In a case with potentially far-reaching significance for home mortgage applicants across the country, a South Carolina consumer has filed class action lawsuits against the three national credit bureaus, charging that they allow a practice that lowers millions of individuals' credit scores.
Depressed scores raise the interest rates and fees that are quoted by mortgage lenders at application. Sometimes the higher rates lead to monthly payments that are hundreds of dollars higher than they should be.
The three suits charge that, under the federal Fair Credit Reporting Act, the national bureaus - Equifax, Experian and TransUnion - are required to follow "reasonable procedures to assume maximum possible accuracy of information in consumer [credit] reports."
Nonetheless, said William A. Harris Sr. in his complaints, each of the bureaus allows credit-card giant Capital One Financial to withhold the credit limits on its card accounts - knowing that such omissions frequently lower consumer credit score calculations.
Though not the only company that refuses to report credit limits, Capital One is the biggest and best known. According to Barron's, the investment publication, it is the fourth-largest issuer of Visa and Master Cards in the United States and has 49 million customers. Capital One did not respond to a request for comment on the Harris suits but in the past has confirmed that it withholds its customers' credit limits from the bureaus as a corporate policy.
Credit-industry experts say lenders withhold limits as a way to discourage raids on their customer lists by competitors who have access to national credit files. Cardholders with lower apparent scores may be less desirable to other creditors sifting through national bureau data in search of prospects.
The suits, filed in U.S. District Court in Greenville, S.C., shed light on a controversial behind-the-scenes practice that may be more commonplace than many consumers are aware.
When Federal Reserve Board researchers examined 310,000 individual credit files two years ago, they found that 46 percent of all consumers were missing at least one credit limit.
Consumers who are new to the credit marketplace or have relatively few cards or other credit accounts typically are hurt the most. That's because the most widely used credit scoring system in the mortgage field - Fair Isaac Corp.'s FICO score - gives heavy weight to a consumer's "utilization" of his or her available credit. The higher the usage of credit relative to the limit, the lower the score.
To illustrate, say you've got a credit card with a $5,000 limit. The highest monthly balance you've ever had on the card was $2,500 - a moderate 50 percent utilization ratio. If your card company withholds reporting your limit, however, the scoring software may substitute your highest balance in place of your actual limit to compute your ratio.
Say your most recent balance on the card was $2,000. That appears to be a very high usage of credit when your substitute limit is just $2,500, not the actual $5,000. Now you appear to have a utilization ratio of 80 percent and your credit score could be depressed significantly - 20 to 50 points or more - according to Terry Clemans, executive director of the National Credit Reporting Association.
A 50-point decrease could mean a 1 percentage point difference in your mortgage rate quote, according to Fair Isaac's MyFico.com Web site.
On a $216,000 fixed-rate 30-year mortgage last week, an applicant with a 660 FICO would typically be quoted 7.07 percent, or $1,447 a month in principal and interest.
An applicant with a 610 FICO would be quoted 8.05 percent, with a payment of $1,592 - $145 more.
In his suits, Harris charges that Capital One's "standard policy of not reporting has a substantial adverse impact on consumers. It makes it appear that many, if not most, Capital One credit card customers have used up more of their available credit than is actually the case, thereby lowering their credit scores."
Because Equifax, Experian and TransUnion know the potentially negative effects whenever a creditor withholds credit limits, the bureaus "have systematically violated the [law] by failing" to require Capital One to report all card members' limits.
Capital One is not named as a defendant in the suits. Under the prevailing, voluntary credit system in this country, no federal law requires it, or any other lender, to report any client's data to any bureau. However, federal law does require the credit bureaus to strive to be accurate, and Harris' suit argues that Equifax, Experian and TransUnion are not in compliance.
Asked for comment, a spokesman for Experian said the company had not yet seen the complaint, but that "in any event, we do not comment on ongoing litigation."
Equifax and TransUnion did not respond to requests for comment.