Friday, May 04, 2012

Private and Public Bureaucracies: Home Ownership Edition

-- Posted by Neil H. Buchanan

[Note to readers: This post begins with an anecdote that I thought was the basis for a Dorf on Law post that I wrote two years ago (roughly). I have not, however, been able to find that post in the archive, making me think that I might have imagined writing that earlier post. In any case, if the story sounds familiar to some of you, I assure you that you are not alone.]

In 2009, I received a notice from the New York State government, warning me that my state income tax delinquency from 2004 was about to be referred to a collection agency. Any such notice will make a person's heart skip a beat, of course. In my case, however, the initial fear quickly gave way to confusion. I had not lived in New York in 2004, so I could not imagine how I ended up with a tax bill from the state.

My next thought was that fixing the problem would be absurdly time-consuming and frustrating. Even getting in touch with a human being would be difficult, I thought, to say nothing of being lucky enough to find someone who might be helpful. (My opinion of the New York State government has always been especially low.) I imagined the worst kind of bureaucratic nightmare, with my credit rating ending up in the trash, and the state unwilling to give up on a bogus tax bill. I braced myself for a long, maddening fight.

To my surprise, however, I did find a helpful person, who was willing to speak with me right away. The problem was simple and understandable. As part of its regular procedures, New York (like most states) checks IRS filings to find people who should have filed state tax returns. I had moved to New York in early 2005. When I filled out my 2004 Form 1040 in Spring 2005, I had entered my new New York City address on the form, so that my 2005 forms would be sent to that address. New York's auditing software noted that my 2004 federal forms included a New York address, which kicked in an automatic deficiency computation. By the time that this process had run (a few years, for no apparent reason), I had moved to DC. New York State only found me again in 2009, when I moved to Ithaca for my sabbatical. That is when they sent me the deficiency notice.

The solution was easy. I should send my full-year New Jersey state tax return from 2004 to the New York State tax department, to prove that I had not lived in New York during that year. Accordingly, I promptly sent in the appropriate copies and forms, and in short order, I received a letter from NYS canceling the tax delinquency. I was delighted, and life went on.

As I noted in yesterday's post, I recently purchased a house. I genuinely had not expected to be in the market for a new house, so I did not go through in advance the due diligence that one would normally hope to see from a borrower (checking one's credit rating for errors, etc.). But because I had done nothing that should affect my credit record, I proceeded on the assumption that my credit was pristine, and that financing would not be an issue.

Wrong. The NYS tax delinquency was still sitting on my credit reports, from all three national credit rating agencies. My mortgage originator (an extremely good guy, and one of the most helpful and hyper-competent service professionals I have ever met) told me that the reduced credit score would result in a mortgage interest rate 0.25% higher than it would otherwise be, which adds up to tens of thousands of dollars over the life of the loan. No problem, I told him. I have the letter from NYS verifying that the delinquency was erroneous. I faxed that letter to the mortgage originator. Problem solved.

Wrong again. The credit agencies did not accept the letter from New York State. Instead, they wanted a "stamped" letter. Not having access to a nearby New York State government office that could stamp a letter (because I live in Maryland, hundreds of miles away), and lacking the luxury of time, I had to find an alternative. Happily, the Albany clerk's office responded to a conference call from the coordinating credit agency, with me on the line. The clerk not only verified that I had no tax delinquency, but she pointed out that the erroneous delinquency had been "vacated," which meant that "it never should have been." That is, it was not a valid delinquency that had been paid off, but a mistake that had been erased. Now, everything would go forward.

Wrong yet again. The credit agencies refused to accept this evidence, and they all refused to change my credit score. They said that they would allow me to authorize the release by New York State of information to them, which they would then validate on their own. The Albany clerk then told me that the credit agencies had been told many times over the years that this is illegal. The mortgage originator (the good guy in this story, along with his amazing assistant) then tried to get the credit agencies to accept a new letter that had arrived in the meantime from New York, this one with a stamp. That satisfied two of the three credit agencies. Unfortunately, the third agency was not only unsatisfied, but it initiated a 30-day audit of my account.

With the closing on the house set for the next day, we were left in a difficult position. Fortunately, the mortgage originator was able to cobble together a temporary work-around that (while not entirely risk-free) will almost certainly allow me to end up where I should have been in the first place, with no extra money out of pocket, net of everything. As of this moment, we are a little less than a month away from knowing what will happen next.

A few thoughts:

(1) While it might appear that I wrote down the gory details of these events for my own therapeutic purposes, my real purpose is to contribute a datum to an ongoing discussion about the nature of bureaucracy. Because this is turning out well for me, there is no anger to work through here. Indeed, I found myself both amused and even pleased as the process unfolded, especially when I realized that I had a blog post in the making. (Talk about twisted priorities!)

(2) In addition to the heroic mortgage originator, the other "good guys" in this story are the New York State bureaucrats (whom I had feared so much). They were (both at the initial stage of making the delinquency go away, and in the various dealings with the credit agencies) both professional and helpful. They were genuinely fulfilling their role as public servants, while upholding important legal protections and procedures.

(3) The private credit agencies exhibited the worst kind of bureaucratic idiocy. The only similar experiences to which I can compare their bureaucratic intransigence are: (A) when I have had to resolve credit issues with cable TV companies, and (B) every single interaction that I ever endured with Harvard University's administration. There are unhelpful people everywhere, but the myth that public bureaucrats are somehow worse than private bureaucrats is surprisingly resistant to evidence.

(4) Upper-middle class people receive a lot of help, when a problem arises. Upper-middle class people who have law degrees receive even more help. Even without this odd problem with a phantom tax delinquency, the level of help that I received throughout the process was much better than anything I received when I was younger, buying less expensive houses, and not yet trained in the law. I shudder to think what happens to people who are not favored by the system.


Michael C. Dorf said...

I wonder whether the mortgage originator oughtn't to count as a villain in this story too. Presumably, it was the source of the rule that required an extra quarter point of interest due to your credit score and was unwilling to make an exception to that rule, despite being presented with conclusive evidence that the credit score companies were acting unreasonably.

Searching For Rule Of Law In America said...

i found this a very interesting (insightful)read... thx for sharing your experiences...
and enjoy your new home...


Srikar said...

I think stereotypes of "inefficient" public bureaucracies and "efficient" private sector personnel take a beating with experiences such as these!

Frank said...

I think this serves as an example of how much not very well regulated power three corporations have. We constantly hear horror stories about credit reports.

Neil H. Buchanan said...

Thanks to all four commenters, and to Mike for his kind wishes. In response to Michael C. Dorf's suggestion, I think this might call for a new blog post, but my initial thought is that the mortgage originator's policies are driven by the reality that its mortgages will be securitized. In that world, credit scores rule! It's not a good system (in many ways), but it makes them non-culpable, in my mind.

Ann Smith said...

Today more and more people have home credits. They take mortgage loans and don’t think about paying money back. The rates are very high and it’s hard to pay back. I found the solution of the problem. I know how a little by little to pay back your credit. I take emergency money from reliable lender and pay back my mortgage loan. Of course it will get a lot of time but it’s really helpful advice.

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