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This story appears in the March 2009 issue of Cards&Payments.
Expect the number of consumer credit lawsuits, including suits against card issuers, to increase in 2009 and 2010. With lenders restricting access to unsecured credit to only those with solid credit histories and high credit scores, many consumers are willing to escalate efforts to have incorrect and damaging information removed from their personal credit files.
In almost all of the cases in which I have served as an expert witness, plaintiffs–almost always consumers–have made significant efforts to use the standard dispute protocols the credit-reporting agencies recognize to have mistakes corrected. Their lack of success forces them either to live with the errors until statutes of limitations expire or to litigate.
More consumers who historically may have balked at paying attorneys' fees now find it worth the expense to fight paying disadvantaged interest rates on existing or new debt or being denied credit thanks, in part, to the current credit environment. The trade-off is the cost of suing versus less-expensive access to capital if a lawsuit is successful.
A search performed on LexisNexis Courtlink shows consumers filed 5,422 credit lawsuits between January 2006 and December 2007.
The distribution of these lawsuits is disproportionate to Georgia, California and Illinois because these are the states where the three national consumer credit reporting agencies–Equifax Inc., Experian PLC and TransUnion LLC–maintain their U.S. headquarters. Though the credit bureaus often find themselves as defendants, a large percentage of these lawsuits also include a credit card issuer or other type of lender being sued for alleged negligent credit reporting.
The following is a very common example of events that can lead to litigation:
A consumer has an existing credit account with a lender, which furnishes information to one or more of the three credit reporting agencies on a month-to-month basis.
The lender believes the consumer has done something adverse in the management of the account, such as making a payment late. The lender reports this negative incident, which can vary in severity, to the credit-reporting agencies. Fair Isaac Corp.'s FICO credit-scoring system takes the negative item into account, which punishes the consumer's credit scores to some varying amount.
The consumer is unaware of the damaging item and organically functions within the credit environment up to a point where he or she applies for a new credit benefit. A prospective lender pulls credit reports and scores that include the negative, inaccurate information. The resulting lower score leads either to an adverse action, such as a denial, or to an approval with disadvantaged rates and terms.
These cases almost always involve allegations of negligent or willful violations of the Fair Credit Reporting Act because of the furnishing and subsequent distribution of inaccurate account information, also referred to as "trade," to one or more of the credit-reporting agencies.
Further, the damage requests, which adversarial experts almost always challenge, generally are specific to compensating plaintiffs for disproportionate interest rates on credit cards and other loans and the closure of accounts in good standing. This new loss of capacity, especially of unsecured credit, generally will lead to lower credit scores, which is why consumers and their attorneys have identified it as a potentially damaging event.
The common theme I have noticed across all of the lawsuits I have been or am a part of is this: Lenders and credit bureaus do not want to see the inside of a courtroom. Every single disposed case I've been involved with has settled well before trial.
Though some may argue that all plaintiff and defendant decisions regarding lawsuits are business decisions, I believe settling a lawsuit is more an effort by defendants to maintain control, to some extent, of their downside financial risk.
Offering a settlement, fair or unfair, is the only way to avoid allowing jury members to possibly punish a credit-industry player for their own unpleasant experiences with lenders and credit bureaus. CP
John Ulzheimer is president of consumer education for Credit.com, founder of CreditExpertWitness.com and a contributor to CNBC's On The Money. He can be reached at john@theulzheimergroup.com.
