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Over the past decade, surveys and research conducted by the Industry Group National Association of Independent Credit Reporting Agencies (now the National Credit Reporting Association)', and by the U.S. Public Interest Research Group" and Consumers Union' have documented inaccuracies in as many as 70 percent of credit reports. Among other problems, these studies identified false delinquencies, mistaken identities, uncorrected errors, missing information, and duplicate reporting of information in credit reports.
The ability of consumers to identify and dispute inaccuracies in their reports and scores is severely limited.
A. Loopholes in the law and the growth of “risk-based” mortgage lending may endanger
consumer rights under the FCRA to be informed of and challenge adverse credit
Many consumers do not see their credit reports until they suffer an adverse action based on the information in those reports, such as having a loan or insurance application denied, being charged higher than prime rates, or receiving less favorable terms, and are told of their right under the FCRA to receive a free copy of their credit report. Such adverse action notices are usually the catalyst for consumer to exercise their right to review and dispute information in their credit reports. However, there are substantial threats to the effectiveness of this pivotal component of the statute. The trend towards “risk-based” pricing in the current marketplace increasingly means that an “adverse offer” is not the wholesale denial of credit, but an offer of credit at less than the most favorable terms. For this reason, several of FCRA's provisions regarding adverse actions need to be updated to ensure that consumers have access to their rights when they receive a credit offer with higher rates or stricter terms.
First, a loophole in the law regarding so-called “counteroffers” increasingly reduces the efficacy of adverse actions provisions. If a consumer is denied the best credit rate or terms available, but accepts an offer for credit at less favorable terms, they are not entitled to a free copy of their report, or a notice that they have been subject to an adverse action based on information in a consumer report. When applying for a mortgage, many consumers generally identify the type of mortgage they would like to apply for and the amount they wish to borrow, rather than applying for a specific rate. When told about the rate for which they qualify, they are not necessarily in a position to assess whether this rate is unfavorable. Furthermore, many subprime borrowers are unlikely to be alerted to potential mistakes in their credit files that could raise their rate. While increased access to credit is a laudable goal if the loan is not offered on predatory terms and it is sustainable by the consumer, this significant change in the marketplace
any determination as to their accuracy. Furthermore, the study considers only those errors that were significant enough to result in a reversal of the credit denial. Given the sweeping changes in the industry since the study was conducted, including the rise of risk-based pricing, the present impact of smaller errors on consumers should not be overlooked.
Survey/Study Three Bureau Merged Infile vs. Two Bureau Residential Mortgage Credit Report. National
Mistakes Do Happen. Public Interest Research Group. March, 1998.
"Credit Reports: How do potential lenders see you?" Consumer Reports. July 2000. P. 52-3., and "Credit Reports: Getting it Half Right.” Consumer Reports. July, 1991. p. 453.
requires a re-evaluation of the mechanism and circumstances under which consumers are given free access to their credit reports.
B. The current statute does not provide access for consumers to sufficient information to
make informed assessments of the impact of errors in credit reports.
Despite the fact that many lenders may rely heavily or even exclusively on a credit score to make a credit decision, the consumer has no right under FCRA to see the score used to evaluate them. Moreover, even with notice of an adverse action, the current statutory requirements do not give consumers access to the actual information used by a lender to evaluate their application. In mortgage lending situations, this usually involves a "tri-merged" report with data and scores from all three major credit bureaus. Instead, consumers who request a report received a “cleaned up" copy generated by the identifying data the consumer submits, which is more detailed than the information that lenders are required to submit. Credit reports are generated from large databases of information based on the information included in a query. Depending on the amount of identifying information included in the query, the report and credit score will be substantially different. In particular, credit files are more likely to include mixed information from individuals with similar names, addresses and social security numbers, if very little identifying information is used to obtain the file. This incorrect information will not be apparent to the consumer if the file he or she receives is different than that received by the lender. Moreover, as the findings of the CFANCRC report show, the explanations provided to consumers about the reasons for adverse credit decisions are usually vague and unhelpful.
A. Broaden consumer access to credit reporting and scoring information. Empowering consumers with more and better information is the key to improving the accuracy and faimess of the credit reporting system.
1. Require credit reporting agencies to grant consumers one free credit report and credit score per year upon request. Rather than waiting for an adverse credit decision to check their report and score for accuracy, consumers should be given the opportunity to get the information once a year at no charge. Consumers should be given a description of the major factors that are used to calculate the score, the weight of each factor in calculating the score and how the consumer rated on each major factor. Moreover, consumers should be given a copy of the report a subscriber would get, which is generated by less matching information about an individual than a consumer is required to submit. This allows the consumer to see if his or her file contains mixed or unrelated credit information for someone else with a similar name or address.
B. Require credit furnishers to provide more accurate and complete information. As this
testimony has demonstrated, many errors in credit reports can be attributed to the practices of creditors and other credit data fumishers. Credit Reporting Agencies must meet a “maximum possible accuracy" standard but obviously rely heavily on the information that is furnished to them.
1. Increase the legal standard of accuracy for credit furnishers. The current accuracy standard under section 623(a)(1)(A) is quite weak and has not provided an adequate incentive for data furnishers to provide accurate information. It forbids furnishers from providing data to credit bureaus only if they know or consciously avoid knowing that it is inaccurate." Unlike the requirement in Massachusetts—which was allowed to stand when the 1996 amendments to FCRA were made this standard does not require furnishers to know if information they are submitting to a credit reporting agency is actually accurate. A standard more consistent with many other consumer protection laws would be to forbid furnishers from reporting information if they “knew or should have known” it was incorrect.
2. Require furnishers of data to provide complete information on any account for which they use a credit report or score to determine eligibility, pricing or for account reviews. Not all providers of consumer services use credit records or credit scores to determine consumer eligibility, or pricing. However, those that do should be required to report complete information back to the credit repositories, including “positive" payment information and information in all data “fields,” including credit limit information and the date of last activity. Information about any account that was underwritten with a report from one or more credit repositories should be reported to those repositories as frequently as the consumer is obligated to make payments. Collection agencies should be required to report on the status of collections at least once every six months.
3. Require data furnishers to notify consumers any time derogatory information is submitted. Congressman Ackerman has laudably pointed out that such a requirement would offer consumers the opportunity to check the accuracy of derogatory information when it is submitted, as opposed to finding out the next time the consumer applies for credit and is turned down or offered a high interest rate.
4. Prevent duplicate reporting of accounts by preventing credit furnishers from reporting a debt once it is sold or sent to collection. Collection agencies will report this information once they own the account. Credit furnishers should be required to report to credit bureaus when they have sold an account and should be forbidden from reporting information about an account once they no longer own it.
C. Require credit bureaus to distribute more accurate information to the users of credit
1. Require that data provided for credit reports be generated through the accurate matching of at least four of points personal information about the specific consumer who is applying for credit. The amount and type of identifying information provided by creditors requesting a report should be as detailed as that required for consumers requesting their own report or score. This will make it more likely that the credit report that is pulled does not contain "mixed” data from another consumer with a similar name, social security number or address.
2. Require credit bureaus to prevent the reinsertion of fraudulent or erroneous account information that has been previously deleted. There have been repeated complaints that
information that is deleted by a bureau because of an inaccuracy or identity theft is reinserted when the data furnisher submits subsequent routine updates of account information.
D. Modernize the FCRA dispute resolution process.
1. Allow consumers access to the actual credit report and score that were used to make the credit decision. Creditors should immediately provide to any consumer who experiences an adverse credit action a copy of the credit reports and scores used to arrive at that decision free of charge and permit disputes to be immediately resubmitted for reconsideration. All consumers who have experienced an adverse action based on one or more credit reports or scores should immediately be given a copy of both the full report or reports used to derive that score and the related credit scores without having to pay any additional fee.
2. Improve the explanations offered to consumers for why adverse credit actions are taken and offer the consumer the opportunity to correct errors and be immediately reevaluated for the most favorable credit terms. The FCRA and Equal Credit Opportunity Act require lenders to inform consumers that an adverse credit action has been taken. Such an action includes, among other things, denial of credit or the denial of favorable terms on credit. Lenders must also inform consumers what the principal reasons are for the adverse action. As cited above, CFA and NCRA have found that most of these explanations are either vague, duplicative or both. Instead, lenders should be required to identify any specific entries (trade lines) that are lowering the consumer's score and indicate the impact on the consumer (either the point value deducted for that entry or the proportional impact of that entry relative to other derogatory entries in the report). The consumer should then be allowed to identify any errors or out of date information, provide documentation, and be reevaluated for prime rates. The additional cost to lenders and businesses of providing these reports immediately would be minimal. Since they already posses the report in paper or electronic form, they would merely have to copy or print this report.
3. Shorten the deadlines by which creditors must respond to consumer disputes about credit information. Currently, the FCRA provides creditors 30 days to respond to a dispute; 45 days if the consumer submits additional documentation about the dispute. In the age of “instant credit" and three-day credit re-scoring by credit reporting resellers, these deadlines are much too long. By the time the consumer hears back from the credit bureau about the outcome of the dispute, he or she might have lost a home loan (and the home) or submitted to a loan at a higher rate than he or she was entitled to. Given how fast credit decisions are now made, resolution deadlines of ten days (fifteen if the consumer submits additional information) do not seem unreasonable.
4. Require creditors and credit bureaus to meet reasonable minimum standards when “reinvestigating” a consumer complaint. As documented in detail in last week's testimony by the National Association of Consumer Advocates and the National Consumer Law Center, the current automated reinvestigation process used by creditors and bureaus almost always results in creditors verifying that the original data they provided about a consumer is accurate. Credit bureaus are not required to make an independent determination about whether the information that is provided about a dispute is accurate, even if that information comes from an independent third party rather than the furnisher or the consumer. They simply submit a numerical code to a furnisher about the nature of the complaint and ask the furnisher to verify whether the complaint
is accurate or not. Creditors are not asked by credit bureaus to examine the original documents provided in a dispute to determine their veracity.
5. Require decisions based on a single repository's credit report or credit score that result in anything less than the most favorable pricing to immediately trigger a re-evaluation based on all three repositories at no additional cost. Lenders and other credit data users have a desire to keep their underwriting costs low. This is a legitimate desire so long as consumers are not harmed in the process. Some lenders reduce costs by underwriting certain decisions with only one credit report. For example, a lender may offer pre-approved credit cards based on only one report, or underwrite home equity lines of credit or second mortgages with a single report. Given the wide range between scores for a typical consumer and the frequency with which major accounts are omitted from credit reports, such practices have serious negative implications for consumers. Measures should be put in place to protect consumers from any negative impact resulting from such underwriting practices. A simple solution would be to require all decisions based on credit reports to use information from all three repositories. However, this could result in higher costs and reduced availability of products such as pre-approval letters that are beneficial to consumers. Alternatively, lenders and other credit data users could be permitted to continue underwriting based on one report, so long as any adverse impact based on information from a single repository immediately triggers a re-evaluation with information from all three repositories at no additional cost to the consumer. In this manner, businesses could continue to save on underwriting costs for consumers with very good credit, but consumers with less than perfect credit would not be forced to continue to pay a high price for inaccuracies, inconsistencies, or incompleteness on any one credit report.
6. Require creditors to identify any offer of credit at less than the most favorable terms as an “adverse offer.” This would include pre-screened “subprime” mortgage offers or credit cards solicitations that are based on negative or less than favorable credit information. As is well known, the subprime credit industry has boomed in the past decade by offering borrowers with blemished or limited credit histories mortgage loans, car loans and credit cards at higher rates and less favorable terms than offered to their “prime” borrowers. As lenders increasingly offer a continuum of loans at different rates and terms, it is more important than ever that consumers have the ability to exercise their FCRA rights to insure that adverse credit information is correct. In the world of “risk-based” pricing, borrowers should know that they are being targeted because of their less than optimal credit history and should be offered the opportunity to check their credit history and change any information that is not accurate or complete. Furthermore, as stated above, many consumers are unwittingly giving up their FCRA rights because they are accepting loans that are legally considered “counteroffers."
D. Improve oversight of credit scoring. End credit scoring misuse for insurance purposes.
1. Establish meaningful oversight of the development of credit scoring systems. Despite the fact that consumer access to, and pricing for, vital services such as mortgages, general consumer credit, insurance, rental housing, and utilities is increasingly dictated by the automated evaluation of credit, there is no government oversight of the design of these systems. The calculations behind credit scores, a fact of life for the American consumer, remain shrouded in secrecy. The appropriate government agencies, such as HUD, the Federal Trade Commission,