FDCPA/FCRA Expert Witness

Damages and Procedures that must be followed by a debt collector, credit reporting agency, credit bureau or creditor are the two issues that Credit Expert Witness John Ulzheimer says he is most often required to testify on.  John Ulzheimer, the nation’s credit guru, states on his blog at www.fdcpaexpertwitness.com:

“In cases where I’ve served as an FDCPA expert witness it seems as if the most common issues are credit related damages, economic damages, and whether or not the procedures followed by the collection agency were reasonable when performing an investigation or reinvestigation.”

It seems obvious, at least to an attorney, that damages and causation are going to be the two issues most testified on. In every torts case, the Plaintiff’s attorney must prove (1) that the Defendant owed the Plaintiff a duty; (2) that the Defendant breached that duty; (3) that the Plaintiff was damaged; and (4) that the Defendant’s breach of that duty was the cause of the Plaintiff damages. So, the most important elements to prove are causation (that the Defendant’s actions caused the Plaintiff’s damages) and the amount of damages (what is the extent of injury caused to the Plaintiff?).  As John indicates, there are at least two kinds of injuries a Plaintiff may suffer in FDCPA and FCRA actions including actual economic damages (a lower credit score results in higher interest rates or complete credit denial) and credit related damages (the consumers credit score is actually damaged or the consumers credit reputation suffers). On the surface, damages seem to be the easiest element to prove, however, just because something bad happens to a consumer’s credit score or profile doesn’t always mean they are damaged. Part of being injured is knowing that you are injured. I guess the question on proving easy damages is whether or not a lowered credit score would be considered actual damage or injury. Plenty of people’s credit scores increase or decrease on a daily basis without them even knowing. Injury is more easily proven if you can tie economic damages to a lowered credit score or as a result of inaccurate information on a person’s credit profile. Now the tough part – causation – did the actions of the Defendant cause the Plaintiff’s injury?

If a debt collector erroneously reports a collection on a consumer’s credit report, has that consumer been damaged? And if so, is the erroneous collection the cause of the Plaintiff’s damages or are there other factors to consider? Say I have a collection reporting on my credit report since July, 2008 but I don’t know it until October, 2009 when I am denied credit due to low credit scores. The lender specifically tells me that I was denied due to low scores AND a collection account. I do some research and find out that the collection account doesn’t even belong to me. Now I have been denied credit because of a collection account that wasn’t even mine, right? Maybe. The lender denied me because of low scores and a collection account. Let’s assume that the collection account was not there to begin with; would I have still been denied credit as a result of low scores.?Maybe the lender failed to tell me that not only was there a collection account on my credit but all my revolving balances were too high so even if the collection account hadn’t been reported, my scores still would have been too low and I would not have been approved.

In this example the fictional Defendant Debt Collector (1) owed a duty to me not to report inaccurate information on my credit; (2) breached that duty by reporting a collection account on my credit that didn’t belong to me; (3) I was damaged (I didn’t get the financing I applied for); BUT (4) the Defendant’s breach of its duty was NOT the cause of me getting denied credit. In other words, had the collection account not been reported on my credit, I still would have been denied credit as a result of my poor management of my credit balances – the ACTUAL cause of my damages.

The mysteries involved with credit scoring models and how different factors influence a consumer’s credit score must be understood by any credit expert witness to be effective, especially in light of the two most important issues an expert witness is required to testify on – damages and causation.

How are FICO scores calculated?

Before factors in a credit score can be determined, the actual credit scoring model must be defined. There are at least 5 different scoring models used by both creditors and credit bureaus. Specifically, each credit bureau has its own scoring model it uses for credit reports obtained directly from each credit bureau. Additionally, all three credit bureaus have developed a new credit scoring model to compete with the FICO scoring model and last but most used, the FICO scoring model. Additionally, within each scoring model, there are different versions much like the different versions in Microsoft’s operating system Window. Fair Isaac, the developer of the FICO model, has updated the model resulting in different creditors or credit reporting agencies using different versions. This is one reason why a consumer will see different credit scores on different credit reports. There are several other reasons and I may explain these in a separate posting. The 5 main factors used to determine a consumer’s credit score are:

Payment History

Debt Ratio

Average age of file

Mix of Credit

New Credit

Payment history accounts for roughly 35% of a consumer’s overall credit score. The main focus here is negative payment history – late payments, charged-off accounts, and collections. Most people believe that as long as they make their payments on time, they will have good credit scores. This helps, however, there are many more factors to consider. Late payments are probably the most common negative item on credit reports and are usually classified in terms of 30 day increments. A person who makes a payment 35 days after the due date will typically be reported as have a 30 day late payment. If the payment is made more than 60 days late, it will show as a 60 day late payment. The same is true for 90 days late and 120 days late. Late payments affect a consumer’s credit score dramatically at first and gradually less as time goes on. Typically for the first 2-3 years after a late payment is reported, a consumer’s credit score can suffer as much as 150 points. This doesn’t mean that for each late payment reported, a consumer’s credit score will drop 150 points, simply that a consumer will not be awarded as much as 150 points for recent late payments. 

Debt Ratio accounts for roughly 30% of a consumer’s overall credit score. This ratio is calculated in two different ways: (1) the line by line or account by account credit balance to credit limit ratio and (2) the aggregate balance to limit ration of a consumer’s credit accounts. For example a person with a credit account with a balance of $5000 and a limit of $10000 would have a debt to limit ratio of 1/2 or 50%. As both the account by account and aggregate balance to limit ratio rises, the consumer’s credit score will lower. There are rough guidelines for points at which a consumer is penalized more for a higher ratio. The actual numbers are unknown but a pretty good scale to go by is the following:

1-10% – no real effect on score. The scoring model will treat any balances as if they were zero.

11-20% – this starts to effect the score

21-30% – This effects the score more, but is still in not too harmful

30% or more – At this point, a consumer’s score begins to drop and creditors consider the borrower a higher risk.

If possible, keep all your credit account balances lower than 12% and you will be fine.

Average age of file accounts for roughly 15% of a consumer’s overall credit score. This is pretty self-explanatory. The older your accounts are, the better. A common misconception is it is not good to have too many accounts that are open and people tend to close their accounts if they do not use them. This is true to a certain extent, however, by keeping old account open, you gain the advantage of aging the average age of each account on your credit report. The best thing to do with accounts that are not being used, is use them for small purchases every few months. This keeps the accounts active and reporting and ensures that you are getting the most points possible for average age of file.

Mix of Credit accounts for roughly 10% of a consumer’s overall credit score. The best mix of credit is a mortgage account, 1-2 auto loans, and 3-5 credit accounts. 

New credit accounts for roughly 10% and includes new accounts and inquiries into your credit report. Each time a consumer applies for credit, an inquiry is placed on the credit report. Each inquiry can take away as many as 5 points from a consumer’s credit score. Inquiries remain on your credit report for two years in most instances, however, they only affect your score for one year.

The Secret World of Consumer Credit

This is the first of hopefully several posts on SBFC Law Group, PLLC’s blog. SBFC Law Group, PLLC is a small law firm that was founded with the purpose of providing a solution for small business owners and consumers and their credit needs. The world of credit is, in our opinion, a dark and gloomy world to most consumers. Our goal is to educate while aiding our clients in exercising their legal rights with regards to the information reported by each credit bureau on their credit profile.  

The world of consumer credit is regulated primarily by the Fair Credit Reporting Act. This is a federal law that, among other things, provides limitations on both creditors and credit bureaus as to what MAY be reported on a consumer’s credit profile. Generally, consumers understand that information is reported by creditors to credit bureaus or credit repositories and the information is then reported on credit reports. Aside from this, most consumers are not completely aware of how the information is reported on a credit report, what information can be reported on a credit report, how to read a credit report, what credit scores mean and how they are calculated and so on.  For example, does the average consumer understand why the credit scores they see when subscribing to a credit monitoring service are typically higher than the scores they are given when a Mortgage Broker or Auto Financier pulls their credit? Or how about whether or not credit inquiries affect your credit score? One of the most commonly asked questions is “should I close old accounts that I do not use?” The answers to these questions are important and every American should understand how credit reports are created and the factors that affect their credit scores. However, the world of credit is truly a secret world that is difficult to understand without spending hours upon hours in it. That is the purpose of this blog – to help educate everyone and anyone about their credit report and how to improve their credit.  I will try to update this blog with new posts at least every week, but hopefully more frequently.