Should You Sue Your Lender?

(source: Vectorportal.com)

In 2006 3,710 lawsuits were filed under a variety of consumer protection statutes, including the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA). If that number sounds high to you, consider this: 4,372 lawsuits were filed in 2007, 6,025 in 2008, 9,135 in 2009, 10,914 in 2010 and so far in 2011, we’ve already got 8,384. We’re on pace to hit over 12,500 such lawsuits this year, making it the fifth straight record year.

With the drastic increase in credit-related lawsuits over the past five years, three questions come to mind: who is suing who, why are they suing, and what are these laws? I’ll take them in reverse order.

Both the Fair Credit Reporting Act and the Fair Debt Collection Practices Act are Federal consumer protection laws.  The FCRA generally sets the rules about credit report cards, including who can pull your credit reports and what are the obligations of the credit reporting agencies.  The FDCPA sets the rules for how 3rd party debt collectors, more commonly referred to as collection agencies, must treat debtors.

In almost every single one of these thousands of lawsuits, a consumer is suing a collection agency, a lender, or a credit reporting agency.  And, they’re suing them for either illegally trying to collect a debt, placing incorrect information on a credit report or failing to correct credit report data. I know a little about these lawsuits as I’ve been an expert witness in over 90 of them over the past five years. Some of them are valid complaints and some of them are nothing more than shakedowns.

Since 2009, many of the lawsuits have targeted mortgage lenders or mortgage servicers. It’s certainly not a coincidence that mortgage players are involved, given the increase in foreclosures, short sales and failed loan modifications. All of these can have a serious negative impact on your credit reports and credit scores and the disclosures that accompany these mortgage “processes” aren’t always clear as to credit reporting.

These suits always have a credit damage component. This can include being denied a loan, being approved but with less advantageous terms, being denied a job, or seeing existing lines of credit suspended or adversely re-priced. Keep in mind, many of these aforementioned damages are only “alleged” and in many cases can’t be proven.

So how does a mortgage lender potentially violate a credit related statute? Any lender who can report your loan-related information to the credit reporting agencies is technically covered by the Fair Credit Reporting Act. If they report incorrect information on your credit reports and then refuse to correct it once you’ve challenged its accuracy, that’s a violation.

This incorrect information can be in the form of late payments, incorrect balances, and incorrect statuses. All of these things can potentially damage your credit reports and lead to economic damages. I use the word “damages” very carefully because negative credit reporting doesn’t always cause economic damages.

If you’ve got something incorrect on your credit reports and you’ve been denied a $10,000 credit card because of it, have you been damaged? Some people would argue that you have, other people would argue that you have not. There are even some experts that would suggest that you’ve been damaged in an amount equal to the amount denied. Still others would suggest that being denied a credit card is actually a benefit to the consumer because you can’t use that card to get into debt. The opinions are all over the place.

So what do you do if you think you’ve “got a case” against a lender or collection agency for potential violations of these consumer protection laws? First off, you should ask yourself if you’ve really been damaged by the event… or if you’re just angry. I can tell you that the vast majority of cases I’ve been involved in settle for a very small amount of money: less than $10,000, in fact. And, if you hired a lawyer on contingency a chunk of that money goes to cover his or her costs. Point being, credit-related lawsuits rarely result in huge money settlements.

* Statistics provided by WebRecon, LLC

John Ulzheimer is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO and Equifax, John is the only recognized credit expert who actually comes from the credit industry. He is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. Follow him on Twitter here.

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Published September 14, 2011 Updated: April 13, 2016
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