CREDIT REPUTATION DAMAGE as part of an overall economic damage claim has been around since the early part of the last century. Even so, there are a number of myths about credit reputation damage that can prevent attorneys from pursuing the claim. Here are some of the most common myths and misconceptions.
- All credit reports are the same.
Many of today’s compensation laws were in place long before credit reports became everyone’s key personal financial profile. In the past, a person might have word-of- mouth credit reputation with friends, business associates, commercial traders and suppliers. The credit report became part of the landscape with the passage of the Fair Credit Reporting Act (FCRA) in 1970, which dictated what kinds of information could be reported and for how long. The reports signify one’s financial reputation in print—a reputation that must be protected to prevent serious financial consequences and possible loss to quality of life. But are all credit reports the same? When it comes to determining credit reputation damage, the answer is no. Only one kind of credit report is admissible in court: the subscriber credit report. Free credit reports, known as consumer disclosure reports (made available beginning in 2003 with the Fair and Accurate Credit Transactions Act), are routinely rejected in court. Though used as a quick check in the initial stages when a consumer applies for credit, these free credit reports are never used in actual loan or credit application processing or evaluation. Instead, more comprehensive commercial or subscriber credit reports are used, which reveal credit status back seven years prior to the date of issuance/publication and often indicate creditor or public record remarks at the time an injury occurred. Each commercial report is trimerged, meaning they include reports from each of the three national credit bureaus (Experien, TransUnion and Equifax). It is only these subscriber credit reports that are admissible in court. While there are many fee-based credit monitoring services, the reports they issue fall into the same category as the free consumer disclosure reports. This means reports used for tenant screening, bankruptcy preparation or vehicle-related actions, for example, do not have the depth of information useful for credit reputation damage purposes.
- Credit damage can be measured by the amount of cancelled credit accounts.
While true that credit damage is based, in part, on the damage done by cancelling active credit accounts, more importantly, it involves the inability to replace credit in the same amount as before the injury–or the ability to replace it at all.
For example, a business partner, caught up in a messy buyout of his partner, previously had use of a company credit card with a $20,000 credit limit. While in the process of the buyout, her soon to-be-ex-partner maxed out the card on personal items and then refused to make payments on the account. The credit card issuer closed the account. The business partner not only lost the use of credit for his business, but since the business’ credit was now damaged, he was unable to obtain a new card with the same $20,000 limit.
The aggregate amount of credit limit at the time of the economic injury should be sufficient to warrant inclusion in the damage demand. In this case, $20,000. There must be enough credit available or in use to confirm an individual level of creditworthiness.
The credit reputation damage valuation may include denial of credit that would have lowered interest charges. For instance, if a couple tries to refinance their home at a lower interest rate but their application is denied due to inflicted credit derogatory remarks, the different between the higher rate and the lower rate is often an acceptable future damage valuation. Similar recognition of increased costs regarding a new vehicle lease or purchase is another example of future increased out-of-pocket costs.
- Credit damage is timeless.
The credit damage compensation period is regulated by the FCRA. The allowable period for the derogatory remarks to be reported by a creditor in a credit report is seven years from occurrence. Accordingly, this limits the allowable damage period to seven years as the derogatory remarks will no longer appear to cause credit reputation damage after that period.
Items may be reported for 10 years as part of a public record. This would include foreclosure defense matters.
- Credit reputation damage cannot be addressed in divorce matters.
When couples undertake divorce proceedings, rarely are they on equal financial footing. Possible credit reputation damage can be caused by one spouse over the other. Divorce is often an emotional, difficult affair. It is a financial breakup that can leave one (or both) of the partners scared for years. A divorce attorney may obtain a large monetary divorce settlement for a spouse, but that will not resolve the long-term loss and expense caused by damage to credit reputation. It is up to the client’s attorney to see that the spouse is properly compensated for current and future credit damages.
To that end, attorneys should draft mutual indemnification agreements for their clients that specify credit reputation damage rather than a general or “catch-all” agreement. For example, a settlement agreement stipulates liquidation of a specific property within a specific period. However, mortgage payments are often not made within that period causing derogatory remarks to appear on a spouse’s credit report.
- Credit damage reports are frequently neutralized by defense objections that they are too speculative.
In the past, judges and juries would often refuse to acknowledge credit damage as compensable because defense lawyers were able to convince them that credit damage was speculative. Beginning in the mid-90s, a shift began. More and more commercial and individual victims of credit damage began to receive compensation for the damage to their financial reputation because the tools to assess credit damage measurement became more sophisticated and reliable. There are now court accepted foundational documents on which to present nonspeculative valuations. As a result, injury to financial reputation has consistently proven real, not speculative with proper document foundation, and objectively measured to add substantial monetary damages to settlements and jury awards. Since damage to credit is not a theory of liability, but rather a type of injury, a separate cause of action is required. For instance, a repeated accessing of a credit file without the owner’s permission caused credit reputation damage. It was ruled a violation of privacy per the FCRA, with economic damage which resulted in a $1.4 million recovery (Sporn v Home Depot).
- Credit scores are a precise indicator of credit status erosion.
Credit scores, according to FICO, are “indicative,” not “definitive.” They are not part of a credit report, put are provided at the same time as the credit reports ordered. Credit scores must be specifically requested from FICO, a publicly traded, multinational firm that is the primary provider of credit score software to the national credit bureaus recognized for federal funding. FICO does not provide any detailed information on how their scores are develop. Each of the top three credit bureaus has developed a customized version of the FICO software and branded it with its own identity, Equifax: Facta Beacon, TransUnion: FICO Classic (04) and Experian: FICO Redevelopment.
When a lender starts a loan application process, it relies on the credit bureaus to provide a “qualifying score.” Depending on the score, the application process will stop or continue. The score from each credit bureau can vary by as much as 100 points because scores are derived using different software.
While there have been multiple revisions of the FICO software over recent years, there is no requirement that a lender use the latest version. Typically, the more recent the version, the more favorable it is to the consumer/borrower. This can impact the score applied to the applicant, and where it will the fit into the federal score which determines the terms to the borrower.
CONCLUSION • By separating credit reputation damage fact from myth, attorneys can present a realistic, measurable compensation demand during settlement or trial to help lessen the economic burden caused by another party’s actions.
Georg Finder, an Orange County, California Credit Damage Evaluator (CDE), is an expert on credit reporting violations and credit damage measurement. He has more than 17 years of experience evaluating credit reports and appearing for both plaintiff and defense. He is a MCLE provider on credit report issues and credit reputation damage compensation.www.creditdamageexpert.com.