Subprime credit card company survives CROA attack in Supreme court

Technorati Tags: CROA section 1979,Credit card deceptive practices

Wanda Greenwood and two others had filed a class action against CompuCredit and Columbus Bank and Trust over Aspire Visa subprime credit cards that the defendants marketed to consumers with low credit scores.
Though CompuCredit and Columbus advertised that there was "no deposit required" for the cards, which would help them rebuild their credit, they charged about $257 in fees during the first year, against a $300 credit limit, the class claimed. 

On January 10, 2012, the Supreme Court decided CompuCredit Corp. v. Greenwood, No. 10-948, holding that the Credit Repair Organizations Act ("CROA") does not preclude enforcement of an agreement to arbitrate claims brought under that act.
Congress passed the Credit Repair Organizations Act (CROA) to assist consumers in making informed decisions and to protect consumers from unfair or deceptive practices when dealing with companies that claim to help rebuild credit. The CROA augments the Consumer
Credit Protection Act with additional nonwaivable consumer
protections, including a mandatory precontractual disclosure of consumers’ rights when contracting with a credit repair organization.      
In Greenwood v. CompuCredit Corp., the Ninth Circuit denied a request to compel arbitration based on a predispute arbitration agreement, holding that the CROA’s mandatory disclosure term “right
to sue” creates a substantive, non-waivable right that precludes arbitration. 

Plaintiffs in the action—respondents in the Supreme Court—opened credit card accounts through petitioner CompuCredit. They later brought a putative class action, alleging that CompuCredit violated the CROA by making allegedly misleading representations regarding the credit cards' use to rebuild poor credit. The district court denied CompuCredit's motion to compel arbitration, concluding that CROA claims are not arbitrable. A divided panel of the Ninth Circuit affirmed.

The Supreme Court reversed and held that CROA claims may indeed be arbitrated. Federal statutory claims, just like other claims, are subject to the "liberal federal policy favoring arbitration agreements." Under Section 2 of the Federal Arbitration Act ("FAA"), contracts to arbitrate federal claims must thus be enforced—unless the FAA has been "overridden by a contrary congressional command."  The Aspire Visa card is marketed and owned by CompuCredit.  The card was the subject of a massive amount of complaints from consumer rights advocates and the card-holders themselves.  It was basically outlawed by Section 105 of the CARD Act of 2009.

CompuCredit is best known in consumer credit circles as the target of a 2008 FDIC enforcement action documenting the features of these cards, which typically come with a low credit limit and high up-front fees. The card at issue here had a credit limit of $300 and first-year fees of $257, leaving an available credit limit of only $43. Collectively, those features are likely to push the effective interest rate on purchases with the card far above one hundred percent per year. So CompuCredit is no stranger to dissatisfied customers.

CompuCredit represents what is wrong with this country’s financial system and why Congress had to pass the Dodd-Frank Reform and Consumer Protection Act. Following the 2008 near-collapse of the U.S. economy, which was fueled by the crash of the housing bubble, the Dodd-Frank Financial Regulatory Reform Bill established restrictive measures in an attempt to prevent such events in the future. In order to protect unsuspecting borrowers against abusive lending and mortgage practices, the reform bill established government agencies to monitor banking practices and oversight of troubled financial institutions.

In a report from the National Consumer Law Center, staff attorneys Rick Jurgens and Chi-Chi Woo stated Below is the executive summary of their scathing report:

EXECUTIVE SUMMARY

Millions of consumers are being victimized by “credit” card offers that charge hundreds of dollars in fees and extend minimal available credit – sometimes as little as $50. These cards, which we call “fee harvester” cards, share a common thread: high fees that eat up most of an already low credit limit, leaving the consumer with little real, useable credit and at a high price.  For example, one of the fee-harvester cards featured in this report comes with a credit limit of $250. However, the consumer who signs up for this card will automatically incur a $95 program fee, a $29 account set-up fee, a $6 monthly participation fee, and a $48 annual fee – an instant debt of $178 and buying power of only $72. While high fees, high interest rates, and other abuses pose a threat to consumers of prime credit cards as well as to those with bad and no credit histories, fee-harvester cards are designed to maximize profits by targeting the most vulnerable consumers. Fee-harvester cards are part of the subprime strata of credit cards, and represent an extreme version of the abuses by the card industry.

Fee-harvesting is very profitable. In 2006, one company – CompuCredit – collected $400 million in fees from a portfolio of fee-harvester cards that by mid-2007 had saddled cardholders with nearly $1 billion in debt.  The business models of CompuCredit and others that issue and market fee-harvester cards depend upon federal banking laws and regulations that preempt state interest rate caps and consumer protection laws.  Preemption also benefits the mainstream credit card industry, which makes enormous profits by charging interest rates and fees that could otherwise be limited by the states. Weak enforcement actions and guidelines issued by federal banking regulators have done little to contain the harm.  Preemption makes bank charters an invitation to extract high fees. For example, CompuCredit, frustrated in efforts to get its own bank charter, has marketed fee-harvester cards in partnerships with compliant banks that act as issuers.  Recently, CompuCredit partnered with Urban Trust Bank, which says its “mission” is to bring affordable banking services to minority communities. CompuCredit has other powerful partners, including a unit of Synovus, a large Georgia bank holding company that is also a major service provider to mainstream credit card companies. CompuCredit also has ties to some of Wall Street’s largest and most prestigious banks.

Several small banks specialize in the issuance of fee-harvester cards, including South Dakota-based First Premier; First National of Pierre; Delaware-based First Bank of Delaware; and Applied Bank, formerly known as Cross Country Bank. Some big banks also have big stakes in the subprime market, including Capital One, which has sometimes used the fee-harvesting model, and HSBC.

Congress should act to end preemption and to close the legal loopholes that now enable banks to attach high fees to nearly meaningless offers of credit that are at the heart of fee-harvesting. In addition, Congress should regulate interest rates, fees, and unilateral contract changes throughout the credit card industry, and permit individual consumers to seek recourse when creditors violate their rights under the Federal Trade Commission Act.

The entire report is excellent.  Definitely mandatory reading for anyone interested in the credit industry. 

The supreme court is well aware of these companies and how they prey on minorities the economically lower-class populations.  Justice Ruth Bader Ginsburg was the ONLY justice to speak out on the side of the “common man” as she put it.  In her lone dissenting opinion from the bench, she wrote in part: “here, congress’ intended target was vulnerable consumers likely to read the words “right to sue” to mean the right to litigate in court. She distinguished the case from other decisions holding that a statutory right of action does not preclude arbitration agreements, noting that the CROA specifically refers to a “right to sue”, mandates that consumers be informed of this right, and precludes the waiver of any “right” conferred by the act.” 

Ginsburg was the only justice who got it right.  Just because the CROA is “silent” with regard to overriding the FAA rule, the whole purpose Congress created the statute was to protect consumers from the exact kinds of greed and market manipulation perpetrated upon low-income and minority populations by so many credit banks and card companies, like CompuCredit and Columbus Bank. 

How to get assistance from the Consumer Finance Protection Bureau

 Mortgage Assistance – CFPB

The CFPB can help you get connected to a HUD-approved housing counselor. At no cost to you, the counselor can help you work with your mortgage company to try to avoid foreclosure. A housing counselor can help you organize your finances, understand your mortgage options, and find a solution that works for you.
Here’s what to do:
Have this ready when you work with your mortgage company or housing counselor to discuss a possible work-out solution.

• Mortgage loan number (account number)
• Any additional paperwork from your mortgage company
• Recent pay stubs
• Recent tax return
• Household expenses (bills including food, utilities, car payments, insurance, cable, phone, credit cards, car loans, and student loans)

Call the CFPB at 1.855.411.CFPB (2372)
If you would prefer to look for mortgage help online, HUD provides a list of foreclosure prevention resources arranged by state. Military members or veterans can call us or visit the VA’s home loan website to get personalized assistance.
Foreclosure prevention and loan modification scammers target homeowners who are having trouble paying their mortgages. These scammers might promise “guaranteed” or “immediate” relief from foreclosure, and they might charge you very high fees for little or no services. Don’t get scammed. If it sounds too good to be true, it probably is. Call the CFPB if you think you may be the target or victim of a scam.

Legal aid

If you believe you are in need of an attorney, or if you have been served with a notice of foreclosure or other related legal complaint, there might be legal representation available at little or no cost to you. Find legal aid in your state.

Mortgage Assistance – FTC (federal trade commission)
The Federal Trade Commission has help for homeowners in distress.  They have useful suggestions and some resources that might provide you with the help you need.
To learn more about mortgages and other credit-related issues, visit www.ftc.gov/credit and MyMoney.gov, the U.S. government’s portal to financial education.
The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or get free information on consumer issues, visit MyMoney.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. Watch a video, How to File a Complaint, at ftc.gov/video to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

 

There's a New Sheriff in Town: The Consumer Financial Protection Bureau

For years, the big three credit reporting agencies - Equifax, TransUnion, and Experian, have operated with little to no government oversight or regulation. These are the three agencies that control who gets approved or rejected for loans on everything from credit cards, to cars, to even buying a home.

Consumer protection organizations such as US PIRG (US Public Interest Research Group) have long claimed that the big three operate under a mysterious shroud of secrecy and are the reason the entire credit and lending system is plagued with inaccuracies and erroneous information.

Several studies over many years have repeatedly documented the chronic problem of inaccuracies in credit reports. The U.S. PIRG has conducted at least six studies between 1991 and 1998 and each time has found a shocking number of serious errors in consumer credit reports. US PIRG’s most recent study in 1998 revealed the following:

Twenty-nine percent (29%) of the credit reports contained serious errors --false delinquencies or accounts that had never belonged to the consumer --that could result in the denial of credit; 

 Forty-one percent (41%) of the credit reports contained personal demographic identifying information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect; 

Twenty percent (20%) of the credit reports were missing major credit, loan, mortgage, or other consumer accounts that would demonstrate the positive creditworthiness of the consumer; 

Twenty-six percent (26%) of the credit reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open; 

Altogether, 70% of the credit reports contained either serious errors or other mistakes of some kind.


Federal laws like the Fair Credit Reporting Act (FCRA) and the Fair Debt Collections Practices Act (FDCPA) provide consumers with some protections and more importantly, a basis for litigation against companies who violate consumer protection laws regarding how consumer credit information is handled, and how debts should be collected by collection agencies. Still, it seems collection agencies, and the big three credit reporting agencies have managed to sidestep the regulations aimed at protecting consumers from their mistakes, lack of security and illegal collection practices. Credit reporting agencies and collection agencies try to defend (even in courts of law) severely flawed business models that make it extremely difficult if not impossible for the average consumer to call them on their mistakes and get relief from practices that are intentionally harmful to a consumers credit file. Consumer requests to the credit reporting agencies to correct erroneous or inaccurate information in their file are routinely ignored or mishandled. Consumer investigation requests are conducted via a process that has been describes as “shoddy” and “grossly irresponsible” by legal professionals in the industry.


Evidence of high error rates in the credit reporting system is also found in the complaints received by the Federal Trade Commission regarding credit reports. For many years consumer complaints about credit reports have ranked at the top of all complaints submitted to the FTC for any reason. Identity theft, which also involves creditors or furnishers of credit information and credit reporting agencies, is now at the top of all fraud complaints received by the FTC. The FTC reported to Congress that as of March 2002, the FTC received approximately 3000 calls per week to their toll-free identity theft hot line. Approximately 43% of all complaints received by the FTC in all subjects are identity theft related. When one considers number of people applying for credit in the US on a daily basis, the number of persons affected by credit reporting agency mistakes and information mismanagement is absolutely staggering.


It is clear that the credit reporting agencies and the collection companies need more regulation and oversight. A close examination of their procedures and Operations reveal that their business models complement each other, resulting in a two-pronged attack upon the consumer. Well, it appears the consumers’ cry for help after all these years has finally been heard.


On July 16th in Detroit Michigan, the new director of the newly formed Consumer Financial Protection Bureau (CFPB) Richard Cordray announced: “the Consumer Bureau is issuing a new regulation to expand our supervision program to oversee these credit reporting companies. The authority to supervise firms is the authority to conduct on-site examinations of whether and how they are complying with the law. It affords an opportunity to gain a more thorough understanding of their business models and their business practices, to work with them to correct any problems we find, and to find ways to resolve matters that may be causing harm to consumers.”


Cordray went on to comment about the important role credit reporting agencies play in our entire economy:

“So this critical market is at the heart of our lending systems. It has enabled many of us to get credit and to afford a home or a college education. But it is also clearly a market that can cause considerable problems for consumers. For example, sometimes credit reports contain errors that inaccurately reflect people’s financial histories and can unfairly block them from getting approved for credit or can make it cost more than it should. Consumers also can encounter great difficulties at times in getting errors corrected. When the Consumer Bureau first opened its doors almost a year ago, we asked people to share their consumer experiences with us. We have heard reports since from many consumers that their credit reports are not accurate, and it is difficult to get them corrected. Because of the critical role that credit reports play in consumers’ lives, it is our job to make sure we understand the full extent of these problems and address them effectively.”

“Given its enormity, given its influence, and given its wide impact on our overall economy, you can see that there is much at stake in ensuring that the credit reporting market is working properly for consumers.”

David Holt, with Clear Point Credit Counseling Solutions says it's a good move. "This is a big deal for consumers," he says. The goal is to ensure credit reporting agencies are working properly for consumers, lenders and the economy. "The laws are already there in the Fair Credit Reporting Act but they are going to shore up the rules on what the agencies have to do," Holt says.

David Holt of Clear Point is exactly right, this is a big deal. However, the effectiveness of this new bureau will surely be measured by what they actually do, and what real regulative authority they have. I believe the effectiveness of any regulatory government agency should be measured first by its leadership, and second, by its mission statement. The CFPB is headed up by Richard Cordray. But as anyone who hasn’t spent the last three years in a cave would know, the first choice to lead the agency was Elizabeth Warren, the up and coming Harvard Law professor who gained notoriety as an outspoken critic and Chairman of the Congressional Oversight Panel of the infamous TARP Bailout of 2008.

In the hallowed halls of congress, Warren is considered the Champion of the beleaguered Middle Class. The CPFB was her own brainchild. As she crisscrossed the country, spreading the word about the C.F.P.B., Warren became a familiar face to many, especially to those who had seen her on television—on CNBC, Real Time with Bill Maher, and The Daily Show with Jon Stewart. Whatever the reasons, president Obama ignored scores of political groups like the AFL-CIO and thousands of people around the county who had petitioned him to appoint her as the nation’s top consumer protection watchdog. (See article in Vanity Fair).

So, who is Richard Cordray? As attorney general of Ohio, Cordray aggressively pursued lawsuits against some of the country’s biggest financial firms — including AIG, Bank of America and Fannie Mae — for misleading the state’s pension funds, ultimately securing a $700 million settlement from AIG over accounting fraud. He also led an early effort to go after so-called “foreclosure mills” that used falsified documents to speed up foreclosures on consumers, suing Ally Financial in 2010 and campaigning for big banks to slow down their own foreclosure proceedings. “We pursued many actions against foreclosure rescue scammers who were reaching into the pockets of desperate people in an effort to steal what little remained as they sought to keep their homes,” His background seems well suited for the position, but the jury is still out as to what direction the bureau will take and how affective it will be. For Mark Spindel, co-founder of the Potomac River Fund, that will be a major indicator of how effective the CFPB can be. “The key for me is whether and when and if this will have some impact on the foreclosure and housing markets. the real test for the CFPB will be in seeing how aggressive Cordray will be in pushing financial policy to favor consumers.















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