The credit score you’re given may not be the same score lenders use to grade your credit worthiness.

With over 100 different types of algorithms or formulas (FICO, VantageScore, etc.) used to calculate credit scores, it is easy for consumers to become confused and frustrated with the credit reporting industry. This is especially true when some scores sold to consumers by TransUnion, Equifax, and Experian (the big three credit bureaus) are not used by lenders. Instead, those are “educational” scores which only give an estimate to where a borrower stands overall.

Different lenders use information in different ways. A credit card lender may be more focused on on-time payment history where an auto lender is more interested in collateral. Those criteria impact how lenders in different lending industries calculate credit scores. It may explain why a borrower is surprisingly approved or denied credit.

Another problem is that lenders don’t report customer information to all three credit reporting bureaus. A consumer’s credit score is therefore different. It can range from a five point to one hundred points or more difference. And, credit scores change between the time a score is purchased and the time a borrower applies for a loan.

The discrepancy is mostly a problem for borrowers who are struggling in their finances. Negative marks in a credit file cause severe damage to a score. Keep in mind that it is easier to fall down a hundred points than jump up ten points.

Last month, a new rule went into effect allowing consumers to get a peak at their credit score used if the lender: (1) denied their loan or (2) approved the loan with a higher than normal interest rate. Lenders also must explain how they determined their decision. The new rules are an effort to educate consumers on how credit works and allow them to make better decisions for their financial future.

Foreclosing on home-owners after the wide-spread “robo-signing” issue has banks encountering a new problem that is much more serious.

Last fall, banks temporarily suspended foreclosures on delinquent borrowers to resolve robo-signing problems. Robo-signing occurs when employees of a company approve legal documents without reviewing them. Courts throughout the nation noticed documents used to verify debts were submitted in large numbers but only signed by few representatives.

As a result, many cases against homeowners were dismissed because the alleged debts weren’t properly verified. Banks deemed the problem to be simple clerical errors and that it could be fixed in a couple of weeks. But new issues relating to documentation is seriously emerging.

Delinquent borrowers have discovered that their mortgage lender may not have proper documents that shows ownership and therefore cannot collect monthly payments. Their argument in courts is increasingly successful, creating another roadblock for lenders.

At issue now is the inability of banks to properly assign ownership of mortgages after loans were pooled into mortgage backed securities, adding another step for a bank to show it owns the promissory note and that the borrowers owes the lender. Some borrowers have also said lenders backdated or fraudulently fix errors to prove ownership of a loan.

A notable court case highlights the current issue at hand:

Last month, Dana and Robin Murphy won a reversal by the Maine Supreme Court. A few years earlier, HSBC proceeded to foreclose on their home, even after the trial judge initially ruled that the bank couldn’t until the bank submitted new documents showing ownership of the loan made out to the Murphy’s. However, the Supreme Court of Maine concluded that HSBC filed “inherently untrustworthy” documents.

Mortgage lenders across America are focusing on resolving this issue immediately. Pending lawsuits against delinquent borrowers are still moving forward, but lenders are carefully reviewing each document to assure a loan is assigned to the rightful owners.

Statistical data show that having two mortgages on one residential property doubles the number of homeowners who are underwater compared to borrowers with only one mortgage loan.

A report released by Core Logic Inc., a real estate data firm, found 38% of borrowers who took out a second mortgage on their home is underwater. It means that those homeowners owe more than their home is worth. A second mortgage is any loan taken out on a property after a first mortgage loan, and includes home equity loans or lines of credit.

The Federal Reserve’s data show that between 2004 and 2006, the height of the housing boom, homeowners took out a total of $2.69 trillion from their homes. That includes cash-out refinancing. It is estimated that home equity loans account for about 10% of the U.S. mortgage market.

Core Logic found that borrowers who took out a second mortgage were deeper underwater in equity than a borrower without a second mortgage. Second mortgage loan holders were negative an average of $83,000 compared to $52,000 for borrowers who didn’t have a second loan.

During the housing boom, homeowners began taking more cash from their home equity to cover credit card debts, medical bills, or personal loans. Some homeowners used that cash to acquire luxuries such as renovating their homes to increase home value, expensive automobiles, higher education, or bigger and better toys. Other borrowers refinanced their first mortgage without taking on a second mortgage and got cash that way. The purpose of a second mortgage loan was to improve a consumer’s standard of living.

However, after good intentions, 38% of homeowners with a second mortgage are waking up to a nightmare. Banks may be forcing them out of their homes soon. Creditors say borrowers who are underwater are far more likely to walk away from their homes.

According to Federal Reserve data, nearly three quarters of roughly $950 billion in home equity loans outstanding were held by commercial banks at the end of 2009. Second mortgages stay on a bank’s balance sheet because they are classified as loans where a first mortgage is labeled as securities. Most first mortgages were packaged in bundles with other first mortgage loans and sold to investors all over the world.

The nation’s four largest banks hold more than 40% of that debt. They are Citigroup, J.P. Morgan Chase, Bank of America, and Wells Fargo.

It is difficult for troubled borrowers to negotiate modifications on their second mortgages. Lenders see the situation as a sure loss expected to happen any time soon. Homeowners can try to put their property up for “short” sale where it is sold for less than the value of the outstanding mortgage. But, in order to do that, all the creditors involved must agree to take losses on the sale. Second mortgage lenders absorb the first losses which usually add up to be majority of the loss.

The credit reporting industry and consumer advocates are in a heated debate over the system used to correct credit reporting errors. And, both sides deeply disagree on the negative impact those errors have on a consumer’s life.

The Consumer Data Industry Association (CDIA), a trade group that represents credit bureaus such as Equifax, Experian, and TransUnion, maintains that errors in consumer credit reports are small overall and that half of 1% of credit reports contains errors substantial enough to push a consumer to a higher credit score group where better loan terms are pre-set.

Credit scores in the FICO system, the most widely used credit score formula, is grouped in to eight tiers. Therefore, it is more significant for the score to move up or down a group than it is to move any number of points. For example, a score of 699 gets the same loan terms as a 650 score; however, raising it one more point to 700 would gain the borrower a significantly better loan package.

The Policy and Economic Research Council (PERC) was hired by the CDIA to study the accuracy of credit reports. They examined 4,000 consumer credit reports containing over 80,000 credit accounts. Consumers were asked to review their credit reports and they discovered possible errors in 435 accounts.

Consumers then filed a dispute with the credit bureaus. PERC found that 95% of consumers who filed a claim were satisfied with the handling of the dispute process. And, after the dispute was completed, half of 1% of consumers received a revised credit score that gained them a better interest rate.

Stuart K. Pratt, president and CEO of CDIA, writes in USA Today that the study conducted by PERC found “errors in credit reports are few and, most important; if they occur they have little or no impact on a consumer’s ability to get credit under the best possible terms.” He adds that PERC is so confident of its findings that it has turned over all research data to the Federal Trade Commission and the Consumer Financial Protection Bureau.

Consumer advocates disagree with the findings of PERC and the practices of the credit reporting industry. Advocates say the number of credit reports containing errors is huge when analyzing all 200 million consumers who have a credit file. Credit reporting errors affect 1 million consumers and correcting a serious error can become a nightmare.

It is the policy of credit bureaus to reduce most consumer dispute claims to a two-digit code and take the “word” of the creditor company that filed the incorrect information as correct. For example, after receiving a claim from a consumer regarding a credit inaccuracy, the credit bureau forwards the creditor a routine error form and then reports back to the consumer what the creditor says about the debt owed. The credit bureau becomes more like an agent of the creditors and no longer acts as an independent entity that reinvestigates data which keeps fairness in credit reporting.

The facts are that consumers are at a disadvantage when dealing with credit report inaccuracies. Their complaints are filed directly to the Federal Trade Commission. Each year, consumers file about 30,000 complaints and more than 4,600 consumers took their claims to court in the last 5 years.

Consumers will have more leverage next month when a new federal agency, the Consumer Financial Protection Bureau, gains authority to police credit reporting companies. The agency promises to better protect consumers from abuse. Only then will consumers get fairness and be more confident to show their credit reports to an insurer, future landlords, and potential employers.

TransUnion, a major credit bureau that monitors consumer credit, conducted a new study for mortgage-only defaulters and found they are not as risky as previous studies suggested.

The results, released in late May, show that borrowers who default only on their mortgages are less likely to then default on new car loans or credit cards than people who default on their mortgages and one other debt obligation at the same time. The study also found that credit scores for mortgage-only defaulters rebounded quicker than consumers who defaulted on multiple non-mortgage debts such as credit cards, car loans, personal loans, etc.

Steve Chaouki, a vice president at TransUnion, believes his company’s research reduces the assumptions that mortgage-only defaulters will become habitual defaulters. He adds that they “are less risky than they appear” and “lenders will want to lend to those people in the future.”

RealtyTrac, a market researcher, says that almost 4 million U.S. homes were foreclosed on over the last five years. They discovered that a chunk of foreclosed homes were “strategic defaults,” where homeowners who could afford the payments walked away because the value of their home fell below their risk tolerance.

FICO, developer of the widely used credit score algorithm, found in their own study, which was released last April, that strategic defaulters were savvy about credit and had better credit histories than other groups of mortgage defaulters.

In our credit e-learning course, we teach consumers that a credit score is a snapshot of a borrower’s activity. One or several defaults can be overlooked. Whether you have bad credit, no credit, or bankrupted – there is a loan developed to meet your life challenges.

The point we make is that defaulting on loans is not the end of the world. All creditors make you believe it is because they want their loan repaid. And they are justified in their reason. Our innovative financiers have financial products that cater to every situation in life.

A settlement between Bank of America (BofA) and their checking account customers who were charged overdraft fees has received initial approval by a federal judge. The lawsuit was filed by BofA customers in Miami federal court and they allege the bank “systematically” resequenced debit transactions by posting, also known as clearing, larger purchases first to empty their funds quicker in order to maximize overdraft revenue.

More than a million BofA customers joined as plaintiffs and consolidated their lawsuits. The settlement requires BofA to put $410 million in an escrow account. The money will be divided among customers who were assessed overdrafts resulting from debit card transactions as early as 2001. Court documents show the plaintiff’s attorneys’ could collect up to 30% of the settlement for their fees.

Jeremy Alters of Alters Law Firm, which represents the plaintiffs, said consumers have been “wronged” by resequencing debit card transactions. He believes that method has been used by more than 30 banks. He intends to help more consumers recoup their money. Mr. Alters also said that the settlement with BofA “is a blueprint for success.”

Bank of America denies the allegation that it posted largest debit transactions first and smaller transactions last. A spokeswoman for the bank reiterated it was “pleased to reach a fair resolution to this matter” and was “advocating for a standard solution that would ensure consistent posting order approach across the industry.”

Consumers began using debit cards since the late 1990s. It is more convenient to carry a debit card and swipe it for purchases than to pay with cash and wait for the change. A debit card also recorded the transaction and replaced the need to keep a copy of the receipt. Consumers were freed from that hassle because a debit card purchase appeared on their bank statement at the end of each month.

Consumers who are financially stable benefited most from debit cards. Consumers with limited funds would end up paying penalty fees to their bank for debit card purchases on any given day. There is a painful side to debit card use that results from mistimed purchases.

Imagine swiping your debit card for these purchases: $2 cup of coffee at Starbucks, $3 Big Mac at McDonalds, and $4 for a gallon of gas at BP. Before you left to work that morning, you checked your bank account balance and it was positive $20. So on your way to work you stopped for coffee, a burger, and gas. Little did you know, before the end of business day, your monthly gym membership at LifeTime Fitness was due and the debit card you provided for payment was authorized for $20.

If charges posted in chronological order, how much should your checking account be overdrawn? The answer is negative $43.  Look at this example: the 3 purchases ($2 coffee, $3 burger, and $4 gas) is covered with the $20 in your account and puts you at positive $11 still. The card authorization later in the day for the gym membership due overdraws your account by $9 and a $35 overdraft penalty fee leaves you owing your bank $44.

However, big banks don’t post transactions in chronological order. They resequence your purchases from largest to smallest. In this system, using the same debit transactions from the previous example, your checking account would be overdrawned by $114 instead.

Conclusion: You started out with positive $20 but the gym membership, the largest of the purchases, is deducted first leaving you at zero dollars. The next three purchases is assessed a $35 overdraft fee each because of insufficient funds. So you’ll pay $39 for the gallon of gas, $38 for the burger, and $37 for the coffee. Furious as you may be – your account is now overdrawn by $114.

Resequencing debit transactions is common practice with big banks. Some banks even go as far as charging their customers $8 a day for remaining negative.

Bank of America is not the only institution that agreed to a settlement with their customers. Citigroup Inc., JP Morgan & Chase Co., U.S. Bancorp, Sun Trust Banks Inc., and Huntington Bancshares Inc. were included in the consolidated lawsuit. Other banks are defending overdraft lawsuits in separate filings as well.

Bigger down payment means bigger commitment and less delinquency. Banks are seeking to raise the minimum down payment on home loans to 20% from the average 3.5% in conventional loans (loans bought or guaranteed by Fannie Mae and Freddie Mac). Nine major cities in the U.S. have already been required to fork up 22% down payment on average for their conventional home loans.

Data show that smaller down payments attract riskier borrowers and higher probability to be foreclosed on, because they are less committed in capital to keeping on-time payments. In the late 1990s, the median down payment hovered around 20% and crept its way downward in 2001 in nine cities: Chicago; Stockton, CA; Las Vegas; Los Angeles; Miami-Fort Lauderdale; Phoenix; San Diego; San Francisco; and Tampa Bay.

Zillow.com, a real estate portal, analyzed that those cities rates fell as low as 4% in the fourth quarter of 2006. Economists have noted that it is no coincidence that markets with lower rates sink deeper underwater on home loans. Altogether, it means that the home value is less than the debt owed on the home.

Federal Deposit Insurance Corp. Chairwoman Sheila Bair told spoke to an industry conference earlier this year and said she supported the 20% minimum down payment. The Obama administration has called for gradually raising down payments to a 10% minimum on conventional loans.

The mortgage industry is working to determine what the right rate should be for borrowers. Higher down payment could send housing prices falling and slowing down home sales, while a smaller down payment translate into risky loans. The equilateral solution may possibly be to allow those with better credit records to qualify for 10% down payment and those with lower credit scores to put 20% down.

Criminal tax prosecutions by U.S. authorities in 2010 rose 25% since 2001 – marking a 10-year high. The government is aggressively cracking down on offshore tax evasion by wealthy Americans and increasing enforcement action against tax preparers who assist evaders with fraud.

Internal Revenue Service (IRS) data show for 2010 that it recommended prosecution in 1,507 cases to federal prosecutors. The number for recommended prosecution also marked a 10-year high, which increased from 1,002 cases (up 50.4%) since 2001. For year 2010, prosecutors filed charges in 1,250 tax related cases in federal court.

Source: “Feds Pounce On Tax Evaders” by Kevin McCoy (USA Today)

A recent US News and Report article states that consumers are doing the unthinkable and paying their credit card bills instead of their mortgage.  This new trend is confirmed by Trans Union who found that the number of Americans who were current on their credit cards but behind on their mortgage increased to 6.6 percent from 4.3 percent in the third quarter of 2009.   Moving in the opposite direction is the share of consumers making mortgage payments on time but behind on their credit cards, sliding from 4.1 percent to 3.6 percent over the same time period.

A 2009 USA Today survey found that each of the 10 largest banks allow consumers to overdraw checking accounts.  By doing so, banks reaped a record $38.5 billion from overdraft fees that year, nearly twice the $20.5 billion collected from credit card penalties, such as late and over-limit fees.