume that Capital One wants to have a good understanding about the credit history of its potential customers. In other words, your underwriters need information to make under-writing decisions like everybody that extends credit.

Mr. HILDEBRAND. Absolutely.

Chairman SHELBY. So as consumers of information, you are fully supportive of its widespread availability?

Mr. HILDEBRAND. Yes.

Chairman SHELBY. But as providers of information, you seem to have adopted a different perspective from what the staff has told us. They say you deliberately withhold furnishing to credit bureaus important customer information, information which has a material bearing on your customers’ eligibility for credit. Some have claimed that Capital One, your company, is gaming the system to prevent its customers from appearing like worthwhile marketing targets to your competitors in the marketplace. Do you think your customers know of, let alone understand, Capital One’s policy with respect to furnishing information to the credit bureaus? Quick answer.

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page 534
Mr. HILDEBRAND. So you speak about our reporting of credit lines?

Chairman SHELBY. Yes, under reporting stuff. Our staff has said——

Mr. HILDEBRAND. One specific variable that has been cited is the reporting of credit lines, Senator.

Chairman SHELBY. You said you do that because if you report it all, then the customer might have a better shot in the market.

Mr. HILDEBRAND. We have not seen any research yet that indi-cates that this is in any way impactful on consumers. we have agreed to team up with Fair Isaac to actually look into this.

Chairman SHELBY. But you do not deny doing it, I would hope?

Mr. HILDEBRAND. No, no, we do not report customer’s credit line, that is correct.

Chairman SHELBY. Well, why don’t you report it, because accu-racy is so important?

Mr. HILDEBRAND. It is a proprietary issue for us. At Capital One, one of the ways we manage risk, quite appropriately, is through the granting of credit lines, and the way that we manage that is called ‘‘credit line sloping.’’ We believe that is a competitive tool that we use better than anybody else in America. Our concern is that if we were to report that, our competitors could reverse engi-neer our credit policies and replicate that. It is an advantage that we have in the marketplace.

Chairman SHELBY. But on the other hand, what about accuracy? If I was doing business with you or anybody, I would want my re-port coming from Ms. St. John’s company or whoever does this, to reflect everything I have to be accurate. In other words, how can the other people determine the report that comes out to be accurate if you do not, as a creditor, furnish that information to the credit bureau or if you skew the information?

Mr. HILDEBRAND. We do not yet——

Chairman SHELBY. I know you do it for proprietary reasons, but the customers out there, which is all Americans, do not know that.

Mr. HILDEBRAND. No, they do not. And as I said, Senator, we do not yet have any evidence that it actually has an impact on the ac-curacy of their credit score. If we receive that, we will certainly re-consider our policy.

Chairman SHELBY. But it could have some impact on whether or not the customers can go somewhere to shop for better.

Mr. HILDEBRAND. That is possible.

Chairman SHELBY. Could it not? Sure.
Mr. Plunkett, do you think the average consumer in America un-derstands that they can suffer negative consequences because a firm they have a credit relationship with decides to underreport in-formation regarding their credit history?

Mr. PLUNKETT. Senator, the answer is no. Our survey shows that, we asked a specific question here, that the majority of Ameri-cans do not understand.

Chairman SHELBY. Do you think that the average consumer un-derstands that they may suffer, yes, suffer negative consequences because a firm they obtained credit from decides to underreport in-formation regarding their credit history, same fact?

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page 535
Mr. PLUNKETT. Same answer, Senator. They do not understand they can suffer and this actually harms their overall credit score.

Chairman SHELBY. Would you agree that firms, that everybody that is in the marketplace, with credit so available, and accuracy so important, need to either furnish complete and accurate infor-mation to the credit bureaus or they need to inform their customers about their policy of limiting reporting?

Mr. PLUNKETT. Senator, we think the first is absolutely essential. We need a requirement for complete reporting. As for informing customers on this one, this is an unethical practice. The experts on credit reporting and credit scoring tell us that it is very, very likely that this is a ding on the credit report. We know that if you look maxed out on your credit card, that is, you have a $500 balance and it looks like your credit line is $500, that that almost certainly is used as a negative factor in some way in calculating your credit score. Absolutely, it should be required that this information be re-ported. Telling consumers about it after the fact, I do not know that that helps them very much on this one, because the point of the whole credit reporting system is to have accurate and complete information.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Mr. Chairman, I want to take a moment or two to follow up on your line of questioning that you were pur-suing. I think it is important.
Ms. ST. John, in your statement you say that 30 percent of your FICO score is determined on the basis of amount owed.

Ms. ST. JOHN. Yes.

Senator SARBANES. And you list as one of the factors under amounts owed proportion of credit lines used, proportion of bal-ances to total credit limits on certain types of revolving accounts. So you would look to see—maybe you have a $5,000 limit—whether you would use $500 of it or $4,500 of it. Is that correct?

Ms. ST. JOHN. Yes.

Senator SARBANES. Okay.

Ms. ST. JOHN. The amount of available credit line that is actually used and the balance owing been proven to be predictive factors.

Senator SARBANES. And the higher percentage of the available credit on a particular credit line a consumer is using could hurt their credit score. Is that correct?

Ms. ST. JOHN. In general, the pattern that we see is the higher the percentage of the line utilized, the greater the risk of non-payment in the future, yes.

Senator SARBANES. How do you determine what a consumer’s credit limit is on any given line of credit?

Ms. ST. JOHN. There are several different fields that are avail-able that vary by the different credit reporting agencies. Some have a specific credit limit amount. Others represent a high credit amount that has been reached. The scoring systems use a variety of information to determine that high credit amount. If the credit
limit is missing, it may look to see if there is other information that is available that can be used that has been proven predictive in the calculation of that ratio.

Senator SARBANES. The credit limit reported by the creditor, is that where that information comes from, presumably?

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page 536
Ms. ST. JOHN. Yes.

Senator SARBANES. All right. Now, is the creditor required to re-port that information?

Ms. ST. JOHN. No.

Senator SARBANES. What happens if a creditor does not report a credit limit maximum for a particular credit line?

Ms. ST. JOHN. It depends on the specific algorithm or the pre-dictive variable that is being calculated. In some cases, the vari-ables may default to a high credit amount or another field that is available. In other cases, it may bypass that particular account from the calculation altogether if it cannot contribute to the cal-culation overall. The end result is that the individual score for any given consumer in that situation could be higher or could be lower, depending on the ratio of credit used relative to the limits on all their other accounts.

Senator SARBANES. On the particular credit line, isn’t the highest amount charged reported as the maximum?

Ms. ST. JOHN. Depending on the credit reporting agency, yes, the highest amount actually reported is——

Senator SARBANES. So if the creditor did not report the maximum score, that could artificially depress a consumer’s credit score be-cause it would make it appear he had maxed out or was close to maxing out, when, in fact, that was not the case. Is that right?

Ms. ST. JOHN. It actually depends on what the current balance is at the time relative to whatever the maximum balance may have been. If they are carrying a very low balance at the time relative to the highest amount reached historically on that file——

Senator SARBANES. Let’s assume that——

Ms. ST. JOHN. —it could be lower.

Senator SARBANES. —the maximum balance they ever had was far short of what the credit limit was. So you could end up—let’s say my maximum balance has been $500. I have $400 on my card. My limit is $5,000. But I am going to get reported as though I am at 80 percent of my usable money, as I understand what you are telling me, rather than getting reported at 8 percent. Is that right?

Ms. ST. JOHN. It actually depends on what the total limits out-standing are across all revolving trade lines and the total balance is across all. So it’s not calculated on an individual account or trade line basis, but across all revolving accounts on the credit report.

Senator SARBANES. If that is my only revolving account?

Ms. ST. JOHN. If that is your only revolving account and is the maximum balance reached, then, yes, it would be lower. It would likely result in a higher calculation.

Senator SARBANES. Well, I just want to ask Mr. Hildebrand. Does Capital One report the maximums on the credit limits?

Mr. HILDEBRAND. We do not report the credit limit, the credit line that has been granted. We report the amount outstanding.

Senator SARBANES. Yes, so the person, this hypothetical person I have been describing, would really get a black mark when they do not deserve it. Isn’t that the case?

Mr. HILDEBRAND. To paraphase Ms. St. John, it depends on the broad spectrum of the credit that you are looking at as the score is developed. The score is developed looking at the entire credit profile coming from the bureau.

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page 537
Senator SARBANES. I understand that, but this is one factor in there.

Mr. HILDEBRAND. It is one factor.

Senator SARBANES. As far as this factor is concerned, clearly a negative mark is going to register against the consumer when they do not deserve that negative mark.

Mr. HILDEBRAND. Senator, there are other scenarios that could be constructed that it is just as positive for consumers. And that is the research we are trying to do, to understand the impact that this would have. We certainly do not want to do anything detri-mental to American consumers. We have a business to run as well. That is what we are trying to protect here. And so we have to bal-ance those two. Right now it is a voluntary system.

Senator SARBANES. Are you unique amongst businesses in fol-lowing this path?

Mr. HILDEBRAND. I do not know.

Mr. PLUNKETT. Senator, I can tell you from our survey and our study in December, from the Federal Reserve study in February of this year in which they looked at 248,000 credit reports. Capital One is likely not the only one using this practice. The Fed study, one of their conclusions, by the way, was that the use of this posi-tive information does overstate risk for particular consumers. The other point I would make is that one of the standard generic explanations that consumers get when they get that adverse notice we have been talking about is, ‘‘Proportion of debt to available credit.’’ That means this is one of the reasons why your credit his-tory, your credit report and your credit score, is not as high as it could be.

Senator SARBANES. I have used a lot of time on that, but I——

Chairman SHELBY. It has been very informative.

Senator SARBANES. It is an important point.

Chairman SHELBY. Senator Bennett.

Senator BENNETT. Thank you. I think it is an important point as well, and I think we should dig a little further into it. Where it leads is where I am not quite sure I want to go, which is legislation laying out the requirement as to what the provider of information has to provide by law. Currently, it is entirely vol-untary, is it not?

Mr. HILDEBRAND. Yes, it is.

Senator BENNETT. Now, everybody who participates in the sys-tem has a vested interest in seeing that the system works. And, therefore, you are going to be as cooperative as you possibly can in providing information that you think will help the system work. If legislation comes in and says, okay, we are going to determine, by the wisdom of Congress, that the following things must be re-ported by every provider, with fines or other kinds of punitive ac-tion taken by the Government against a provider that does not fill in every single aspect of the blank, it conjures up, for me, a world that I am not really comfortable with because it means the Govern-ment virtually has taken ownership of this process, and the next step, Mr. Winston, is that the FTC runs it, Fair Isaac goes out of business, the FTC is giving scores, Congress is mandating what will be considered and what will not. And I think somebody out there is going to figure out a way to game that and get around it