CARD Act a Homerun? Think Again.

During a recent interview with a Salt Lake City newspaper, I told the reporter that I gave the CARD Act a C+. How can the most significant set of consumer protection laws since, well, ever, be anything less than a home run? Simple: Because some of the CARD Act is either meaningless, unfair, based on anecdotal evidence, or just plain silly:

45-Day Advance Notice for Interest Rate Increases – There’s nothing in the Act that requires the notice to be accompanied by fireworks, so if, say, 90 percent of the cardholders trash their notices without evening opening them (and many people do), then it won’t matter if they come 45 days in advance or 450 days in advance. Meaningless!

Under 21?: You Need a Co-signer – Would you trust a 21-year-old with $10,000 any more than you’d trust an 18-year-old? I didn’t think so. There’s no evidence that proves a 21-year-old is in any better shape to manage credit cards than an 18-year-old. Anecdotal!

No More Over-Limit Fees – Thanks for motivating the credit card issuers to come up with another fee to replace the revenue they’ll lose by not being able to charge me an over-limit fee if and when I do charge over my credit limit. At least I could see that one coming. This one was also unfair to credit card issuers, as it kicks them squarely in the wallet. Unfair!

Gift Cards Can’t Expire for Five Years – What a great idea... Give me no incentive to get rid of the small deck of gift cards that have been taking up space in my top drawer for years. Without a realistic expiration date, there is less of a sense or urgency to actually redeem them… and that’s NOT anecdotal. The law should have been that gift cards HAVE to expire after 30 days. Talk about a run on the mall. It would be like cash for clunkers. This was just plain silly!

John Ulzheimer is obviously beholden to no one, which is exactly the opposite of the people who wrote or fought to weaken the CARD Act.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Digging Out of Debt

Gerri Detweiler, our very own Debt Expert and Credit Advisor for Credit.com, appeared on FOX 35 Good Day recently. Gerri shared her insight on all of the different options for getting out of debt, including DIY debt reduction, credit counseling, debt settlement and bankruptcy.

To find out more, watch the clip:

Changes at FHA

I recently wrote a blog discussing the tightening of various underwriting rules by Fannie Mae and Freddie Mac.  FHA has now joined the fray with an announcement of various ways they are tightening the rules.

First, the most important change is the proposed increase in the initial Mortgage Insurance Premium from 1.75 percent to 2.25 percent. The initial premium is not a cash payment but instead is added onto the loan balance.

For example, if a borrower were to make a 3.5 percent down payment on a $300,000 home, the nominal loan amount is $289,500. Adding the MIP of 2.25 percent, or $6,513.75, yields a final loan amount of $296,013.75. After making ten years of payments, the loan balance would still not be reduced to 80 percent of the initial purchase price.

Second, FHA has asked Congress for permission to increase the annual premium that is charged to borrowers. Currently that amount is one-half of one-percent, or $123.34 per month. The effect of this change, assuming it is approved, will be to start increasing the FHA reserves that have been bettered by recent losses. According to an article in The Wall Street Journal, the agency's reserves fell 72 percent to about one-half of one percent of the balance of the loans it has insured.  

FHA is going to require a minimum FICO score of 580 rather than the previous limit of 500 to get the 3.5 percent down payment program. According to Money-Zine, only 15 percent of Americans have credit scores below 600.  

FHA will do loans for people with FICO scores of less than 580, but they now have to make a 10 percent down payment. At a score of 500, about 97 percent of people have better credit. But FHA says that these are "borrowers who have historically performed well." Given the losses on the FHA portfolio of loans, I would like to see the data that shows such good performance.

In another move, the amount of allowable seller concessions was reduced from 6 percent of the purchase price to 3 percent.

Not mentioned in the article is the widespread rumor that FHA will increase the minimum down payment to 5 percent. Additionally, there is a move in Congress to increase the maximum FHA loan amount in high-cost areas from $729,750 up to $829,750.

Speaking as a loan originator, this makes me wonder why in the world we are doing loans for people who have such bad credit. Neither do I think that it is wise policy to allow 3.5 percent down payments on loans of $729,750 or $829,750. This is not much different than zero down payment loans that created so much of our current problem. Anyone who can qualify for a loan amount that large should have had the financial foresight to save enough for a reasonable down payment, say 10 percent.

I realize the FHA commitment to under-served communities, but the large group of people who have been financially irresponsible does not fall within my definition of "a community." Trying to serve that group is (at least in part) what got us into the current mess we are in.

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.

Paying to get organized

As the editor-in-chief of MAKE, a technology project magazine, I'm an advocate of DIY (do-it-yourself). In fact, for the last year-and-a-half I've been writing a book about my participation in the DIY movement. I've built a chicken coop, raised chickens, started beekeeping, tricked out my espresso maker, carved wooden spoons, built cigar box guitars, and conducted other rewarding DIY activities.

But the one project I always wanted to tackle but failed at time and again is organizing our house. For the last year or so, I've been donating unwanted clothes, selling books, throwing away broken stuff and storing our possessions in bins and boxes. I've made a little headway, but at the rate I was going, I'd be in my dotage by the time I had things the way I want them. My wife Carla finally intervened by hiring a professional organizer to help get the job done.

I was resistant at first, because I didn't think anyone would be able to organize my office, which is a jumble of computer peripherals, cables, art supplies, musical equipment, tools, electronic components, comic books, CDs, DVDs, books, paperwork, and thousands of other items. I sort of know where everything is, and I was afraid an organizer would simply reclutter my clutter, making things harder to find. But I finally gave in, allowing the organizer to come over and do her thing while I was away on business for a few days.

While I was away, Carla reported that the organizer (Jen is her name) was making great progress. She had rearranged the furniture, placed all the office supplies together, and made a bunch of piles of related stuff for me to go over with her when I returned. She had also instructed Carla to order some shelving units for the garage.

When I got back, I was pleasantly surprised by how much Jen had accomplished. Things that had been floating around the house were now put away next to related things. The closets no longer had multi-layered piles of junk on the floors and shelves. Jen explained that things should be stored in a way that made it easy to find them when you needed them later. No storing things in shoeboxes (clear bins were better) and no hiding things behind other things. It was important to be able to see everything you owned when you opened a door or drawer. Armoires with visible shelves were better than chests with lots of small drawers that required lots of opening and closing to find what you wanted.

After the tour of our home, Jen helped me decide what to do with the piles of stuff in my office. She was merciless and efficient, which inspired me to be the same. I thought I had gotten rid of all the stuff I no longer wanted, but Jen helped me dispose of three large boxes of junk I would never use or care about.

We still aren't finished with Jen, but she is in such demand we have to wait a week for her to return and work more of her magic. In the meantime, I'm repeating my new mantra: "A place for everything and everything in its place."

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.

More FICO Mythbusters

When I started at FICO in 1997, the company was going through a growth spurt. Most notably was the increase of FICO® score usage by mortgage lenders thanks, in part, to the adoption of FICO® scoring by mortgage industry giants Fannie Mae and Freddie Mac. Many mortgage industry players will tell you that Fannie and Freddie force-fed FICO scores to the industry, and they’re not entirely wrong about that.

Now that we're a good 12+ years into the mortgage industry's use of FICO scoring for underwriting, there still seems to be some misunderstandings about the tool. So in this edition of FICO Mythbusters we'll dedicate some digital ink to clearing up circa-1997 misunderstandings.

1. Income Matters – Nope, not in your FICO score. Remember that the FICO score is a CREDIT BUREAU-based scoring model. This means that it can only take into account what’s on your credit reports – and income isn’t. Income was being purged from credit reports when I started in the credit industry in the early '90s, and it hasn’t reappeared since. So whether you make $1,000,000 or $15,000, there’s no direct influence on your FICO scores. Those that complain about this assume, incorrectly, that capacity equal credit worthiness.

2. Risk-Based Lending is Unfair – …because it makes credit for higher-risk borrowers more expensive or unattainable. Duh! Lending is not a charitable event. Lenders have to make money or, well, they don’t need to be lenders. The following statement will eliminate me from any future presidential ambitions: nobody deserves credit. Credit is not a right. Credit is an earned privilege. Those who don’t pay their bills on time don’t deserve the same "cost" for their credit as someone who does. Complaining about this is a waste of time.

3. "Honest Mistake" Late Payments Shouldn’t Hurt Your Scores – Really? And why shouldn't they? Where in your closing documents or promissory note does it allow you to "honestly" not pay your bills on time? I'll save you the research time; it’s not there. Put yourself in the lender’s shoes just for a moment and pretend that the $250,000 home loan came out of your pocket. Would you really care why the payment isn’t being made on time? If you do, then you should not be in lender.

4. There is Such a Thing as a "Co-signer for Credit Only" – There is a very interesting lawsuit working its way through the court system in Georgia where a co-signer is suing a lender because the other co-signer stopped making payments on a car loan. Follow me… two people co-sign an application for a boat loan. The two people break up and one moves to Arkansas, with the boat. He stops making the payments because he lost his job. The other co-signer refuses to make the payments because, well, she can’t use the boat. Lender repossesses the boat, sells it at auction, sues both co-signers for the deficiency balance, and reports it to both of their credit reports and their FICO scores go down. Co-signer, sans boat, sues the lender because she claims that she was a "co-signer for credit only" and shouldn’t be liable for the payments. I love it. Now we’re creating new industry terminology because we don’t read our loan documents. This isn’t a joke; someone is actually making that argument and clogging the Georgia court system with this ridiculous lawsuit.

The silver lining of the credit meltdown, I hope, is that people will actually take time to learn more about the system rather than just complain about it. Complaining about something without offering a reasonable alternative is just that – complaining – and nobody wants to hear it. Complaining about something and having your facts wrong is just that – complaining – and nobody wants to hear it. Complaining about something, having your facts straight, and offering a reasonable alternative isn’t complaining; it’s innovation.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Goals Gone Wild: Don't Let the Means Ruin the End

Every January 1st, I join millions of other people who put pen to paper and make a list of resolutions for the coming year. (I don't call them resolutions, because that seems too negative -- like I'm trying to break a bad habit. I call them goals.)

I have five goals this year, relating to career, family, and personal aspects of my life. If I meet these goals, I will be proud of myself. But I need to remind myself that the ways I meet the goals are at least as important as achieving them.

According to a study conducted by Harvard Business School called "Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting," setting goals, especially in the workplace, has a number of potentially negative consequences. The authors of the study found that some people focus so much on their goals that their overall performance drops, they ignore other important issues not tied to their goals, they create a disharmonious workplace, and they engage in "risky and unethical behaviors."

For example, in the early 1990s, when Sears set a goal for its auto repair staff to bring in $147 an hour, the staff began overcharging and performing unnecessary repairs. "Ultimately, Sears’ Chairman Edward Brennan acknowledged that goal setting had motivated Sears’ employees to deceive customers," according to the study.

Even though the study looked at the dangers of corporate goal setting, its conclusions are worth considering when you set goals about your finances and other personal areas of your life. Don't set unrealistic goals about money that cause you to ignore your family, cheat on your taxes, or engage in illegal or unethical behavior, for instance. I suggest appending all of your goals with something like "... in a way that doesn't cause harm to myself or others." Then you can truly be proud of your accomplishments.

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.

Mortgage Loan Standards Are Tightening

You have likely overheard someone talking about their trials and tribulations in getting a mortgage. Some of the issues may be overblown, but many others just reflect a changing environment in real estate finance.

All lenders, including and perhaps most specifically Fannie Mae and Freddie Mac, are writing off billions of dollars of uncollectable debt as they acquire homes through foreclosure. By tightening the standards, they hope to contain the damage to what is already on their plate. I don't blame them. At this point, we have a mess that is larger than anyone could have imagined a few years ago. It isn't over, and no one wants to add more loans that are likely to go bad in the future.

Remember that in this environment, there has been a lot of tightening already. For example, you cannot borrow without documenting sufficient income; you need to have reasonable credit scores; and you need to have a down payment if purchasing, and equity if refinancing. Here are some samples of current tightening:

Fannie Mae announced that they will not approve borrowers with total debt-to-income ratios greater than 45 percent. For example, if your income was $5,000 per month, your maximum outgo would have to be less than 45 percent, or $2,250 per month. If you had a $300 car payment and other bills with payments of $100, you would subtract $400 from $2,250, leaving $1,850 for a housing payment. Subtract anticipated monthly taxes and insurance to get the maximum allowable mortgage payment.

This is a dramatic change, as they would have approved loans with much higher ratios not too long ago. Note that Freddie Mac has not instituted this restriction. At least not yet, so if your ratios are pushing this limit, you would want to work with a lender that uses Freddie Mac.

Fannie Mae will also no longer do any loan where a borrower's FICO score is less than 620. They were doing these before, but they were exacting revenge by pricing hits that were almost confiscatory. Freddie Mac, again, has not done this yet.

I expected that real estate investors would take advantage of the drop in value to load up on properties, and that seems to be happening. I believe a good strategy is for an investor to buy now and hold for the long term value and cash flow. Fannie and Freddie will still allow up to ten properties to be financed, but the minimum FICO score is now 720 and loan-to-value is lowered. Purchases and rate-and-term refinances are allowed, but cash-out refinances are not.

Finally, on the Super Jumbo Conforming loans available in higher-cost areas, getting a new loan that is larger than the current loan, even if paying off a second TD loan, is considered a cash-out refinance. The minimum FICO score is 740 and the maximum allowable loan-to-value is 60 percent, and there is a 1-point added hit to the upfront fees.

The upshot of this is that if you want a mortgage, you will need to do everything you can to improve the measures of your creditworthiness. As a responsible adult, you would want to do this anyway, but a stricter disciplinarian is now in the room to assure compliance.

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.

AmEx's Unrewarding Rewards?

American Express cardholders can use rewards points to pay off federal or state taxes this year.

The credit card giant said it’s providing this tax option—an industry first—because it wants to give customers a practical use for rewards points in these hard economic times. Cardholders can use their points when they use one of two websites to file their taxes: Pay1040.com and OfficialPayments.com.

Wait for it.

Here it is. The catch: It takes a whopping 200 points to pay off just $1 in taxes. Card members earn about one point for every dollar spent. So they would have to charge $1 million to pay off just $5,000 in taxes.

Rewards points can be used for travel, dining, and shopping. But oddly, some of the items on the AmEx rewards website come cheaper than a dollar’s worth of taxes: For example, there’s a $25 Barnes & Noble gift card for 2,500 points (100 points per dollar of value), and a Canon PowerShot SD-series 10-megapixel camera—regular price $299—goes for 34,600 points (116 points per buck).

It’s unclear how helpful this new points-to-taxes option is, though AmEx claims it will help people who are really struggling.

But here’s one thing to consider: Card issuers have already begun to make rewards programs less rewarding. To offset the anticipated loss in revenues once the majority of the CARD Act provisions go into effect next month, card issuers are reducing the value of rewards points, raising annual fees on rewards programs, and increasing costs to collect rewards.

Not only are rewards cards (including cash-back cards) imposing new restrictions, but they also generally carry higher interest rates. According to the latest rates on Bankrate.com, all variable-rate credit cards averaged an APR of 11.77 percent, while cash-back cards averaged a much higher 15.0 percent.

Cristine Gonzalez — A freelance writer who covers family and personal finance, Cristine has worked as a reporter for The Oregonian and The Associated Press in Portland, Ore., and as a copy editor for People magazine in New York City.

It's Official: 2009 Sets Record for FDCPA Lawsuits

Early last year, I predicted a record number of consumer credit protection lawsuits would be filed in 2009. The basis for my opinion was the fact that the number of consumer protection lawsuits filed in 2007 was so much higher than in 2006. Well, the final numbers are in, and they are staggering.

According to Jack Gordon, CEO of Michigan-based WebRecon that tracks FDCPA lawsuits and other consumer rights litigation, 2009 has ended and the number of FDCPA lawsuits has shattered 2008's record number. There were 8,287 FDCPA lawsuits filed in 2009, which is up from 5,188 filed in 2008. The number of FCRA lawsuits filed in 2009 was 1,174 compared to 1,164 in 2008.

The FDCPA, or Fair Debt Collection Practices Act, protects consumers from abusive collection practices by debt collectors. And with 2008 and 2009 being record years for credit card defaults, it's not a surprise that more bad debt has been consigned or outright purchased by debt buyers for the purposes of collection. And while the law does do a good job protecting consumers from the bad apples within the collection industry, some would say that it goes too far and hamstrings collection efforts.

The FCRA, or Fair Credit Reporting Act, provides for the accuracy and fairness of credit reporting. It also mandates that the credit reporting agencies adopt reasonable procedures to ensure maximum possible accuracy of credit reports.

What does 2010 hold for consumer protection lawsuits? Many experts, including this one, predict more of the same.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

The New Look Reality Distortion Field

In 1947, two psychologists, Jerome Bruner and Cecile Goodman, conducted a psychology experiment with children involving the perceived size of coins compared to the actual size. The children were placed in front of a machine that drew a circle on a piece of glass. The size of the circle was adjustable with a knob. Then the kids were shown coins and cardboard circles that were exactly the same size as the coins. When the children were asked to approximate the size of the objects by adjusting the dial on the machine, their coin diameter estimates were larger than their cardboard circle estimates. And poor children tended to exaggerate the size of the coins more than rich kids did.

This experiment, and others like it, were part of the "New Look" theory in psychology, which as Mind Hacks explains, "argued that our perception of reality could be directly influenced by our desires."

More recent experiments suggest that the New Lookers were right. Psychologists Emily Balcetis and David Dunning ran a series of tests which demonstrate that people perceive desirable objects as being closer than undesirable ones. One test involved setting a piece of paper on the ground. The test subjects were placed some distance away from the paper and were told to toss a bean bag as close as possible to the paper. Subjects who had been told beforehand that the paper was a $25 gift certificate tended to undershoot the mark, and those told that the paper was worthless tended to overshoot it.

The next time you desire something, remember that your perception of it might be subject to the "New Look" reality distortion field. I'm not sure there's an easy way to compensate for the bias, but if you have any suggestions, please post them in the comments.

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.