Credit Limit Omissions Spur Suits Tied to High-End Cards
Credit Limit Omissions Spur Suits Tied to High-End Cards
American Banker | Tuesday, September 4, 2007
By H. Michael Jalili
Complaints from consumer advocates about issuers' withholding credit limit information from the credit bureaus have extended to charge cards and to high-end credit cards that have no preset spending limits.
Lawsuits filed against American Express Co. and Citigroup Inc. charge that by not reporting "behind-the-scenes" limits on such cards, the issuers have damaged consumers' credit scores.
Amex has no preset spending limits on its charge cards or its One credit card. Citi's World PremierPass and Hilton HHonors cards, as well as other high-end cards that Citi offers on the Amex network, also have no preset limits.
Capital One Financial Corp., whose policy of not reporting credit limits had been under attack for years, said in July that it planned to start reporting credit limits.
Paul A. Herman, a lawyer at Fair Credit Law Group LLC in Fort Lauderdale, Fla., said the same legal and political pressure that forced Capital One to reverse its policy will be applied against Amex and Citi in the matter of the high-end cards.
Failure to report "artificial" limits on cards that have no preset spending limits hurts high-end consumers, who usually have clear records, because it stains their records, Mr. Herman said. "It's like having a beautiful skin on your face and having this zit on your forehead. It's going to do a hell a lot more than if you have acne."
Banks "think it's affecting only a limited number of people. We think it's going all the way up and affecting the economy."
Molly Faust, an American Express spokeswoman, said the New York company uses factors such as account behavior, credit history, and personal financial resources to determine the spending ceiling on cards. But she said it distinguishes charge cards, for which it provides no credit limit, from credit cards when it reports information to credit bureaus.
Sam Wong, a spokesman for Citi, said it would not discuss the issue.
Fair Isaac Corp., which created the FICO score, says providing spending-limit information would be helpful.
"Complete and accurate information is the name of the game in terms of getting a very robust and predictive score," said Tom Quinn, the Minneapolis company's vice president of global scoring solutions. "Any data element coming in could potentially be considered in the score and could have an impact on the score."
The FICO scoring model considers charge cards as a separate category and looks at the payment history, Mr. Quinn said. When asked if the highest balance on the cards is treated as a cardholder's limit, he said, "We consider the balance information."
Sarah Davies, the senior vice president of analytics and product management at a Fair Isaac rival, VantageScore Solutions LLC, a joint venture of the three major bureaus, said that all card products that lack preset limits have a "shadow limit," which banks do not report to credit bureaus.
Most scoring models use the highest balance on the card as the limit, Ms. Davies said.
For "just about any bank that offers no preset spending limit, the consumer doesn't appear to have a credit line, but the bank always has a behind-the-scenes limit," she said. "They use that to manage the account and they use that as trigger if the consumer goes above that."
John R. Ulzheimer, who has worked at Fair Isaac and Equifax Inc., said it takes two variables to calculate a consumer's use of a card.
"You can't take the balance and not the limit in the utilization calculation," said Mr. Ulzheimer, the president of Credit.com's educational services.
Mr. Herman said the issue will gain wider attention this year as the credit crunch compels consumers to repair their credit.
"I think you're going to see more suits stemming from mortgage foreclosures and more consumers having to fix their credit," he said. "To me it's analogous to gas prices. When gas is cheap, you drive down the street. When prices rise, people start becoming frugal."
Consumers have filed about half a dozen lawsuits this year across the country against card issuers and credit bureaus alleging that omitting credit limits violates the Fair Credit Reporting Act because incomplete information amounts to inaccuracy. However, their legal challenge is in proving this omission equals inaccuracy.
"It's definitely incomplete. The question comes down to what the legal definition of accurate is," Mr. Ulzheimer said.
The industry says that under the FCRA providing information is voluntary, and that it just needs to be accurate. Consumer lawyers, however, argue that withholding that information paints an inaccurate picture of the consumer.
Jonathan D. Jerison, a lawyer at the Washington firm Buckley Kolar LLP, which counsels banks, said these lawsuits are stretching the FCRA "beyond what it was supposed to serve."
"The way I read it," he said, "it doesn't require a lender to report everything about a consumer's account; it does require whatever they report be accurate."
W. Douglas Smith, a litigation lawyer who is representing a plaintiff in a lawsuit in South Carolina against Equifax, Experian Information Solutions Inc., and TransUnion LLC over the issue, said withholding credit limits has put many consumers in the subprime category.
"For some consumers it has meant the difference of hundreds, even a thousand, dollars a month," said Mr. Smith, a lawyer at Johnson, Smith, Hibbard & Wildman Law Firm LLP in Spartanburg, S.C.
Mr. Herman's client, Antoinette D. Allen, sued Amex and Citi in the U.S. District Court for the Southern District of Florida, and had planned to seek class action status for both. But the suit against Amex hit a wall last week when Amex's lawyers said they would use an arbitration agreement to block it.
Mr. Herman said that because the U.S. Court of Appeals for the 11th Circuit in Atlanta has been receptive to the arbitration clause, his team may pursue a class action in a more favorable venue, such as California.
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