“The Big Short,” which I saw last weekend, is an entertaining movie. It’s also deeply disturbing because one take-away is that we learned nothing from the stupidity and greed of the subprime mortgage meltdown.
Want proof? Look no further than a recent crackdown in the subprime sector by the Consumer Financial Protection Bureau.
The watchdog agency, which conservatives say is the embodiment of regulatory overreach, slapped Florida’s Clarity Services Inc. and its owner, Tim Ranney, with an $8 million fine for illegally accessing the credit files of thousands of consumers nationwide.
That’s bad enough. Making things even worse is what the company did with all those credit files.
According to the bureau, Clarity used them to generate sales leads for firms that make “small-dollar loans to consumers who have thin credit files.”
In plain English, that means Clarity wanted to help pitch high-interest payday loans and similar products to people with little borrowing experience or limited financial resources.
“Credit reporting plays a critical role in consumers’ financial lives,” said Richard Cordray, director of the bureau. “Clarity and its owner mishandled important consumer information.”
Ranney didn’t respond to my interview requests. But he said in a statement that “while we do not agree with the CFPB’s allegations, the settlement allows Clarity Services to move beyond this distraction.”
The typical credit file contains your name, birth date, Social Security number, where you live, where you work, who you owe money to and how you handled past debts.
It also will include any lawsuits, bankruptcies, foreclosures and other financial missteps you might have made in recent years.
Stir all that together and you get a credit score that will be the primary consideration by lenders in deciding whether you will be approved for a loan and what interest rate you will pay. It also can play a pivotal role in the job-application process.
“Your credit file is incredibly important,” said Linda Sherry, a spokeswoman for the advocacy group Consumer Action. “Almost anything you want to do as a consumer that involves trustworthiness can involve you being vetted through your credit report.”
Most people’s credit files are maintained by three huge companies: Experian, Equifax and TransUnion. But a shadowy world of data merchants exists to supplement mainstream credit records.
Clarity’s website says the company specializes in providing credit information on “the U.S. subprime consumer population.” That is, people who represent the greatest risk to lenders.
The company says it combines traditional credit files with information from auto financiers, check cashers, prepaid card issuers, payday lenders and other sources to help creditors determine the risk of people with “minimal recorded data.”
“Clarity’s growing database provides information that is not available from traditional reporting agencies and assists lenders in gaining a competitive advantage by viewing subprime consumer data,” the company says.
However, the Consumer Financial Protection Bureau said Clarity didn’t just wait for lenders to contact the company. It allegedly took the initiative in generating sales leads.
The company “violated the Fair Credit Reporting Act by illegally obtaining the consumer reports of tens of thousands of consumers – without a permissible purpose – for use in marketing materials for potential clients,” the bureau said.
In one instance, according to the bureau, the company obtained more than 190,000 consumer reports from a credit reporting company without proper authorization. As a result, all those files incorrectly showed they were accessed by a prospective lender, which in turn can lower a person’s credit score.
A spokeswoman for the bureau declined to say how widespread such practices might be as financial firms renew attention on subprime borrowers.
But Sherry at Consumer Action said her organization has seen an uptick in efforts to market financial services to high-risk people as the economy improves.
“It’s happening all over the place,” she said.
Federal regulators lowering the boom on Clarity Services is an important reminder to the financial-services industry that just because the economy is on the mend doesn’t mean cash-hungry companies can return to business as usual.
But we can do more.
The credit-check system needs to be tightened so that inquiries can be made only by companies directly involved in the process – no middlemen.
There also is a need for an improved verification process, some way for credit bureaus to ensure that consumers are aware of any inquiry in their name. Would it be so difficult to send out an email or letter saying a request for a credit check has been submitted?
In “The Big Short,” we see that as soon as the bailout dust settled, the financial-services firms awarded their senior execs fat bonuses and once again looked to subprime borrowers for profits.
Clarity boasts online that it has “more than 400 financing and collection clients, including small-dollar lending, title lending, non-prime credit cards, telecommunications, buy here/pay here automobile finance companies and more.”
Ranney, the owner, said in his statement that “we are focused on delivering innovative solutions and excellent service to our customers.”
Those would be the more than 400 payday lenders and other bottom feeders he does business with. Nowhere in his statement did Ranney mention consumers.