DEEEECLINED! Get the Details about Your Notice of Denial!

Doritos and Mountain Dew. That's all I wanted. It was my third year of law school in Florida. I walked into the gas station, grabbed my goods, and went to the counter to begin a day with a friend on his boat. I handed the items over to the clerk, he scanned them with a ubiquitous beep. I slid my card.

—Pause—

"DEEEEEECLINED!" He didn't so much scream it as much as he swung it like a blunt force weapon. The sound came from his not-so-insignificant gut. Like a Viking charging. My friend standing behind me heard him. Everyone heard him. I felt it. My mother, I am sure, felt a surge of disappointment six states away. I didn't have enough money to buy processed cheese and yellow caffeine. My friend who had been standing behind me gently added his items to mine, slid his card, and we left.

Getting declined hurts! It doesn't just hurt. It is personal. Somehow we feel it reflects on us as people. I know someone whose debit card was declined through a processing error—he paid with another card, went to the nearest ATM, printed of a balance receipt, and left it for the waitress to see that he really did have money.

People of all socio-economic classes currently struggle to obtain credit. According to the Federal Reserve Board's April 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, banks continue to report "tightened credit standards on residential mortgages." So, if you've gotten rejected recently too, you are not alone. People who could get credit three years ago can't get credit now.

While the Viking at the gas station bellowed my rejection, you probably got a consumer credit "Dear John" letter, a.k.a. "Denial Notice". In no uncertain terms you were told "No." You are probably wondering why you received a denial notice, what it means, and what you can do.

The first step is to figure out why you were denied credit. The good news is that federal law grants you the right to obtain specific information. Getting your hands on the reason you were denied may not be easy, but the information can help you learn how to qualify next time.

Two key federal bodies of law provide you the right to receive specific information. First, the Equal Credit Opportunity Act (and Regulation B) prohibit certain discriminatory practices. These laws require creditors to explain the reason they denied you. They require creditors to keep certain records and send you these notices to document the actual reason you were denied. The second federal law requiring the denial notice is the Fair Credit Reporting Act. It requires creditors to tell you if they based your denial on information from a consumer-reporting agency (or other outside source) and to tell you if they obtained certain information from an affiliated company.

These laws mandate specific requirements for your denial letter. When you got denied, your notice was most likely titled: Disclosure of Right To Request Specific Reasons for Credit Denial or a Notice of Action Taken and Statement of Reasons. The first type of notice is very general and tells you that you can ask for more information. The second type of letter is more informative and actually lists the denial reason. If your notice didn't really tell you why you were denied, you can force the creditor to provide a specific reason, as long as you properly contact the creditor within 60 days.

To get the information, send a letter to the creditor at the address provided. Give them your information and tell them in writing that you "would like a statement of specific reasons why your application was denied." Always send your notice by certified mail, return receipt requested.

If your denial notice already included specific reasons, pay attention to those reasons. Creditors establish certain criteria, often called underwriting, and if you meet the criteria, creditors want to lend you money.  This is how they make money and stay in business. It is always possible the creditor may have misunderstood your financial situation.

Maybe you accidentally entered the wrong information on your application. If this is the case, the creditor may be amenable to providing credit if you can update your application with correct information. The creditor might have denied you based on your "length of employment."  While you may have entered "7" as the number of years you have worked for your employer, the credit analyst may have misunderstood your response to mean seven months. Or perhaps the creditor could not contact your credit references and denied you credit instead of notifying you about this problem. If you can alert your references, you may be able to get credit.

These are just examples, but you get the point. Don't curl up into ball or write poetry about it. Investigate it, learn from it, and use the information to your advantage. (And if you already wrote poetry about the experience, please post it!)

If you were denied because of something in your credit report, order your report and see what it says. If it contains inaccuracies, you can correct them with the consumer reporting agencies. 

Naturally, nobody wants to be declined. Certainly, "Dear John" letters don't feel good. That being said, federal law does provide you a great way to figure out what's going on with your credit. The good news is you can take the time to find out why you got denied so it won't happen again.

This article is intended to be informational and does not provide legal advice nor create an attorney-client relationship. Laws are constantly changing, and each federal law, state law, and regulation should be checked by legal counsel for the most current version and before acting on this information. Certification as a Specialist in Consumer Finance Law by the

Tennessee

Commission on Continuing Legal Education and Specialization is not currently available. None of the attorneys listed in this communication are certified in any area of specialization.

Justin B. Hosie – Justin Hosie is a member of Chambliss, Bahner & Stophel, P.C.’s Consumer Finance Group, focusing his practice on consumer financial services, the Federal Electronic Signatures Act, Truth in Lending Act, Equal Credit Opportunity Act, and Electronic Funds Transfer Act, as well as state regulatory compliance.

Book Review: The Complete Idiot’s Guide to Person-to-Person Lending

The moment I saw The Complete Idiot's Guide to Person-to-Person Lending, one question immediately came to mind: Where has it been all this time? Person-to-person lending started in the U S with Prosper.com (now Prosper Marketplace) in early 2006. I first heard about Prosper from a Credit.com article. In April 2007 I was officially a lender. But still, without a Complete Idiot’s Guide, this complete idiot went on a lending spree and… well, let’s just say that I’ll try not to ask for a Federal bailout.

Thankfully, you’ll find that the Guide is thorough and leaves no room for error. If you have a strong working knowledge of credit scores and how they are calculated, as well as our current economy and how the current economic climate might all affect a person’s chances of getting a loan, you’ll breeze through “Part 1: The Basics of Person-to-Person Lending.” You might then discover that the Guide really starts with “Part 2: Prime-Time Players in the P2P Marketplace,” which identifies and distinguishes several person-to-person lending sites. I admit I’ve grown attached to Prosper because nearly all my experience lies there. However, I was amazed to find that there are many others including Kiva, VirginMoney, and GreenNote.

Part 3 and Part 4 explore borrowing and lending money, respectively. You’ll find nearly all of this information on the website of the company you get started with. However, if you decide to sit on the sidelines for now—there isn’t much choice with some companies—these sections are definitely worth your time and can save you serious money in the long run. Sharpen your marketing skills to create the perfect listing. This will then get you the best interest rate on your loan. Or diversify your investment into many loans to minimize risk while still maximizing return. You’ll find out how to do it here.

Personally, as a lender, the highlight of this book was the section on taxes, outlined in Part 4. This was unexpected and very refreshing. It was basic but thorough. It works through 1099s and how to handle defaulted loans. The book covers federal and even state income taxes. Also, the Guide is not shy about telling you when a tax professional is needed. I’ve never seen this on a third-party website or blog and I doubt I ever will. The Guide really did its homework. That piece of advice alone is worth the price of this book.

Let’s get back to the first question: Where was this book all this time? Taxes aside, it was everywhere! It was in blogs, on websites (including Credit.com), and in the news. Lucky for us, it’s now in a Complete Idiot’s Guide to help us all navigate this exciting market of person-to-person lending now and as it really takes off in the next few years.

Alex Won is our credit card editor and a peer-to-peer lending network expert. He helps match Credit.com customers with their perfect credit cards everyday. See Alex's top credit card picks online.

Pricing/Locking Scam

You can start out shopping for a mortgage, collect rates on the Internet, talk with loan officers, and so on, but you do not know what rate you will get until you actually lock in your loan. So what is the problem?

Many lenders, especially the big banks, are severely backlogged. They reduced staff in 2008 and simply do not have enough people to handle the huge influx of loans that has occurred in 2009. I talked to a friend who is a senior executive with one such "big bank" and he said they had 200,000 loans in the pipeline. That is over 90 days worth of loans.

What does that mean to you? It means that if you were to apply there today, you will have to wait until 200,000 other loans are processed before they start working on yours. It also means your loan will not get funded for at least 90 days.

Now let's look at this from a lender's perspective. They have 200,000 loans in the pipeline. They know that behind each of those loans are 1+ frustrated borrowers. Here's what they also know:

They know that those frustrated borrowers are still shopping. They know that they will not close all 200,000 loans, even if all were approvable. To offset the likelihood of run-off, in some cases lenders charge a non-refundable application fee. The sole purpose of that fee is to try to keep people "in line" and keep them from straying. Or if they do stray, at least the bank has a few dollars to cover some of the processing costs.

The other thing in the mix is quoting and locking. When they quote rates, it's today’s rate based upon an immediate close. What they don't tell you is that the rates for 45-day, 60-day, and 90-day locks are higher. The rate for a 90-day lock could be higher enough that you wouldn't want to lock in even if you could. So how valid is that low quote they gave you? It's meaningless.

This isn't exactly a scam, but look at it this way. They are luring you to apply based upon low rates today. It may be a teaser because you may not be able to get that low rare when you are ready to close. You will have to take whatever the rates are 60 days from now when you are eligible to lock. In fact, as I write this, rates just jumped up and my guess is that if they don't go back down a bit, they will lose thousands of those loans because they are no longer as economically attractive the borrowers.

That isn't good for the lender either. They really would like to do all 200,000 loans. So why don't they let you lock today? Because they also know from past experience with high backlogs that as soon as they let you lock, you will start shopping again. Maybe YOU wouldn't, but tens of thousands of people will call lenders and say, "I’ve got a loan locked at 5 percent. Can you beat that?" And maybe the market will be such that they can beat 5 percent. In that event, the big bank just lost a loan. 

In fact, if the market moved so much that one guy decided to switch, it is likely that thousands of other people would switch too. That's thousands of lost loans for the big banks.

Advice: You need to put this factor into the shopping equation. The questions you should ask when you call a lender are: "How big is your backlog? When would my loan be approved if I applied today? When will I be able to lock in my rate?" If they say you can do a long-term lock, ask them: "What is the rate? What is the rate for loans approved today?"

I think that you will likely end up dealing with the lender who can deliver your loan sooner rather than later. And you'd better avoid dealing with someone who has a great rate but won't or can't lock you in. It's likely that it's a scam.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Update: New York Times Economics Reporter Didn't Disclose Wife's Bankruptcies in His Story

Readers of this blog had strong opinions about my May 19th entry concerning New York Times economics reporter Edmund L. Andrews' story, "My Personal Credit Crisis," which ran in the New York Times Magazine a couple of weeks ago. In his engrossing piece, Andrews' describes how he and his wife took out a house mortgage they knew they couldn't afford and recounts the painful repercussions that followed. His story evoked my sympathy, but more than a couple CreditBloggers readers said he got what he deserved.

I'm starting to agree with them, now that it's been revealed that Andrews' wife, Patty Barreiro, declared bankruptcy twice, a fact that Andrews failed to mention. In her Asymmetrical Information blog for The Atlantic, Megan McArdle reported that Barreiro declared bankruptcy once when she was married to her first husband, and a second time while she was married to Andrews. As McArdle points out, there's nothing unusual about a husband wanting to save his wife from embarrassment by concealing this kind of information from the public. However, Andrews presented his story as an open-book account of his and his wife's financial difficulties. His decision not to mention the bankruptcies (from his and the book from which it was excerpted) is rather troubling.

Shortly after McArdle posted her story, Andrews went on PBS to respond indirectly to McArdle's blog post. His excuse is inordinately lengthy, but it can be summed up in the first sentence of the third paragrpah of his response: "These bankruptcies did occur, but they had nothing to do with our mortgage woes." In the comments section of the PBS story, you'll see that some people agree with Andrews, while others aren't buying it. I'm inclined to agree with the latter. What about you?

By the way, if you're falling behind on your credit card or mortgage payments, or are on the verge of bankruptcy, Credit.com offers a range of products and services that can help you.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

Five Myths About Foreclosure

I made an appearance on KRON 4 news here in San Francisco last night. The topic was the top five foreclosure myths. Does foreclosure ruin your credit permanently? Is a short sale better for your credit than a foreclosure? Check out the clip!

Emily Peters – Credit.com's personal finance expert and former TransUnion credit bureau insider, Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

New Rules for FreeCreditReport.com

I'm glad the new credit card reform bill is going to curb bad practices by the credit card industry, but what really caught my attention was the provision that requires companies like FreeCreditReport.com to clearly state that the services they offer are not free.

Earlier this year I reported on Boing Boing that I had been misled into thinking that FreeCreditReport.com was the same thing as AnnualCreditReport.com, a truly free credit report service. I had no idea I'd actually signed up for a $15/month credit monitoring service until I saw the charge on my bank statement.

Well, it turns out that there are an awful lot of people like me. And the government is doing something about it. Arthur Delaney of the Huffington Post reported that the new credit card reform law will require FreeCreditReport.com and its ilk to disclose that the only free credit report available is AnnualCreditReport.com. Ads must also state: "This is not the free credit report provided for by Federal law."

The only bad thing about this new requirement is that we won't get to see any more videos like this one.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

Wells Fargo Credit Card Rejection Due to "Lack of Checking Account Relationship with Wells Fargo"

Here's a new twist from the credit card industry! When a Wells Fargo credit card customer was rejected for a balance transfer earlier this month, the bank cited the following reasons in its "adverse action" letter: 

After careful review, we are unable to accommodate your request at this time for the following reasons:

1. Total monthly payments due for open bankcard accounts on credit report is too high
2. The average Wells Fargo Bank collected demand deposit balance in the last 3 months is too low
3. Lack of checking account relationship with Wells Fargo
4. The payment as compared to the amounts due on your credit card account in the last 3 months is too low

So... none of that is readable to normal humans. Let's try to translate:

1. The minimum payments for your credit cards add up to an amount that is too high.
2. This one is rough. "Demand deposit" usually means a checking or savings account. I'm guessing they mean that you don't have enough automatically depositing into a savings account?
3. You don't have a checking account with Wells Fargo. This point is clear, but requiring this sort of relationship is highly unusual behavior for a credit card.
4. You are not paying a large enough amount on your credit card each month. They want you to be paying more than the minimum. 

Have you recently been turned down by Wells Fargo or another bank? Did they say that not having a checking account with the bank was a factor in the rejection? If so, we want to hear from you! Send our team an email or post your comments below.

Emily Peters – Credit.com's personal finance expert and former TransUnion credit bureau insider, Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Fannie and Freddie's Regulator Received an Award? Why?!

I am a big believer in the regulation of the mortgage industry. Many borrowers are clueless, while the opportunities for lender mischief are great; for this reason, more regulation is needed. This statement might surprise you coming from a conservative guy like me. But the following really gets to me...

The Federal Housing Finance Agency (not to be confused with FHA, or the Federal Housing Authority, which insures FHA loans) was responsible for regulating Fannie Mae and Freddie Mac and now acts as their conservator, i.e. "nanny." The FHFA just announced that they received an award, the CEAR Award For Fiscal Responsibility and Accountability.

According to a news release from FHFA, "The CEAR (Certificate of Excellence in Accountability Reporting) is the highest award for outstanding accountability reporting in the federal government."

This news astonishes me – if there is one agency of the federal government that does not deserve praise, it is this one. It is instructive to examine the track record of this agency, formerly known as the Office of Housing Enterprise Oversight. Let's set the stage...

In 2004, the combined shareholder value of both Fannie Mae and Freddie Mac was $134 billion. Shortly thereafter began accounting scandals that allegedly resulted from manipulating of earnings. It seems to me that when regulators regulate and when auditors audit, they are supposed to reveal inconsistencies in regulation and accounting respectively. So, looking back now, we'd have to account for the oversight that did occur as a failure.

Next was the issue of exorbitant executive bonuses based upon these fraudulent earnings. Franklin Raines and two other executives were named in a civil suit wherein OFHEO attempted to get them to return bonuses paid on inflated earnings. The suit asked for $110 million in penalties and return of $120 million. It was ultimately settled for $3 million in penalties, and those were actually paid by Fannie Mae’s insurance company. Fannie Mae also ended up paying a $400 million civil fine. Another failure.

The successor CEO was Daniel Mudd who was CEO until he was fired in late 2008 when FHFA took over Fannie Mae. He was paid some $80 million during his tenure at Fannie Mae. Another failure

The stories at Freddie Mac aren't very different with earnings manipulations. A 2005 story in the New York Times:

"The size of the restatement also prompted some lawmakers and regulators to raise anew their concerns about how Freddie Mac is regulated and to call for more stringent oversight." 

More failures, but apparently no one in Washington read this article. Today, of course, not only has the $134 billion in shareholder value gone but the enterprises are in hock to the federal government for something approaching $100 billion. That’s a swing of almost a QUARTER OF A TRILLION dollars. That is about five times bigger than the Savings and Loan disaster 20 years ago. In fact, it must be the greatest single regulatory failure in the history of the planet. 

So for all of this wonderful regulation, FHFA will receive an award... For what? 

On the brighter side, according to notes at Wikipedia, in 2004 Working Mothers magazine named Freddie Mac one of the 100 best companies for working mothers. 

All of this and more is detailed in the book Fannie Mae and Freddie Mac: Scandal in U.S. Housing.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Does Credit Card Reform Go Far Enough?

Consumer advocates are hailing the new Credit CARD Act as a tremendous victory for consumers. And there is no question in my mind that this consumer protection legislation will help restore commonsense lending principles to the credit card industry while protecting consumers.

But does it go far enough? At least one member of Congress, Bernie Sanders, thinks not. While he voted for the bill, he also added that he is going to continue to fight for interest rate caps. In a Senate floor speech, he said:

“It is a good bill. It is an important step forward in protecting consumers, but I am going to be back on this issue of usury. In the United States of America we have got to finally tell banks and credit card companies that it is simply not acceptable to charge people 25 percent, 30 percent or 35 percent interest rates.” Sanders recently tried to introduce a 15 percent rate cap, but was not successful.

When I started in the credit education field in 1986, there were still a number of states trying to protect their constituents through usury laws. But they were losing the battle due to a 1978 Supreme Court decision (Marquette National Bank v. First of Omaha Service Corp.) which allowed national banks to charge whatever they wanted. All they had to do was move their operations to a state without a usury law (think South Dakota, Delaware) and then they could export their high-rate cards to any state in the country. Sanders notes that in 1978, about half of the states in the country had usury laws that limited credit card interest rates.

At Credit.com, many of our staffers (including yours truly) have received notices over the past several months warning that our interest rates on our credit cards would be going up. We're just a drop in the bucket, though. The Center for Responsible Lending says an estimated 10 million cardholders have received notices of rate increases over the past six month. CRL also found in a recent survey that there are high levels of support for an annual interest rate cap on consumer loans of no higher than 36 percent. According to the CRL survey, three out of four Americans think that Congress should cap interest rates at some level, and 72 percent think that level should be no higher than 36 percent.

The new legislation is a hard-won and important victory for consumer advocates and members of Congress who spearheaded it. My hats are off to them.

But is the fight over? Or should rate caps be next? What do you think?

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis .

President Obama Signs Credit Card Accountability, Responsibility and Disclosure Act into Law

It's official! President Obama signed the Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act) this afternoon and set into motion a 15-month roll-out plan:

August 20, 2009
The first set of changes happens this August with the implementation of two big timing reforms. Consumers will get 45 days' advance notice of any significant credit card term changes. They will also get 21 days to pay their monthly credit card bills.

February 22, 2010
The biggest set of reforms are set to go live early next year. This batch includes the ban on retroactive rate changes and double-cycle billing. Plus, the changes in February will include new rules concerning the worst fees (over-limit fees, late fees, and foreign transaction fees) and restrictions on credit card access for people under age 21.

August 22, 2010
This final batch of reforms includes the 6-month "make-good" policy (allowing borrowers to earn back their old APR with six months of on-time payments). The August 2010 wave of reforms also includes the gift card rules that will make all gift cards valid for five years and will limit fees on such cards.

Remember: None of these protections go into effect immediately, and your credit card company is still free to continue their current policies until August, when the first changes will take effect. 

Which part of the reforms are you most excited about? Which parts do you think will do more harm than good? Share your opinions and questions about the Credit CARD Act in the comments below or in our credit card forum.

Emily Peters – Credit.com's personal finance expert and former TransUnion credit bureau insider, Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.