[Senate Hearing 112-760]
[From the U.S. Government Publishing Office]
S. Hrg. 112-760
MAKING SENSE OF CONSUMER CREDIT REPORTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
ON
EXPLORING THE CONSUMER CREDIT REPORTING MARKET, CONSUMER UNDERSTANDING
OF CREDIT REPORTS, AND THE EXPANDED OVERSIGHT OF KEY MARKET
PARTICIPANTS IN THE CREDIT REPORTING INDUSTRY
__________
DECEMBER 19, 2012
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia MARK KIRK, Illinois
JEFF MERKLEY, Oregon JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina
Dwight Fettig, Staff Director
William D. Duhnke, Republican Staff Director
Dawn Ratliff, Chief Clerk
Riker Vermilye, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Financial Institutions and Consumer Protection
SHERROD BROWN, Ohio, Chairman
BOB CORKER, Tennessee, Ranking Republican Member
JACK REED, Rhode Island JERRY MORAN, Kansas
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MIKE JOHANNS, Nebraska
DANIEL K. AKAKA, Hawaii PATRICK J. TOOMEY, Pennsylvania
JON TESTER, Montana JIM DeMINT, South Carolina
HERB KOHL, Wisconsin DAVID VITTER, Louisiana
JEFF MERKLEY, Oregon
KAY HAGAN, North Carolina
Graham Steele, Subcommittee Staff Director
Michael Bright, Republican Subcommittee Staff Director
(ii)
C O N T E N T S
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WEDNESDAY, DECEMBER 19, 2012
Page
Opening statement of Chairman Brown.............................. 1
Opening statements, comments, or prepared statements of:
Senator Corker............................................... 2
Senator Akaka
Prepared statement....................................... 26
WITNESSES
Corey Stone, Assistant Director for the Office of Deposits, Cash,
Collections, and Reporting Markets, Consumer Financial
Protection Bureau.............................................. 3
Prepared statement........................................... 26
Response to written questions of:
Chairman Brown........................................... 135
Stuart K. Pratt, President and CEO, Consumer Data Industry
Association.................................................... 13
Prepared statement........................................... 27
Response to written questions of:
Chairman Brown........................................... 137
Chi Chi Wu, Attorney, National Consumer Law Center............... 15
Prepared statement........................................... 38
Response to written questions of:
Chairman Brown........................................... 139
Additional Material Supplied for the Record
Senators Merkley, Schumer, Menendez, and Brown letter to Richard
Cordray, Director, Consumer Financial Protection Bureau........ 143
Richard Cordray, Director, Consumer Financial Protection Bureau,
response letter to Senators Merkley, Schumer, Menendez, and
Brown.......................................................... 145
National Association of Credit Services Organizations letter to
Senators Brown and Corker...................................... 147
Letter to Senate Banking Committee and House Financial Services
Committee in support of S. 2149 and H.R. 2086 from a coalition
of organizations, including the National Homebuilders
Association, the Mortgage Bankers Association, the American
Medical Association, and the Consumers Union, among others..... 149
LexisNexis articles from the Columbus Dispatch's investigative
series on credit reports....................................... 151
New York Times article, ``Discrepancies on Medical Bills Can
Leave a Credit Stain'', by Tara Siegel Bernard................. 208
Associate Press article, ``Medical Bills Can Wreck Credit, Even
When Paid Off'', by Carla K. Johnson........................... 212
(iii)
MAKING SENSE OF CONSUMER CREDIT REPORTS
----------
WEDNESDAY, DECEMBER 19, 2012
U.S. Senate,
Subcommittee on Financial Institutions
and Consumer Protection,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee convened at 10:06 a.m. in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Senator Brown. The Subcommittee will come to order. Thank
you for joining us. I will welcome Mr. Stone in a minute. We
will have two panels today.
I thank Senator Corker. This may be our last hearing
together like this on the Subcommittee, as Senator Corker moves
on to bigger and better things, and I appreciate his
cooperation and his good sense in asking tough questions during
his Subcommittee hearings over the last couple of years.
Americans, as we know, depend on access to credit to fund
our education, purchase homes, to run their businesses. That is
why we need to address credit reports, one of the most
significant and least understood elements of the consumer
credit system.
This hearing highlights yet another benefit of Dodd-Frank
and the new Consumer Financial Protection Bureau. In the past,
the Federal Trade Commission has had authority over furnishers,
those who send financial information to the credit bureaus.
Those furnishers are, in most cases, banks. But it did not have
the authority--the FTC did not have the authority to examine
the credit bureaus themselves. They could only bring
enforcement actions.
The CFPB has comprehensive authority now to examine the
operations of credit bureaus, to shed new light on the credit
reporting industry, about which we do not know much in many
ways, and to write new rules of the road. That is just one
reason why the CFPB is so important.
Though consumers are entitled to one free copy of each of
their credit reports each year, one from each of the three
bureaus, if they choose to do that, the CFPB finds that only
one in five consumers request a copy of their credit year
report in any given year. Last year, eight million consumers
disputed more than 30 million items in their credit report,
challenging their voracity or accuracy in one way or another.
Even though each American, every American who is in the credit
system, as most Americans are, each American has three credit
reports, one for each one of the bureaus, an error on just one
credit report can affect that consumer's ability to access
credit.
A former colleague of mine in the House of Representatives
recently contacted my office. His wife had passed away earlier
this year. When he applied for a mortgage, he was denied
because one of his credit reports listed him as deceased. When
he called the bureau to tell them that he is still alive, he
was told that the error would take 30 days to correct, and 30
days is a long time if you are in the midst of a financial
transaction, obviously. He got in touch with us. We fixed the
problem for him, something he should not have had to do. But he
still does not know what other credit reports say.
Unfortunately, that is just one story, admittedly, but
these stories are all too common. An investigative series in
one of my State's largest newspapers, the Columbus Dispatch,
found that more than half of consumers who filed credit report
complaints with the FTC, back when it was done that way still,
had been unable to resolve their issues through the normal
dispute process with credit bureaus. Problems abound, even for
consumers with nearly flawless credit.
One of the Nation's foremost bankruptcy experts visited my
office last week. She has nearly perfect credit and recently
received an auto loan with a rate of 1 percent. She then
received an adverse action notice in the mail explaining she
may have received a higher than expected rate because of
adverse information on her credit report. It is hard to think
she could have gotten a rate below 1 percent, but it was not
explained, and like most hard-working Americans, she did not
have the time to really pursue the follow-up with the
organization that sent the notice.
These examples, in my mind, show that the current system
does not work always for consumers. It does work and is quite
profitable for the banking industry, who are the main customers
of those three bureaus, admittedly, but not for consumers who
ultimately fact the impact of credit ratings, credit scores.
Creditors make money off of loans with higher rates. Their
ability to report negative information too often gives them
leverage over consumers. Credit bureaus are largely paid by the
lenders, by the furnishers, in many ways, by the lenders
themselves when they go back to the bureaus and ask for
information. Conducting thorough investigations costs money and
cuts into profit margins. Under the law, credit bureaus and
creditors have some general commands, but few concrete
obligations.
Too often, the burden is on the consumer, whose credit
rating and credit score may not be accurate and whose interest
rates on their financial transactions may be higher as a
result. The burden is on consumers who do not know enough about
their credit reports--too few people ask for them--or who do
not have time to navigate the all-too-often arcane and
confusing system.
I look forward to hearing from our witnesses how we can
help to work together to create a system that really protects
consumers' interests, is more transparent and more
understandable to all of us who use our credit system in this
country.
Senator Corker.
STATEMENT OF SENATOR BOB CORKER
Senator Corker. Thank you, Mr. Chairman. I appreciate you
calling the hearing and I have enjoyed working with you over
the last couple of years, and I certainly look forward to the
testimony of our witnesses and learning more about some of the
issues around credit reporting. So thank you for being here and
I look forward to your testimony.
Senator Brown. Thanks. Thank you, Senator Corker.
Corey Stone is Assistant Director for the new Consumer
Financial Protection Bureau's Office of Deposits, Cash,
Collections, and Reporting Markets. Immediately prior to
joining CFPB, Mr. Stone served as a Fellow at the Center for
Financial Services Innovation, was Chair of Start Community
Bank in New Haven, Connecticut, visiting clinical lecturer at
Yale Law School's Community and Economic Development Clinic.
From 2006 to 2008, he served as CEO of Pay Rent, Build Credit,
an alternative credit bureau helping underserved thin file, he
called them, consumers to demonstrate their creditworthiness
using their rental and bill repayment history. He served as a
member of the Federal Reserve Board of Governors Consumer
Advisory Council. He is a graduate of Harvard and the Yale
School of Management.
Mr. Stone, welcome, and thanks for your public service.
STATEMENT OF COREY STONE, ASSISTANT DIRECTOR FOR THE OFFICE OF
DEPOSITS, CASH, COLLECTIONS, AND REPORTING MARKETS, CONSUMER
FINANCIAL PROTECTION BUREAU
Mr. Stone. Chairman Brown, Ranking Member Corker and
Members of the Subcommittee, thank you for the opportunity to
testify today on the consumer credit reporting industry.
Credit reporting plays a critical role in consumers'
financial lives. Credit reports on consumers' financial history
and behavior can determine their eligibility for credit cards
or car loans and home mortgage loans, and they often affect how
much consumers pay for their loans. The industry is critical in
our economy. It promotes access to credit that consumers can
afford to repay. Without credit reporting, many consumers
likely would not be able to get credit at all.
Credit reports are also often used in a number of noncredit
decisions about consumers. They can be used to determine
whether a consumer is offered a job, a car, homeowners'
insurance, or rental housing.
The CFPB is the first Federal Government agency that
supervises both consumer reporting companies and the largest
banks and many of the nonbanks that provide them with
consumers' credit information. This responsibility is a
priority of the Bureau. Last year, the CFPB published one
report to Congress on credit scores and another report on
whether remittance information might help consumers develop
positive credit scores. Earlier this year we published a
Consumer Advisory about credit reports. In July, the CFPB
adopted a rule to extend its supervision authority to cover
larger consumer reporting agencies. In September, the CFPB
released its examination procedures for these companies along
with a study examining credit scores--the three-digit numbers
used to assess consumers' creditworthiness. In mid-October, the
CFPB began handling individual complaints about consumer
reporting companies. If a consumer files a complaint with a
credit reporting company and is dissatisfied with the
resolution, the CFPB is available to assist.
As many of us at the CFPB conduct outreach all over the
country to learn how consumers hurt by the financial crisis are
recovering, we have heard many express frustrations about their
credit reports or credit scores. And we have heard a
considerable amount of confusion and misunderstanding about
credit reporting.
Last week, the CFPB issued a new report based on
information provided by the big three consumer reporting
companies--Equifax, Experian, and TransUnion--and their
industry association. The report highlights the basic systems
that credit reporting companies use to collect, organize, and
maintain consumer credit information. It is one of the most
comprehensive looks at the consumer reporting industry to date.
And it represents a significant step forward in understanding
this industry and making it more transparent for consumers.
Some of the key findings in the report are, first, more
than three quarters of the trade lines in the credit bureaus'
databases come from the top 100 furnishers of information.
These are largely the large banks and nonbank lenders--and now
the largest debt collectors and debt buyers--who fall under the
CFPB's supervision. This means for the first time a Federal
agency has the tools to examine and understand how well all
parts of the credit reporting system are working--including
both the sources of credit information and the credit bureaus
themselves.
Another finding, more than a third of consumer disputes
relate to collections items. In fact, the information provided
by the collection industry is five times more likely to be
disputed than information from the mortgage industry.
Another finding: A relatively small percentage of
consumers--approximately just 20 percent--look at their credit
reports each year. This is a shame because--while we do not
know for sure how common inaccuracies are--it is likely that
many additional consumers could identify and correct
inaccuracies if they reviewed their credit reports.
Another finding: Most complaints are forwarded to the
furnishers that provided the original information when they are
submitted to the credit bureaus. Credit reporting companies on
average refer 85 percent of complaints on to the furnishers
that provided the original information. But documentation that
consumers mailed in to support their cases may not be getting
passed on to the data furnishers for them to properly
investigate and report back to the credit reporting company.
The CFPB's report should help clarify the confusing world
of consumer reports. It should help to inform policymakers and
consumers about how this important industry works. If consumers
know more about how these companies report on credit use,
consumers should be better able to make decisions for
themselves and use credit more wisely.
Thank you for inviting me to testify today. I will be happy
to answer any questions you have about our report.
Senator Brown. Thank you, Mr. Stone.
Expand on the last things you said, that if a consumer that
is signing up, that is doing a refi of their home, of their
home mortgage, wants to challenge her credit score and talks to
one of the three companies that does that, typically--and sends
documentation of something that she said is inaccurate--
typically, the credit bureau does not go back to the original
furnisher of the information with the--I mean, goes back to
them, but not with the documentation that the consumer sent to
the bureau, is that correct?
Mr. Stone. That is correct. If the consumer sends in paper
documentation, if they were filing the complaint by mail or
faxed it in or provided it in an email, that is correct.
Senator Brown. There is also my understanding the CFPB's
study noted that only 255 characters of consumer-supplied text
typically can be provided. Some do not even have a text field
available. That makes the consumer complaint less likely to be
examined in the way that the CFPB would recommend. Is my
understanding right about that?
Mr. Stone. Well, we do not know what happens when the
complaint gets to the furnisher. We know that the text field
can be filled in either by the consumer themselves when they
file a complaint online, or if they call it in or mail it in,
it can be translated onto a text field, that same text field,
by a representative of the consumer reporting agency.
Senator Brown. So my understanding is the law requires the
credit bureau supply the furnisher with all relevant
information. So is that a violation of the law, that they have
not provided? Partly, it is a technology issue that, I would
think, could be fixed easily enough, I would think. And,
second, it is just an issue that they make a determination not
to send the furnisher all this information. So is that a
violation of at least the spirit of FCRA, or it is a violation
of the law? What is it?
Mr. Stone. Senator, our purpose in putting together this
paper, which is characteristic of the work of all of our
markets teams, is, first, to be descriptive rather than
prescriptive, so what we are describing is what we heard. We
have many tools with which we can make determinations about
whether the law is being violated or not, and in this case,
that is what is going to happen. So we have found that this
information is not being forwarded.
Senator Brown. Is it a fair statement to say that consumers
must provide evidence when they challenge a credit score, but
that creditors are taken at their word?
[Pause.]
Mr. Stone. It is--to describe the system that way, I think,
would be accurate. So you are saying that the consumer can
provide information, it is not going to get to the furnisher
necessarily in the form in which they provide it. It does get
converted into codes. It can be put into this limited text
field and it can get to the furnisher----
Senator Brown. Or may not entirely be passed on.
Mr. Stone. It may not be passed on if it is a separate
document.
Senator Brown. And the consumer--the bureau, then, makes
this determination by--I mean, there is no outside player here.
There is the consumer going back to the bureau, the bureau
going to the furnisher, perhaps with less complete
documentation, and then the bureau ultimately making the
decision which will affect the consumer's credit score, the
consumer's interest rate, the consumer's access to credit
generally, but all done internally with no real disinterested
party making a determination, correct?
Mr. Stone. I would not say it is fair necessarily to
characterize the credit bureau as not a disinterested party,
but their interest is in making sure that the complaint gets
passed on and they fulfilled that obligation. They have created
codes and mechanisms to automate it as much as possible. And so
the question is--is there more information that a furnisher
could use to do a better investigation or not? So there are
pieces of information that we know are not getting through.
Senator Brown. One last question and I will turn to Senator
Corker. The three bureaus make the great preponderance of
their--the revenues for the three bureaus overwhelmingly come
from the financial institutions, not from the consumer,
correct?
Mr. Stone. That is correct.
Senator Brown. So the most important customers to the
bureau are the furnishers and those whom they send the credit
scores and share the credit information with the financial
institutions, correct?
Mr. Stone. That is correct, although I would point out that
there is roughly a billion dollars of revenue earned by the
three credit bureaus we are talking about today from consumers
through credit monitoring services that they sell directly or
wholesale through various partners.
Senator Brown. Give me a couple of examples of--I know you
pay $11 if you want your credit score. That does not make up
much of the billion dollars, I assume. So where does it come
from----
Mr. Stone. There is a subscription service that consumers
can sign up for. That is how some of the 40 million consumers
who get their reports, that we referenced in our report, are
actually getting them. They answer an ad online or they go to
one of the three bureaus or other people who sell these
subscription services and say, yes, I would like to get a copy
of my bureau reports and an educational score once a month, or
once a quarter, and they pay $8.99 or $12.99 or some monthly
subscription fee for that service.
Senator Brown. OK. Thank you.
Senator Corker, thanks.
Senator Corker. Thank you, and I know we have some
witnesses that are coming right behind you. I will just ask one
question, and hopefully we can get through everybody.
Has anyone raised any concerns about the accuracy of credit
scores and their ability to predict? It seems to me that based
on what our office knows, they have been very good predictors
of behavior, generally speaking, and I know we are talking
about a lot of different things today, but have there been any
questions in your office about their ability to predict
behavior, generally speaking?
Mr. Stone. Thank you, Senator. I am glad you asked that
question. Obviously, people focus in on the score because it is
a single number and it is easier to tell where you rank----
Senator Corker. Right.
Mr. Stone.----compared to all the underlying information.
Credit scores that lenders use are these three-digit numbers
that are built on the information that is in the credit report.
So one concern one needs to have is whether the underlying
information is accurate. When it is not accurate----
Senator Corker. Yes, I understand----
Mr. Stone.----then the score will be less predictive than
when the information is accurate.
Senator Corker. But, generally speaking, just out of
curiosity, is there any sense in your office different than,
generally speaking, they are pretty predictive, is that
correct? I mean, I know there may be some outliers and I
understand that there are some things that need to be rectified
as it relates to consumers' ability to ensure that, you know,
the credit ratings they have are accurate and they have access,
and I value all those things. But, generally speaking, if
someone's credit rating is correct and the information is
there, are they fairly predictive for the future and useful in
that regard?
Mr. Stone. Yes, Senator, the lenders have found them
useful, and that has to be one way in which we need to judge
them. But lenders depend on these scores. The mortgage industry
depends on a specific score, or a specific set of scores. We do
find increasingly that in the auto industry and the credit card
industry, that lenders use multiple scores when they do
underwriting decisions. They will not rely on just a single
score, and they are increasingly relying on scores derived from
other kinds of information besides that found in credit
reports. So these are different kinds of scores and information
is overlaid on top of the original score and the original
credit report that would have been pulled as part of an
application to make a determination about whether to accept an
application and how to price that account.
Senator Corker. So I would assume, since lenders lose a lot
of money if they make bad loans, that having an indicator or a
predictor of how people are going to handle their finances is
something that is an asset and actually is an asset especially
to people who keep their credit in good shape. Would that be
true or false?
Mr. Stone. It certainly helps people who keep their credit
in good shape and where that credit is reported accurately. One
of the concerns that we need to be aware of in the building of
credit is the impact that the very first credit lines that
consumers establish have on their credit history. Credit scores
rely on credit history and, therefore, scores are really using
the past to predict the future.
And we know that different consumers start out with
different kinds of products and the different products may have
different likelihoods of resulting in good or bad payment
behavior. One of the questions we are beginning to think about
is whether bad loans and bad products make bad repayers and,
therefore, can result in harm to consumers' credit histories.
Senator Corker. Well, listen, I appreciate your efforts to
ensure that when something happens on someone's credit report
that is inaccurate and unfounded and, candidly, makes it very
difficult for them to navigate the society we live in, I
appreciate your efforts to rectify those things and make it
easier for people to be able to overcome that. I think that is
an important thing. At the same time, obviously, they have some
value and have been good predictors, and hopefully, when we are
through with this process, we will end up in a place where they
are still a useful tool, but at the same time, people who have
been maligned inappropriately have the ability to rectify
those, and I thank you very much for your testimony.
Mr. Stone. Thank you, Senator.
Senator Brown. Thank you, Senator Corker, and I think we
concur with that. That is where we want to get to. And I
understand the valuable service that they provide.
Before turning to Senator Merkley, I ask unanimous consent
to include the following documents in the record of this
hearing: The National Consumer Law Center's report, ``Automated
Injustice''; second, a statement by the National Association of
Credit Services Organizations; and third, articles from the
Columbus Dispatch investigative series on credit reports that I
mentioned in my opening statement. Without objection, so
ordered.
Senator Brown. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chairman, and I
am going to jump right into an issue I have some concern about,
which is the role of medical debt in consumer reports.
I found it fascinating with just my family of four, how
many billings I get in the mail, so many letters saying, ``This
is not a bill, but here is the information,'' and after about
four or five of those, ``Here is a bill, but you need to check
with your other insurance to see if it is covered,'' et cetera.
And it has not been unusual for us to look at it and go, well,
this should have been covered, and so we call up and say,
``This should have been covered,'' and virtually always, we are
right and it just simply was not processed the first time
through. Maybe the insurance company just kind of stamped it
and hoped we would not call back and say, ``Well, but wait a
minute.''
I guess the portrait I am trying to lay out is, just from
my personal experience, enormous confusion about what you are
paying when, and people simply having to go through a complex
set of hoops in order to really determine, do I really owe this
or should it have been covered by insurance company number one,
insurance company number two. Was it a mis-billing? It does not
even look like it was the right charge for what I went in for.
So I have looked at all that and proposed that settled
medical debt--in other words, after you have sorted through all
that mess but you have reached an agreement on what you will--
and you have paid it--should not be included in your credit
score. And I thank very much the Chair of the Subcommittee,
Senator Brown, for cosponsoring that.
But I wanted to ask about your sense of this. Before I do,
I want to enter several things into the record. I would like
the letter that the Chairman and I sent to CFPB's Director
Richard Cordray on the need to address the impact of medical
debt; his response back to us; a support letter by a broad
coalition that includes the National Homebuilders Association,
the Mortgage Bankers Association, the American Medical
Association, the Consumers Union; and then two recent articles,
one from the AP and the other from the New York Times,
highlighting the disastrous effect of medical debts on
consumers' credit and their financial futures many years down
the line. If I could enter those things into the record, I
would appreciate it.
Senator Brown. Without objection.
Senator Merkley. So, Mr. Stone, I wanted to get your
perspectives on this. In your recent report, you cite research
showing that 40 percent of all consumer disputes at credit
reporting agencies related to collections events. But before we
jump into just that piece of it, overall, this issue of the
complexity of medical debt and resolving it, whether it is a
good predictor, whether it should be part of the credit
reporting system.
Mr. Stone. Senator, I appreciate your bringing this issue
up. It is definitely a source of concern. The fact that
collections items are disputed at very high rates is not a
surprise, just because negative information gets disputed more
often than positive information. So we should expect high rates
on collections items.
As I think you have pointed out in some of your own
correspondence, over half of collections items about 10 years
ago in a Fed study come from medical collections items, which
is way out of proportion to the role that the health care
system plays in the economy compared to debt. So----
Senator Merkley. Is that the Federal Reserve study you are
referring to?
Mr. Stone. That is the Federal Reserve study, correct.
Senator Merkley. Yes, 2003? OK.
Mr. Stone. So it is clear that consumers face enormous
challenges just understanding medical bills, who is liable for
what, dealing with insurance payments. Consumers get with a
single procedure bills from multiple entities, some of whom
they may not have even been aware they were being treated by--
the anesthesiologist, the ambulance driver----
Senator Merkley. The laboratory that is involved----
Mr. Stone.----the laboratory, all of that stuff, and it is
not clear when a bill is a bill.
One of the complicating factors is also that many health
care providers outsource not just collections, but their whole
accounts receivable function to agencies who manage the
billing. And so the timing of when an item gets charged off or
is treated as a collections item and then ultimately gets
reported to a consumer reporting agency can vary considerably
from provider to provider. There is not a single set of rules
out there that happen in the medical billing environment that
have evolved, unlike what has evolved in, say, the credit card
industry, where a charge-off happens at a particular period of
time.
So some collections items show up earlier and before even
some of the responsibilities on who owes what or a formal
invoice may have been received.
Senator Merkley. So, given all that, when a person has
worked their way through all that and settled the debt, should
it still be on their credit report?
Mr. Stone. So there are a couple of issues raised by that
and I think that those are questions that you will have to
answer in the process of developing your legislation. But one
of those is simply----
Senator Merkley. No, no, no. I am asking you for your
expertise. I have already developed the legislation.
Mr. Stone. So here are the things----
Senator Merkley. I already know my answer to it.
Mr. Stone. Here are the things that we are looking at, and
I have to tell you, we are looking at them now and I do not
have firm answers. But one question, obviously, is to what
extent medical items, or certain medical items--and many of
these are very small, as you know, $100, $75----
Senator Merkley. Seventy percent under $250.
Mr. Stone. Yes, tiny items. Are they predictive if they are
not paid? Many consumers find out about them only when they go
to apply for a loan and they learn that there is a collections
item. So the idea that the collections item for those consumers
was something that was willfully not paid or that could not be
paid is not something that you can infer. And so for those
people, one could argue that it would not be predictive of
anything regarding ability or willingness to pay, which is kind
of the way credit history is used and reflected in credit
scores.
A second issue is where in the system one wants to hold
accountable the filter for determining what is and what is not
predictive. We have the credit reporting agencies who collect
the data, and then we have score developers such as FICO and
VantageScore who translate the underlying data into something
that is predictive of creditworthiness. And so they have the
ability to leave out information that is unimportant. They have
the ability to distinguish between items that have been there
for a long time versus not, or between the large items and
small items, and those are things that a score developer could
determine. We actually have purchased a panel of anonymized
consumer data from one of the credit reporting agencies that
will have this medical data and from which we will be able to
make a determination about the predictiveness of this data.
Senator Merkley. Terrific. I am going to have to cut you
off there because I am way over my time. I do want to take note
that VantageScore does throw out most medical data, and my
understanding is they do not consider it to be predictive. But,
still, this data is in the scores and it is affecting millions
of Americans. And again, I am only arguing that when people
have settled these, gone through the complex process of
determining which insurance company should have paid what, they
settle it, but by that time, it has already been reported and
it is on their credit record for 7 years. Between the fact that
a lot of the industry does not consider it predictive and the
fact it does so much damage, it seems to me it ought to come
out and I look forward to the results of your study. Thank you.
Thank you, Mr. Chair.
Senator Brown. Thank you, Senator Merkley.
Before calling on Senator Akaka, I believe this probably
will be his last hearing, at least in the Banking Committee,
and I appreciate your work, especially the work you have done
for the underbanked and the unbanked, how that is a persistent
problem in our society, and we have looked to your leadership,
Senator Akaka, on that issue and also on financial education.
Thank you for all of your work in all of that. I yield to
Senator Akaka from Hawaii.
Senator Akaka. Thank you very much, Mr. Chairman. Chairman
Brown, it is so good to be here with you and the Committee. I
have enjoyed working with all of you here. Of course, we are
here to help the people of America.
First, let me just say thank you very much for holding this
hearing today and for all of your work on consumer protection
issues, Chairman Brown. I know you agree, when Americans make
wise economic decisions and are protected from bad actors, our
economy and Nation are stronger for it.
It is fitting that a hearing on the topic of consumer
protection will be my last as a Member of the Senate. Financial
literacy and consumer protection issues are very close to my
heart. So while my Senate career is coming to an end, I know
there are many of my colleagues who will continue to empower
consumers to make the best financial decisions possible. So
thank you very much to my colleagues here on the Committee,
also Chairman Johnson and Chairman Brown and Senator Reed,
Senator Merkley, Senator Hagan, and others who I know share my
strong interest in consumer protection issues.
I also appreciated the dedicated work of the Committee and
the staff and personal office staffs, as well, because we have
worked together very well to do so much to support the work
that we do, so thank you, again, as well.
And I want to thank our witnesses for your tireless work on
consumer protection.
Mr. Chairman, I ask that my full statement be added in the
record----
Senator Brown. Without objection.
Senator Akaka.----and I would like to ask just a couple of
questions.
Senator Akaka. We are glad to have you here, Mr. Stone. I
am so glad to see that the Consumer Financial Protection Bureau
is working out here. I look forward to your work.
I believe that it is important to have a complete picture
of an individual's financial record when calculating a
meaningful credit report. I fought to include a report on
remittance transfers in the Dodd-Frank provisions. Last year's
CFPB report on the remittance transfers mentioned research that
the CFPB planned to do to address the potential for using
remittance histories to enhance credit scores. So my question
to you is, can you please discuss any progress being made in
those research projects.
Mr. Stone. Yes, Senator. First, let me thank you for making
sure that that report requirement was inserted in Dodd-Frank.
It is an important issue of what kinds of information are going
to help provide a complete history that gives all consumers an
opportunity to get access to credit.
As you pointed out, we did provide an initial report last
year and that dealt with some of the strengths and weaknesses
that we would anticipate would be involved in using remittance
history. For context, lots of people who send remittances are
people who have thin files, so it is a great opportunity for a
new kind of information to enrich our understanding of their
ability to pay and financial wherewithal. A downside of
remittance information is that it is not an obligation and,
therefore, does not provide indications of whether an
obligation has been met.
I am happy to say that since we completed that report, we
received a sample of information from one of the largest
remittance providers, transaction history, all anonymized on a
very large sample of consumers. That information has been
matched with those consumers' credit histories so that we have
remittance history and we have how those consumers performed on
their credit obligations subsequent to that remittance history.
Right now, we are doing the analysis to determine how useful
the remittance transactions are in predicting the credit
performance and repayment history of those consumers. So we
expect that report to be finished in the second quarter of
calendar year 2013.
Senator Akaka. Well, thank you very much for that.
The CFPB report discusses the many ways that credit reports
affect the lives of Americans, from finding a job to finding a
home, two fundamental topics when we talk about moving our
economy forward. Yet, less than one in five consumers accesses
their credit report. Please tell me, what is the CFPB doing to
encourage people to access their credit reports?
Mr. Stone. Thank you, Senator, for asking that. It is
important to us that consumers access their credit reports, and
we have a number of mechanisms to do so. As you know, we have a
whole Consumer Education and Engagement Division. That office
posts blogs. We develop content that gets distributed through
all kinds of community partners. We also make sure people are
aware of research that shows what the benefits are of people
seeing their credit reports and knowing their credit reports
and knowing their credit scores. In fact, there was a very
recent article from the Federal Reserve Bank of Boston that
showed some of the potential benefits of consumers knowing
their scores when they apply for credit and the handicap of not
knowing their scores.
I want to call attention to our particular constituent
offices that were part of the formation of our Consumer
Education and Engagement Division. We do special outreach to
service members through our Office of Service Member Affairs
headed by Holly Petraeus. We have an Office of Students. Our
Office of Older Americans is headed by Skip Humphrey. These
offices have developed specialized channels for communicating
what in particular about credit reports and scores is important
for these particular groups to know, and we are trying to make
the message available to each of these groups at the most
teachable moments.
Senator Akaka. Well, thank you very much. May I then ask
you to please pass my aloha to Holly Petraeus. She did come out
to Hawaii, and particularly to talk to the military about
financial literacy, and she did a great job, and the staff that
came with her, also. So I am proud of what you folks are doing
to help the people of our country.
Mr. Stone. Thank you, Senator. I will be happy to pass on
your greetings to Mrs. Petraeus.
Senator Akaka. Thank you very much.
Thank you, Mr. Chairman.
Senator Brown. Aloha. Thank you, Senator Akaka.
Thank you very much for your testimony, Mr. Stone.
The Chair will call up Stuart Pratt and Chi Chi Wu, if the
two of them would join us.
[Pause.]
Senator Brown. I thank the two of you. Stuart Pratt is
President and CEO of the Consumer Data Industry Association
headquartered in Washington. He has advised U.S. Presidential
and gubernatorial task forces on the importance of the free
flow of information to the economy. He has testified often
before Congress. He serves as an advisor to the Department of
Commerce regarding E.U.-U.S. trade negotiations and has
counseled private and government entities overseas on
responsible uses of consumer data. He serves on the U.S.
Chamber of Commerce's Committee of 100 and on the Advisory
Council for the National Foundation for Credit Counseling. He
received his Bachelor's degree from Furman University and
conducted his graduate studies in business at the University of
Maryland. Welcome, Mr. Pratt.
Ms. Wu, Chi Chi Wu, has been a staff attorney at NCLC for
over a decade. Her specialties include fair credit reporting,
credit cards, refund anticipation loans, and medical debt,
which Senator Merkley asked about. Before joining NCLC, she
worked in the Consumer Protection Division at the Massachusetts
Attorney General's Office and the Asian Outreach Unit of
Greater Boston Legal Services. She is a graduate of Harvard Law
School and the Johns Hopkins University. She is coauthor of the
legal manuals Fair Credit Reporting and Collection Actions, and
a contributing author to Consumer Credit Regulation and Truth
in Lending. Welcome, Ms. Wu.
Mr. Pratt, would you begin. Thank you.
STATEMENT OF STUART K. PRATT, PRESIDENT AND CEO, CONSUMER DATA
INDUSTRY ASSOCIATION
Mr. Pratt. Chairman Brown and Ranking Member Corker, thank
you for the opportunity to be here before you today.
Let me just touch on a few highlights of the written
testimony that we have already submitted. To start off, I think
that we talked a little bit about credit reports and whether or
not consumers really understand them or not, but they really
are the strongest advocate for me as a consumer. When I walk
into the bank, the bank does not know me. Lenders do not know
me. Forty million of us move every year in this country. We
move to new cities. We need to engage in business. And the
credit report is the bridge that tells my story. It is about my
hard work. It is about how I pay my bills. It is about the good
decisions I make. It is about personal responsibility. So
credit reports at their very best are an incredible indicator
to others of everything about me that you want somebody else to
know about me.
In fact, USAID, the International Finance Corporation, Bank
of International Settlements, and the World Bank are all so
deeply involved--they are so supportive of credit reporting
that they are involved in spreading this good news around the
world. And, in fact, I serve on an International Task Force for
Credit Reporting Standards to try to advance credit reporting
in other parts of the world, as well.
The system is big. I think the CFPB's report laid it out
very well. Two-hundred-million consumers plus have a credit
report in this country. About 10,000 lenders and other data
furnishers are supplying data. There are about 1.3 billion
accounts in the credit reporting system and about three billion
updates every month going into that system, as well.
With all of that said, our members are confident of the
accuracy of the system that we have, and they should be. They
work on accuracy 7 days a week.
We provided the FTC with data free of charge so that they
could conduct their study of accuracy, and I think it is
imminent. They are going to release their report soon, and we
will see what they have to say.
We did not wait for the FTC, however, to measure the
question of accuracy, and, in fact, we wanted to answer the
question that consumers most often asked of us, and that is, is
there an inaccuracy on my credit report that is consequential,
one that is likely to affect the mortgage loan for which I am
making application? And I think there is some good news in all
of that.
We contracted with an outside group, the Political and
Economic Research Council. It was an arms'-length grant that we
gave to them. They controlled the data. They controlled the
results. They controlled the press releases. That was their
study, not ours. And, in fact, it was a very powerful study. It
was peer reviewed by professors at the Wharton School of
Business, University of Pennsylvania, Duke University, and UNC-
Chapel Hill.
So what does it mean to me as a consumer? Well, about less
than 1 percent of the time will a dispute and a correction of
data my credit bureau filed result in a 25-point change in my
credit score, and less than a half-percent of the time, or
about a half-percent of the time, I will see myself move from a
higher-priced pricing tier to a lower-priced pricing tier. So
99.5 percent of the time, I am not likely to see something that
my credit bureau filed that is really going to impair my
ability to engage in the marketplace and to lose out on the
offer that I really am seeking in the first place.
Reinvestigations, another big issue that we have talked a
little bit about already this morning. We also asked consumers
how they felt about reinvestigations, and most importantly, the
result of the reinvestigation. We did this in tandem with the
work that the PERC had done with their accuracy study and we
got a bit of good news there, as well. Ninety-five percent of
the consumers that disputed information on their credit reports
and then saw the results indicated that they were satisfied
with those results, 95 percent.
Automation really is not the problem. We have heard that
sometimes, but it really is not. We solved fundamental problems
for consumers with automation. I go all the way back to the
1990s when we depended on mail for processing disputes. Today,
it is a highly automated system. It is Web-based. It wires
together about 15,000 to 18,000 financial institutions. And
whereas law requires that we resolve a dispute in 30 days,
these automated systems allow us to resolve disputes in 14
days.
We had a little bit of a discussion of paperwork already
this morning, so I thought I would add a bit to CFPB's report.
CFPB and our own research indicate about 44--roughly 44 percent
of the time, the consumer sends a communication about a dispute
through the mail. They send us paper. However, 85 percent of
the time, it is just a standardized form or a single-page
letter. Ten percent of the time, it is an identity theft
report, and maybe two to 3 percent of the time is it something
more than that. That is really important, because I think the
perception has been consumers are sending big stacks of
validating data. Some of that is not getting to the lenders.
But we see consumers satisfied at 95 percent and we see a
system which is working today even though it is automated,
because, in fact, it turns things around faster, serves that
consumer who is in the middle of that lending transaction.
One of the biggest challenges for reinvestigations,
however, is credit repair. Forty-three percent of the mail we
receive comes from fraudulent credit repair activity, 43
percent. It clogs the system. It interferes with process.
Consumers, when they hire a credit repair, often do not know
what the credit repair agency is going to do. Credit repair
agencies take money from consumers in cases where, in fact,
they could exercise their rights free of charge. We are
grateful for the Credit Repair Organizations Act having been
enacted. We are grateful for FTC enforcement. But credit repair
is one of our greatest challenges.
I am happy to go forward. I see my time has expired,
however, Mr. Chairman, so I will leave it at that and I look
forward to the questions and answers. Thank you.
Senator Brown. Very helpful. Thank you, Mr. Pratt.
Ms. Wu, welcome.
STATEMENT OF CHI CHI WU, ATTORNEY, NATIONAL CONSUMER LAW CENTER
Ms. Wu. Mr. Chairman, Ranking Member Corker, Members of the
Subcommittee, thank you for inviting me here today. My name is
Chi Chi Wu. I am a staff attorney at National Consumer Law
Center.
Mr. Chairman, thank you for holding this hearing about the
American credit reporting system. Credit reports play a
critical role in the economic lives of Americans. They are the
gatekeeper for affordable credit, insurance, sometimes,
unfortunately, even a job. Yet despite their vital importance,
the system is full of preventable errors, and the dispute
mechanism mandated by the Fair Credit Reporting Act to fix
these errors has been turned into an automated travesty of
justice.
Consumer advocates have been complaining about these issues
for over a decade in numerous hearings, reports, and media
articles. These issues were discussed in a 2006 report by the
FTC, by the groundbreaking series this year in the Columbus
Dispatch that the Chairman mentioned, and in a report released
just last week by the CFPB.
Preventable errors include what are called mixed files,
where credit information relating to one consumer is placed in
the file of another. Mixed files happen because the credit
bureaus' matching criteria are too lax. In particular, they
match information based on seven out of nine digits of the
Social Security number if the consumers' names are similar.
Mixed files could be prevented by requiring the credit bureaus
to have an exact match of Social Security numbers, the one
piece of unique identifying information that most every
American has.
Debt collectors and debt buyers present their own special
types of errors created by the fact that they usually do not
get any of the supporting documentation to establish that the
consumer actually owes the debt, the correct amount, whether
there are any disputes, or even if the collector is dunning the
correct consumer. The report issued by CFPB indicates a
disproportionate number of errors involve debt collectors,
given that they only provide about 13 percent of the accounts
to the credit bureaus, but generate 40 percent of the disputes.
Now, the industry has attempted to rebut these issues by
citing the studies that they funded showing less than 1 percent
of reports contain serious errors. We have a number of concerns
about this study and it contrasts with studies by consumer
groups and polling surveys finding higher rates. But even if we
take this 1 percent error rate at face value, that figure
translates into two million Americans, given that the credit
bureaus have information about 200 million Americans in their
databases. That is not acceptable. Would we accept it if 1
percent of airplanes fell out of the sky?
As for the dispute process, we have documented the broken
nature of the system in our 2009 report, Automated Injustice,
which we thank the Chair for introducing into the record.
Credit bureaus translate disputes, sometimes painstakingly
written by desperate consumers, into two- or three-digit codes.
They use the same handful of codes over 80 percent of the time.
And the entire role of the foreign workers employed by their
offshore vendors to handle these disputes amounts to little
more than selecting these codes. They fail to send documents,
as has been mentioned, that have been submitted by the
consumers, such as canceled checks, payoff statements, even
court judgments, to the furnishers involved in the dispute.
Then the credit bureaus blithely accept or parrot whatever
the furnishers respond with, no matter how good the consumer's
evidence is to show they are right, even when the furnisher is
a debt buyer or debt collector with a known record of bad
behavior. The consumer is not only always presumed guilty, but
she cannot even get an innocent verdict if she provides proof
and the furnisher just says, ``Nah, she is guilty.''
For their part, furnishers also engage in nonsubstantive
investigations, mostly limited to ensuring data conformity
between the records maintained by the credit bureaus and their
own records. For instance, the FTC just brought a case in which
it alleged that Asset Acceptance, a debt buyer, required its
dispute handlers, 14 or 20 of them, to handle half-a-million
disputes a year--that is, to process one dispute every 3
minutes.
The end result of this broken system is that no one, either
at the credit bureau or the furnisher, conducts any sort of
meaningful inquiry into the consumer's dispute, such as
examining documents, contacting the consumers by phone or
email, or exercising any form of human discretion in resolving
a dispute.
Reform needs to happen now. It should have happened years
ago. We have high hopes for the CFPB, now that it has begun
formal supervision of the credit bureaus. But Congress can
help, too, by giving consumers the ability to seek injunctive
relief under the Fair Credit Reporting Act.
Turning to medical debt, this is an issue with enormous
impact on credit reports. We support the Medical Debt
Responsibility Act and thank Senator Merkley for introducing
it. It is probably the simplest and quickest fix out there to
improve the credit records of millions of Americans. As we have
heard, medical debt makes up over half of the items on credit
reports for debt collection, and it is often for services that
are involuntary, unplanned, and unpredictable. It could result
from a dispute between the insurer and provider or a mistake in
billing. When mistakes occur, delay happens and bills can be
sent to collection agencies in the meantime. Now, tell me, how
does the fact that a consumer got caught between an insurer and
a hospital in a billing dispute make him or her a bad credit
risk?
Thank you for the opportunity to testify and I look forward
to your questions.
Senator Brown. Thank you, Ms. Wu.
Before beginning questions, I turn to Senator Corker for a
couple of comments.
Senator Corker. Mr. Chairman, again, thank you for this
hearing. I am going to step into another meeting, and I know we
all have multiple things to do today, but I think this has been
very enlightening.
Mr. Pratt, I thought your testimony was, from the
standpoint of the credit folks, very, very good. And, Ms. Wu,
if I am ever in a situation, which I hope I am not, where I
need an attorney for that kind of thing, I am going to call
you. You are very good.
[Laughter.]
Senator Corker. So I hope that--you know, look, we all want
this to work for everybody, and obviously there are some issues
here that need to be resolved and I hope we can do that.
And I want to thank you again for calling this hearing and
for your leadership, and I will see you later today.
Senator Brown. Thank you, Senator Corker. Thank you. Thanks
very much.
And I thank both of you for testifying, and I endorse
Senator Corker's comments about the two of you and your
insightful testimony.
Mr. Pratt, let me start with you. Is it feasible for credit
bureaus to share documentation with furnishers? I understood
you said that, more often than not, it is a one-page document.
I understand the technology issues. But I understand, also,
that it seems pretty certain that the bureaus do not share that
information with furnishers when furnishers, it seems to me,
should be able to see it. Is it feasible for them to begin to
share all of that information each time?
Mr. Pratt. So, I think if you look at technology, the
answer is there is probably some technologies we could look at,
and, in fact, we are always in that dialogue. Is there a way to
improve the reinvestigation process? Is there some new
mechanism that we could put forward?
Just to give you an idea of one of the challenges, though,
when you do get, I guess, a thicker letter, and that is
consumers will often talk about two or three different accounts
on the same front page of the letter. One of our challenges is
we cannot send a Bank of America information about Citigroup or
information about another lender. So how do we parse through
the letter and make sure that we get the right information to
the right lender? So one of the legal issues we have--it is a
matter of law issue--is how to unpack complicated
communications so that data could be sent from one party to
another if, in fact, it is going to advance the ball beyond the
coding systems we have today.
Again, our measure is we think we are getting it right. In
other words, most of the letters come in and they say, ``That
is not my account.'' Or most of the letters come in and say,
``I never missed a 30-day late payment. Go talk to my lender.''
And, by the way, I will say one more thing, and that is
more consumers, I think, with a complicated dispute, are
choosing to dispute directly with their lender the issue that
they have, and this is something that was done----
Senator Brown. Even if the lender is not the furnisher?
Mr. Pratt. Well, the lender in this case would be the
furnisher.
Senator Brown. OK.
Mr. Pratt. I mean, right. So, yes. In the case where my
lender is the furnisher, I, actually, through the FACT Act, an
Act, of course, that you voted on, as well--the FACT Act
actually pushed forward the idea that sometimes I may need to
go talk directly to my lender and I should have that right
under the law, under the Fair Credit Reporting Act, and
sometimes I may go to the credit bureau. We see more consumers
with complicated issues going to the lender to resolve the
issue, and that is why I think you will continue to see that
evolution going forward. I think it was a good idea that was
put into the law in 2003 and it is one that consumers are
beginning to take up----
Senator Brown. But it seems, more often than not, the
furnisher and the lender are not the same institution.
Mr. Pratt. No, they are--if a consumer says--if a consumer
looks at his or her credit report and says, here is a credit
card issuer. I disagree. I never missed 30 days. Then,
obviously, assuming I do not think that that account is----
Senator Brown. That is if they have their credit report.
Mr. Pratt. Yes.
Senator Brown. But if they look at their credit score and
then they see--when they are in the middle of a transaction
with a financial institution, they look at their credit score--
--
Mr. Pratt. Right.
Senator Brown.----they question why it is that low----
Mr. Pratt. Right.
Senator Brown.----and they then come back to you, to the
credit bureau, and the credit bureau--I mean, I think that
consumers do not--I mean, this is a sort of a dense kind of a
black hole for consumers dealing with the credit bureau so
often, and if the credit bureau is not sharing the information
with the furnisher, there is sort of no good appeals process
for that----
Mr. Pratt. Well, you know, we want that process to work,
first of all. You know that. I know that. It may not be----
Senator Brown. Why would you not share--I understood the
one reason you would not share with furnishers, but that is not
the story every time.
Mr. Pratt. But the primary reason is because furnishers
themselves--it is a voluntary system. Historically, we have had
to be very careful about overburdening the system where a
furnisher says, you know what? I have just decided to stop
sharing my data. So that is one challenge. So we try to
automate and make sure that we deliver the right information to
the furnisher so the furnisher can process that information
effectively.
I would tell you today that if a consumer writes a single-
page letter and says, ``That is not my account,'' furnishing
the letter does not do anything to change how that lender is
then going to investigate the data. If the consumer says, ``I
never missed a 30-day late payment,'' whether it is a code that
says, ``Never missed payment,'' or whether it is a letter that
says, ``Never missed payment,'' it has the same effect and the
lender is going to process the dispute in precisely the same
way.
So I think the wheat and the chaff here is there is very
little communication coming over the transom to the credit
bureaus that is large, thick, complicated sets of data.
And, by the way, on the letter writing side, I will tell
you this, Senator Brown. One of the challenges we have is
credit repair is flooding the mail-based system. Forty-three
percent of what we are getting is coming from credit repair.
Credit repair is out there saying, we will dispute unverifiable
data, but what they mean is I will dispute the same information
over and over and over again until the lender stops reporting
it, even if it is accurate. And so 44 percent of our mail--and
if we keep pushing that mail or those disputes back out to that
lender, all we are doing is harming the system.
So one of the great challenges we have, it has been around
for a long time, the Credit Repair Organization Act was enacted
in 1996. The FTC has been enforcing the law. State Attorneys
General have been enforcing their State laws. But it is a
challenging issue for us.
Senator Brown. Thank you.
Let me shift for another round of questions to the Asset
Acceptance that you brought up, Ms. Wu. Why did credit
bureaus--and then certainly Mr. Pratt has a chance to respond
to it, too--why would credit bureaus keep accepting customers
that have a poor record of compliance? Talk through more of the
Asset Acceptance, what happened.
Ms. Wu. Well, that is a great question, Senator Brown, and
it is a very simple answer. It is, money talks. Asset
Acceptance--just a little background--Asset Acceptance is a
company we complained about in 2007 before the House. It is a
debt buyer, a particularly notorious debt buyer. They were
subsequently sued by one of the credit bureaus for supplying
inaccurate information to that credit bureau, getting that
credit bureau involved in a lawsuit----
Senator Brown. Five million accounts, is that number
correct?
Ms. Wu. Uh----
Senator Brown. They were sued for providing false
information for several million accounts, is that----
Ms. Wu. I do not remember the exact number, but it was a
class action involving a number of accounts. And then, just
this year, the Federal Trade Commission sued them for egregious
violations of the Fair Credit Reporting Act.
This is the type of furnisher that is constituting about 40
percent of the disputes, by the way. This is the kind of
furnisher that the industry says it does not want to burden
with the obligation of resolving the disputes. I think they are
required by law to deal with these disputes.
But, anyway, the reason that Asset Acceptance is still in
the system--and we think they still are because their SEC
filings so state--is because they are the customer. They pay
the credit bureaus both to enter their information into the
system and to pull reports. They are a subscriber. And it is
the creditors and the debt collectors that are the major
customers of the credit bureaus, not the consumer.
This is an industry unlike every other industry in the
United States, or almost every other industry. Usually, in an
industry, you have competition. A consumer has a choice. If
they do not like one cell phone carrier, they can go to
another. In this system, consumers do not have a choice. If you
are unhappy with how Experian handles your information, you
cannot say, ``I am not going to deal with Experian anymore. I
am only going to deal with TransUnion,'' because, you know
what? If you want a mortgage, you have to go with Experian. So
there are no traditional market forces to improve the services
to consumers.
On the other hand, creditors and debt buyers, like Asset
Acceptance, can choose between the credit bureaus, and they are
the ones who are paying the bulk of the revenues.
Senator Brown. Mr. Pratt, you can certainly answer that,
but answer this, too. Given the history of bad behavior among
some debt collectors, should there be a higher standard for
these furnishers and for credit bureaus that work with them?
Mr. Pratt. So, let me do two things. I will answer that
question, and it kind of ties back, of course, to some of Ms.
Wu's comments.
First of all, I think it is just fundamentally wrong, what
Ms. Wu is saying about our relationships with consumers.
National credit bureaus, and I think Mr. Stone described it, as
well, are seeking a relationship with consumers and tens of
millions of consumers have that relationship every year through
these products and services they make available----
Senator Brown. But you do acknowledge the relatively small
part of revenues for the----
Mr. Pratt. To the contrary. To the contrary. One of our
national credit reporting systems, their direct-to-consumer
relationships generate more revenues than their credit bureau.
To the contrary. It is an important relationship that is
developing and evolving. It is market-based. It is free market-
based. It is exactly what we should want in this country, and
it operates conterminously with the rights that I have under
the law, which I can certainly exercise free of charge.
Senator Brown. Your revenues--of the three major----
Mr. Pratt. One of our members has a revenue stream----
Senator Brown. One of the big three gets more money from
consumers than they do from lenders, furnishers, other
financial institutions?
Mr. Pratt. That is right. That is right.
Senator Brown. The other two----
Mr. Pratt. The world is changing.
Senator Brown. What is the ratio on the other two?
Mr. Pratt. I cannot tell you.
Senator Brown. You know a lot about the one. Do you not
know about the other two?
Mr. Pratt. Yes, I just do not have math in my head that I
can tell you exactly. It is obviously less than that.
Senator Brown. OK. Fair enough. Proceed.
Mr. Pratt. So I think it is just patently wrong to say that
we are not seeking a relationship with consumers. And it is
also patently wrong to say that we want to have a less than--
some sort of substandard system for processing
reinvestigations. All I can tell you is when we look at our
metrics, we have one of our companies that measures every time
a consumer goes through and talks to an operator, ``Would you
like to take a survey and tell us how we did? Please sign up
before you talk to the operator.'' You know, one out of five--
one to five, do we do a good job. The average is 4.5 for
consumers.
We are measuring and looking for ways to serve consumers
through what the law requires, and we are also looking for ways
to serve consumers in the marketplace that we have. Both are
important ways for us to reach consumers.
I would also say that there has been a lot of discussion of
consumers being confused about credit reporting, but I have it
in the testimony, the Consumer Federation of America, totally
independent from us, often one of our critics, has surveyed
consumers and said progress has been made. Consumers understand
credit reporting better today than ever before, and by many,
many multiples over earlier surveys. So we are making progress
with that. So I think it is probably wrong to say that we are
still in the same place that we might have been back in 2003 or
back in 1996.
Why do credit bureaus do business with--debt collectors are
certainly one community with whom we do business. That is true.
And I think that Mr. Stone said it just right. Because debt
collectors report negative information, their dispute rate will
be higher.
We, however, as credit bureaus, evaluate every new incoming
data furnisher. They go through probationary periods. Actually,
the CFA White Paper does a great job of outlining the process
by which we check and bring a new furnisher on board.
Examinations that the CFPB is conducting are looking at that
very question. How do we bring a new customer on board? And we
also have an ongoing audit process for every set of data that
is coming into the system to make sure that we quality control
for what is coming into the system before it is loaded into the
system.
So this is not the Wild West description that I think we
sometimes run into. It is a very deliberate, very careful
quality assurance process, which is why, by the way, I think
you see dispute rates that are running around--bank card
retail, a dispute rate of 0.17 percent. Even with collection
agencies, by the way, the dispute rate runs around 1 percent of
all data reported. So when you look at it in the macro level,
the dispute rates are incredibly good relative to the amount of
data that is reported. That is what is showing up in the
accuracy study that we sponsored in the first place.
Senator Brown. Do you want to specifically--and thank you
for that. Do you want to specifically respond to the Asset
Acceptance question?
Mr. Pratt. Yes. I cannot speak to Asset Acceptance
specifically other than, obviously, one of our national members
felt that there was a basis for them to sue the company for
what was being furnished in the first place.
Senator Brown. Great.
Senator Merkley.
Senator Merkley. Thank you, Mr. Chair.
First, I wanted to ask both of you about the use of credit
scores in employment. Are we setting up a vicious cycle where a
person's credit score may affect their ability to get
employment, which, in turn, obviously, affects their ability to
pay bills? Ms. Wu.
Ms. Wu. Thank you, Senator Merkley. Yes, we have taken the
position and strongly oppose the use of credit reports in
employment, except in very limited circumstance. We think it
harms American workers. It does create a vicious catch-22. If
you lose your job, you cannot pay your bill. Your credit report
is damaged. And now your credit report is being used against
you when you are getting a job. It just sets up the worker to
fail. It puts them in a horrible bind.
When you are talking about our most recent economic
recession, where we had almost 10 percent unemployment, we have
millions of consumers affected by this practice. We know that a
lot of employers use it. The statistic is 60 percent of
employers use credit reports in some form or another in jobs.
We also think it has a disparate impact on minorities. We
have evidence and statistics. Every study shows that, as a
group, certain minority groups have lower credit scores. If
credit scores are supposed to be an accurate translation of the
credit reports, that means this practice disproportionately
affects those communities.
So we have supported bills in the House before to restrict
this practice.
Senator Merkley. What is the employer's best argument for
using the credit score, and how much weight do you think that
carries?
Ms. Wu. Well, I think some employers make the argument that
the credit report is somehow a reflection of personal
responsibility, that it shows hard work, you know, good values.
But I submit that people with damage on their credit report
often are the victim of circumstances, of bad luck. They lose
their job. They cannot pay their bills. They get sick. I mean,
we just had this discussion about medical debt and how a lot of
the damage on credit reports is from medical debt.
So I do not think credit reports are a reflection of
personal responsibility. I think they are a reflection of
circumstances, bad luck, and sometimes hard times.
Senator Merkley. What about student loans? We have this
recognition that student loans now involve more debt across
America than credit cards. And, of course, when you come out of
college in a setting like this and you cannot get a job, your
student loans are due. Is that proving to be a challenge for
people trying to get work in that their student loans create
bad credit because they do not yet have a job to pay their
student loans, and then that makes it impossible to pay their
student loans?
Ms. Wu. Yes, student loans certainly show up on credit
reports and certainly have an impact on credit reports and
credit scores. And then what we have heard, at least in the
past, is that if you have deferments, it actually affects the
credit score in another way having to do with the ratio of
credit available to credit outstanding. So it definitely does
have an impact on credit reports.
Senator Merkley. Does this create kind of a generational
bias, in that if you are fortunate enough to have parents who
can cover your student loans, you then have a much enhanced
ability to get a job as compared to someone who did not have
parents who could pay your student loans while you are in that
process of looking for work?
Ms. Wu. I think credit reporting and credit scoring often
reinforces gaps in the economic circumstances, whether they are
generational, because of what has been happening in our economy
and how the younger generation is being impacted by high
unemployment; whether it is racial, by sort of baking into the
system centuries of discrimination and racism. You know, the
evidence we have with credit scoring is that the good scorers
tend to have their scores go up. The bad scorers, their scores
go down because they have to pay more for credit. They have to
pay more for insurance. Remember, credit scores are often used
in insurance. Everybody needs insurance if you are going to
drive a car, if you are going to own a home, and you are going
to pay a lot more if your credit score is low for insurance.
And so the burdens placed on a consumer economically
because of a bad score makes it financially harder for them to
dig out and reinforces that sort of vicious cycle.
Senator Merkley. Now, in insurance, you have a situation
where, if you do not pay your bill, you lose your insurance, so
there is no kind of credit outstanding, if you will, and no
credit issue. Why would a credit score be used in that setting?
Ms. Wu. From what we understand from the industry, they use
credit scores because they have found them to correlate with
loss ratios, in other words, when people file claims. Again,
industry claims that the reason why credit scores are
correlated with loss ratios is that consumers who are bad with
their credit reports are just bad drivers and have messy lives.
Again, we submit that the correlation has to do with economics.
People with low scores may have lower income, have more
difficult financial situations, and if they are in a fender
bender, they are more likely to file a claim. It is all about
the money.
Senator Merkley. Mr. Pratt, what do you think about this
issue of employment and the fact that we are baking into the
process the biases from a previous generation in terms of
parents' ability to cover debts, or particularly student loans,
and thereby kind of putting people on an unequal footing going
forward?
Mr. Pratt. So I think the news is better than that, so let
me share just a few thoughts with you. First of all, the
Society for Human Resources Management, which represents a lot
of the human resources folks in this country who do this sort
of thing for a living, has been polling their members
regularly, trying to learn more about, first of all, what is
going on in the marketplace today, and today, really, only 53
percent of employers who conduct a background check are using a
credit report for any job, and it is really important to know
there is a difference between saying 53 percent of employers
use it for one out of ten jobs versus 53 percent of employers
use it monolithically for all jobs. There is no employer that
is using it monolithically for all jobs that are out there.
Number two, the folks they surveyed said 80 percent of them
have hired somebody despite poor credit. This is because the
human resources folks are saying, we are looking for something
in particular, something that may deal with personal
responsibility, but we are usually doing this after we have
made a contingent offer. So at that point, I am going to talk
to you about your circumstances. At that point, I may be
interested in why you have some delinquent student loans. But
at that point, I may also say, ``I get it. I absolutely
understand it. If you do not have a job, you cannot pay your
loans. I am going to give you a job and you are going to be
able to pay your loans.'' And in this case, I do not think that
this delinquency that shows up on a student loan has anything
to do with how you are going to perform in the particular job
that I have available.
So, in fact, that is what we see. Eighty percent--and, by
the way, credit reports are used most often for positions with
financial responsibilities, for senior executive positions, and
employees who have access to highly confidential information.
So there is a certain cabined-in population. So it is a narrow
set of jobs.
By the way, our members--we have surveyed our members--
maybe 5 percent of the product they issue in the marketplace
includes a credit report from the background screening
perspective. That means 95 percent of the background screening
product in the marketplace does not include a credit report. It
is being used for a very discrete population.
So I think that also responds to the idea that, somehow,
you are right, some parents are able to pay student loans and
other parents are not, and some parents are able to pay their
kids' bills when they can and others are not. I think that it
is the way it is being used. It is not what is in the credit
report, but it is the way that it is being used that really is
the pivotal question. In this case, the answer is, it is being
used responsibly.
Finally, credit scores are not used. The credit report is
used, but our members do not sell credit scores for employment,
so you are not just seeing a number. You are seeing the report
and you are taking a deeper dive into the details, which is
exactly what human resources folks say they want to do. So I
think the news is better than that.
Senator Merkley. Thank you, Mr. Pratt.
Senator Brown. I do not think you meant to say no employer
uses it for every job?
Mr. Pratt. That is probably dangerous these days, is it
not? But I would say that, based on everything we have seen,
Mr. Chairman, it is used very selectively and it is not used in
some sort of just broad filtering process. It is used on a
contingent offer basis, most commonly.
Senator Brown. OK. And you talk persuasively about--and
using percentages--but as Ms. Wu points out, percentages of 200
million are a lot of people. Very low percentages of 200
million, I think it is--you were not inaccurate. I am not
accusing you of that, for sure. But when it is a few percent of
200 million, it is a lot of Americans affected by this, as, of
course, you know.
Thank you. I particularly appreciate Senator Merkley's
questions. I think this points to the fact that moderate-income
Americans and low-income Americans whose lives are often a
challenge when most of them have not had much of a raise in 10
years and then face these obstacles of maybe higher insurance
rates in some cases, more difficulty getting a job, more
difficulty getting an apartment, and more difficulty certainly
getting a lower interest rate than they might otherwise get,
sometimes a credit score that they have earned through their
behavior, other times credit scores that may not be entirely
accurate that are challengeable, but it is low-income and
moderate-income people that are probably least likely to know
that they can challenge these scores and get them fixed. I hope
that--I know that you, Mr. Pratt, are aware of that, and I hope
that we can see, without legislative action, some remedies in
some of this.
I ask both the minority and the majority that anybody who
wants to submit questions to the panelists, please do and get
them back to us by January 2, if you can do that. And if either
of the two of you or Mr. Stone wants to expand on anything you
have said or submit anything for the record, please get that to
us by January 2.
Thank you very much for being here, and the hearing is
adjourned.
[Whereupon, at 11:22 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA
Thank you, Chairman Brown. Thank you very much for holding this
hearing today and for all of your work on consumer protection issues. I
know you agree that, when Americans make wise economic decisions and
are protected from bad actors, our economy--and Nation--are stronger
for it.
It is fitting that a hearing on a topic of consumer protection will
be my last as a Member of the Senate. Financial literacy and consumer
protection issues are very close to my heart. This is a policy area of
the utmost importance to me. I am proud of the work we have
accomplished on this Committee through both legislation, such as the
Dodd-Frank and the Credit CARD Acts, and oversight, including numerous
hearings with officials from the CFPB.
Financial literacy is important for many reasons. Strong personal
finances make for strong families. Being financially literate makes it
easier for individuals to pay unexpected emergency expenses, further
their education, and save for retirement. It allows people to better
fulfill their dreams and deal with difficult times. It makes for
happier, healthier communities and truly helps people in so many areas
of their lives. That is why I have worked hard during my time in
Congress to educate, protect, and empower consumers.
I am pleased that we will hear from our panelists about the work
they have done examining credit reports from a consumer's perspective.
I also look forward to hearing from the witnesses about their ideas on
how to further protect consumers and what more we in Congress can do to
help people secure their financial futures. Working families need to
access mainstream financial institutions so that they are not prone to
make use of predatory and unscrupulous lenders. We need straightforward
disclosures so that consumers can make choices that best suit their
situations. Student debt should not hinder our young people from
getting the training they need to compete globally, and financial
concerns should not put additional strains on our military families.
While my Senate career is coming to an end, I know that there are
many of my colleagues who will continue to empower consumers to make
good financial decisions. Mahalo nui loa to my colleagues here on the
Committee including Chairman Johnson, Chairman Brown, Senator Reed,
Senator Merkley, Senator Hagan, and others.
I also appreciate the dedicated work of Committee and personal
office staffs. They do so much to support the work that we do, so
mahalo to you all as well.
Over the years my staff has provided excellent assistance in
helping consumers in Hawaii and across our country both by aiding
individuals on a case-by-case basis and by advancing commonsense laws
to improve the functioning of the financial marketplace. It is very
nice to know that four of my former staffers--Erika Moritsugu, Matthew
Pippin, Preethi Raghavan, and Elizabeth Songvilay--are continuing to
advance consumer protection and financial literacy in their roles at
the CFPB.
Panelists, thank you for your tireless work to protect consumer
interests. I look forward to hearing your testimony. Thank you.
______
PREPARED STATEMENT OF COREY STONE
Assistant Director for Deposits, Cash, Collections, and Reporting
Markets
Consumer Financial Protection Bureau
December 19, 2012
Chairman Brown, Ranking Member Corker, and Members of the
Subcommittee, thank you for the opportunity to testify today on the
consumer credit reporting industry.
Credit reporting plays a critical role in consumers' financial
lives. Credit reports on consumers' financial history and behavior can
determine their eligibility for credit cards, car loans, and home
mortgage loans--and they often affect how much consumers pay for their
loans. The industry is critical in our economy. It promotes access to
credit that consumers can afford to repay. Without credit reporting,
many consumers likely would not be able to get credit.
Credit reports are also often used in a number of noncredit
decisions about consumers. They can be used to determine whether a
consumer is offered a job, a car, homeowner's insurance, or rental
housing.
The CFPB is the first Federal Government agency that supervises
both consumer reporting companies and the largest banks and many of the
nonbanks that provide them with consumers' credit information. This
responsibility is a priority for the Bureau. Last year, the CFPB
published one report to Congress on credit scores and another report on
whether remittance information might help consumers develop positive
credit scores. Earlier this year we published a Consumer Advisory about
credit reports. In July, the CFPB adopted a rule to extend its
supervision authority to cover larger consumer reporting agencies. In
September, the CFPB released its examination procedures for these
companies, along with a study examining credit scores--the three-digit
numbers used to determine consumers' credit worthiness. In mid-October,
the CFPB began handling individual complaints about consumer reporting
companies. If a consumer files a complaint with a credit reporting
company and is dissatisfied with the resolution, the CFPB is available
to assist.
As many of us at the CFPB conduct outreach all over the country to
learn how consumers hurt by the financial crisis are recovering, we've
heard many express frustrations about their credit reports or credit
scores. And we've heard a considerable amount of confusion and
misunderstanding about credit reporting.
Just last week, the CFPB issued a new report based on information
provided by the big three consumer reporting companies--Equifax,
Experian, and TransUnion--and their industry association. The report
highlights the basic systems the credit reporting companies use to
collect, organize, and maintain consumer credit information. It is one
of the most comprehensive looks at the consumer reporting industry to
date. And it represents a significant step forward in understanding
this industry and making it more transparent for consumers.
Some of the key findings in our report are that:
More than half of the trade lines in the credit bureaus'
databases are supplied by the credit card industry. This means
that credit cards are given great weight in how consumers build
their credit profiles.
More than three quarters of the trade lines in the credit
bureaus' databases come from the top 100 furnishers of
information. These are largely the large bank and nonbank
lenders--and now the largest debt collectors and debt buyers--
who fall under the CFPB's supervision. This means for the first
time a Federal agency has the tools to examine and understand
how well all parts of the credit reporting system are working--
including both the sources of credit information and credit
bureaus themselves.
More than one-third of consumer disputes relate to
collection items. In fact, the information provided by the
collections industry is five times more likely to be disputed
than mortgage information.
A relatively small percentage of consumers_approximately 20
percent_look at their credit reports each year. This is a shame
because--while we do not know for sure how common inaccuracies
are--it is likely that many additional consumers could identify
and correct inaccuracies if they reviewed their credit report.
Most complaints are forwarded to the furnishers that
provided the original information. Credit reporting companies
on average refer 85 percent of complaints on to the furnishers
that provided the original information. But documentation that
consumers mail in to support their cases may not be getting
passed on to the data furnishers for them to properly
investigate and report back to the credit reporting company.
The CFPB's report should help to clarify the confusing world of
consumer reports. It should help to inform policymakers and consumers
about how this important industry works. If consumers know more about
how these companies consider credit use, consumers should be better
able to make decisions for themselves and use credit more wisely.
Thank you for inviting me to testify today. I will be happy to
answer any questions you may have about our report.
______
PREPARED STATEMENT OF STUART K. PRATT
President and CEO, Consumer Data Industry Association
December 19, 2012
Chairman Brown, Ranking Member Corker and Members of the
Subcommittee, thank you for this opportunity to appear before you. For
the record my name is Stuart Pratt, president and CEO of the Consumer
Data Industry Association (CDIA).
CDIA is an international trade association of more than 180
corporate members. Its mission is to enable consumers, media,
legislators and regulators to understand the benefits of the
responsible use of consumer data which creates opportunities for
consumers and the economy. CDIA members provide businesses with the
data and analytical tools necessary to manage risk. They help ensure
fair and safe transactions for consumers, facilitate competition and
expand consumers' access to a market which is innovative and focused on
their needs. Their products are used in more than nine billion
transactions each year.
We commend you for holding this hearing, and welcome the
opportunity to share our views.
My written comments will include important background on the
industry and then focus on the following specific Committee requests
listed below:
Current oversight of credit reporting agencies by the
Consumer Financial Protection Bureau
The dispute resolution process for consumers
Communication between furnishers and credit reporting
agencies
Specialty credit reporting agencies and their duties under
the Fair Credit Reporting Act
Differences in credit scores available to clients versus
consumers
Background Part 1--The importance of credit reporting to consumers and
our Nation's economy.
Consumer Financial Protection Bureau Director Richard Cordray
stated the following about credit reporting during a July 16, 2012
field hearing:
Credit reporting is an important element in promoting access to
credit that a consumer can afford to repay. Without credit
reporting, consumers would not be able to get credit except
from those who have already had direct experience with them,
for example from local merchants who know whether or not they
regularly pay their bills. This was the case 50 or a 100 years
ago with ``store credit,'' or when consumers really only had
the option of going to their local bank. But now, consumers can
instantly access credit because lenders everywhere can look to
credit scores to provide a uniform benchmark for assessing
risk. Conversely, credit reporting may also help reinforce
consumer incentives to avoid falling behind on payments, or not
paying back loans at all. After all, many consumers are aware
that they should make efforts to build solid credit.
In its 2011 publication of Credit Reporting Principles the World Bank
observed:
Credit reporting systems are very important in today's financial
system. Creditors consider information held by these systems a primary
factor when they evaluate the creditworthiness of data subjects and
monitor the credit circumstances of consumers. This information flow
enables credit markets to function more efficiently and at lower cost
than would otherwise be possible.
Congressional findings reinforce the positive contribution of
credit reporting to consumers and state that ``consumer reporting
agencies have assumed a vital role in assembling and evaluating
consumer credit and other information on consumers.''
Ultimately credit reports tell the story of our good choices and
hard work. They speak for us as consumers when we apply for loans and
lenders don't know who we are or how we've paid our bills in the past.
Credit reports replace human bias and assumptions with a foundation of
facts that tell our story and ensure that we are treated fairly. Our
members focus on consumers first, on ensuring fairness for them in the
marketplace and on the accuracy of the data in the products they
produce.
Background Part 2--An overview of the types of data used to build a
consumer's credit history.
Before we provide testimony on particular issues identified by the
Committee, we thought it would be helpful to discuss what is and isn't
in a ``credit report.'' The term ``credit report'' is not defined by
the Fair Credit Reporting Act (15 U.S.C. 1681 et. seq.) The FCRA
defines the term ``consumer report'' and the traditional credit reports
produced by nationwide consumer reporting agencies meets this
definition. Credit reports include:
Identifying Information--Name (first, last, middle),
current and previous addresses, social security number, date of
birth.
Credit History--History of managing various loans issued by
retailers, banks, finance companies, mortgage companies and
other types of lenders.
Public Records--Judgments, bankruptcies, tax liens.
Accounts Placed with a Collection Agency--these accounts
are reported by third-party debt collectors who attempt to
collect delinquent debts owed to a service provider or lender.
Inquiries--A record of all who have a permissible purpose
under law and have access a consumer's report.
Note that credit reports do not contain information on an
individual's medical condition, race, color, religion, or national
origin. It is important to note that our U.S. credit reporting systems
are full-file and thus they include both positive and negative payment
history on a consumer. Full-file credit reporting is inherently fairer
for consumers because it ensures that there is a clear record of not
just missed payments but all on-time payments.
Background Part 3--Consumers and Credit Reports
A consumer's credit history starts with the very first relationship
a consumer has with a lender. It may be when a parent adds a son or
daughter as an authorized signatory on a credit card or when a young
adult makes application for his or her very first loan. Ensuring that
consumers understand how lenders consider their management of credit is
critical and certain fundamental principles are consistently true over
time:
Pay your bills on time.
Don't run up your credit cards to their limits.
Never before in the history of our country has there been a greater
degree of transparency when it comes to the information available to
enable consumers to understand consumer credit reports and their rights
under the FCRA. In particular CDIA applauds its members for their
market solutions which make available to consumers unlimited access to
credit reports, credit scores, as well as providing additional
information about the credit, credit reporting industry. These market
solutions, for example, push alerts to consumer's smart phones when
data has changed on their report and also warn consumers when there's a
risk of identity theft.
Under the Fair Credit Reporting Act consumers also have a right to
an annual free credit file disclosure from each of the nationwide
consumer credit reporting agencies: Equifax, Experian and TransUnion.
We estimate that more than 15 million consumers view at least one of
their reports each year and an average of more than 30 million
disclosures are issued annually. Since December of 2004 hundreds of
millions of disclosure have been issued to consumers.
For some years consumer advocates have been measuring the knowledge
consumers have regarding their credit reports and how credit scores
used by lenders analyze data. In particular VantageScore and the
Consumer Federation of America have partnered on a project to reach
consumers and measure their knowledge. The trends identified through
this effort are very encouraging. Consider the following excerpts drawn
from the CFA News Release issued on May 14, 2012:
A large majority of consumers now know many of the most
important facts about credit scores, for example:
Mortgage lenders and credit card issuers use credit
scores (94 percent and 90 percent correct, respectively).
Many other service providers also use these scores--
landlords, home insurers, and cell phone companies (73 percent,
71 percent, and 66 percent correct, respectively).
Missed payments, personal bankruptcy, and high credit
card balances influence scores (94 percent, 90 percent, and 89
percent correct, respectively).
The three main credit bureaus--Experian, Equifax, and
TransUnion--collect the information on which credit scores are
frequently based (75 percent correct).
Consumers have more than one generic score (78 percent
correct).
Making all loan payments on time, keeping credit card
balances under 25 percent of credit limits, and not opening
several credit card accounts at the same time help raise a low
score or maintain a high one (97 percent, 85 percent, and 83
percent correct, respectively).
It is very important for consumers to check the accuracy
of their credit reports at the three main credit bureaus (82
percent correct).
Somewhat surprising was the fact that most consumers understand
new, and fairly complicated, consumer protections regarding
credit score disclosures. When asked when lenders who use
generic credit scores are required to inform borrowers of these
scores, large majorities correctly identified three key
conditions--after a consumer applies for a mortgage (80 percent
correct), whenever a consumer is turned down for a loan (79
percent correct), and on all consumer loans when a consumer
does not receive the best terms including the lowest interest
rate available (70 percent correct).
``Increases in consumer knowledge probably reflect in part the
increased public attention given to credit scores because of
the new protections,'' noted CFA's Brobeck. ``The improvements
may also be related to increased efforts of financial
educators, including our creditscorequiz.org, to inform
consumers about credit reports and scores,'' he added.
Our members are encouraged by the progress made and these data
argue against the perception reported by some journalists and advocates
that consumers are simply confused and unable to understand the credit
reporting system. It's our view that journalists and advocates would
serve consumers better by setting aside the rhetoric of confusion in
favor of encouraging consumers to act on their rights and to learn how
the credit reporting system is making their lives better.
Background Part 4--Credit Repair Scams
It is good news that consumers' knowledge of credit reports and how
scores analyze credit report data is improving. However it is critical
that consumers remain vigilant and do not fall prey to fraudulent
credit repair schemes. Fraudulent credit repair agencies have a
business model built around the premise of seeking to have accurate,
predictive data deleted from a consumer's credit report and taking
consumers' hard-earned money to do something that consumers can do for
themselves. The quote from an October 13, 2011 FTC press release
regarding a public investigation of a credit repair operator is
illustrative of the problem and challenge our members face:
The FTC alleges that the defendants made false statements to
credit bureaus disputing the accuracy of negative information
in consumers' credit reports. In letters to credit bureaus,
which XXX did not show to consumers, the firm typically
disputed all negative information in credit reports, regardless
of the information's accuracy. XXX continued to send these
deceptive dispute letters to credit bureaus, even after
receiving detailed billing histories verifying the accuracy of
the information, or signed contracts from creditors proving the
validity of the accounts.
The complaint alleges that XXX misrepresented to consumers that
Federal law allows the company to dispute accurate credit
report information, and that credit bureaus must remove
information from credit reports unless they can prove it is
accurate. In the company's words, credit bureaus must ``prove
it or remove it.'' XXX charged a retainer fee of up to $2,000
before providing any service, and falsely told consumers that
Texas law allows credit repair organizations that are
registered and bonded to charge an advance fee.
CDIA applauds the actions of the Federal Trade Commission and State
attorneys general to protect consumers through their enforcement of the
Credit Repair Organizations Act. These enforcement efforts must
continue. But the CFA survey of consumers speaks clearly to the need to
also continue to educate consumers. Consider the following finding:
Over half (51 percent) [of consumers] incorrectly believe that
credit repair companies are ``always'' or ``usually'' helpful
in correcting credit report errors and improving scores.
Experts agree that credit repair companies often overpromise,
charge high prices, and perform services that consumers could
do themselves.
Fraudulent credit repair activities remain a problem for consumers
and also for our members who serve consumers. Our members estimate that
as much as 43 percent of incoming mail is tied to credit repair schemes
that distract from processing valid disputes and which tie up data
furnisher resources leading some to give up and delete accurate,
predictive data.
Committee Request I--Current oversight of credit reporting agencies by
the Consumer Financial Protection Bureau
Our members have successfully operated in a highly regulated
context for decades. Recent changes in how the Federal Government
enforces various consumer protection laws, most notably the Fair Credit
Reporting Act (15 U.S.C. 1681 et. seq.), do not materially alter this
fact.
The FCRA was first enacted in 1970 (PL 91-508). It has since been
the subject of active oversight by many different Congresses. Following
is a partial listing of major and minor amendments to the law which
speaks to the fact that the FCRA is a contemporary law that has been
updated to recognize changes in the marketplace:
Consumer Credit Reporting Reform Act of 1996 (Public Law
104-208, the Omnibus Consolidated Appropriation Act for Fiscal
Year 1997, Title II, Subtitle D, Chapter 1)
Section 311 of the Intelligence Authorization for Fiscal
Year 1998 (Public Law 105-107)
The Consumer Reporting Employment Clarification Act of 1998
(Public Law 105-347)
Section 506 of the Gramm-Leach-Bliley Act (Public Law 106-
102)
Sections 358(g) and 505(c) of the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (USAPATRIOT Act) (Public Law
107-56)
The Fair and Accurate Credit Transactions Act of 2003 (FACT
Act) (Public Law 108-159)
Section 719 of the Financial Services Regulatory Relief Act
of 2006 (Public Law 109-351)
Section 743 (Div. D, Title VII) of the Consolidated
Appropriations Act of 2008 (Public Law 110-161)
The Credit and Debit Card Receipt Clarification Act of 2007
(Public Law 110-241)
Sections 205 and 302 of the Credit Card Accountability
Responsibility and Disclosure (CARD) Act of 2009 (Public Law
111-24)
The Consumer Financial Protection Act of 2010 (CFPA) (Title
X of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203)
The Red Flag Program Clarification Act of 2010 (Public Law
111-203).
Most important to understanding this statute is that it carefully
and clearly divides responsibilities for ensuring the accuracy of
information in credit reports and also how consumer disputes and
questions about their credit reports are resolved. As CFPB Director
Cordray stated during a July 26, 2012 field hearing:
Our credit reporting system involves several key participants.
First are the creditors and others that supply the information
about your financial behavior, which can include your credit
card issuers, your mortgage company, or companies that are
collecting debts they claim you owe, among others. Second are
those that collect and sell the information, which are the
credit reporting companies. Third are those that use the
information, which largely consist of financial institutions,
but can also include insurance companies, auto dealers, retail
stores, and even prospective employers. Fourth are consumers
themselves, who are the object of all this scrutiny and who are
immediately affected by it. All of these participants play
important roles in ensuring that the credit reporting system
operates effectively to help consumer credit markets work
better for us all.
At this same hearing Director Cordray also pointed out:
First, our oversight of the credit reporting companies will
help us make sure that the information provided to them is
itself reliable. Lenders and others who furnish information to
the credit reporting companies are legally required to have
policies in place about the accuracy and integrity of the
information they report--which includes identifying consumers
accurately, correctly recounting their actual payment history,
and keeping their information and recordkeeping in order.
Otherwise, their sloppy work becomes the true source of harm to
the consumer's overall creditworthiness. We want to deepen our
understanding of the recordkeeping and reporting practices by
lenders and we want to see what the credit reporting companies
can be doing to test and screen for the quality of information
they receive.
The FCRA has always been enforced by both State attorneys general
and also through private litigation. Until the enactment of the Dodd
Frank Act (PL 111-203) the Federal Trade Commission had the primary
Federal responsibility for enforcement of the provisions of the FCRA
which apply to our members. As a result of Dodd Frank, the Consumer
Financial Protection Bureau was created (See Title X) and this
enforcement responsibility was transferred to the CFPB. While the CFPB
now has primary oversight for our members' FCRA duties, the FTC and
State attorneys general may still bring enforcement actions. A
Memorandum of Understanding between the CFPB and FTC has been completed
and it outlines how the two agencies will cooperate on enforcement
actions.
Our members have sought a positive and collaborative relationship
with the CFPB. Free of charge, our nationwide credit reporting agencies
provided the CFPB with 600,000 depersonalized credit reports and
another 3,000,000 credit scores so that the Bureau could conduct a
study of the similarities of various credit scores in the marketplace.
One of our members voluntarily provided the CFPB with free,
depersonalized credit reports for a study of the usefulness of
remittance data in predicting creditworthiness of consumers who may
have ``thin'' credit reports or no credit report. Further, our members
conducted extensive, free research for the CFPB in support of their
effort to draft a white paper on the credit reporting eco-system.
Ultimately it is our hope that these efforts are in support of a CFPB
that continues to follow the important guiding comments of the Bureau's
Deputy Director, Raj Date when he stated:
First, we are committed to basing our judgments on research and
data analysis. We won't shoot from the hip. We won't reason
from ideology. We won't press a political agenda. Instead,
we're going to be fact-based, pragmatic, and deliberative.
It is essential that the CFPB remain an organization focused on the
facts and not driven by the headlines. The CFPB cannot be successful if
it seeks out inflammatory headlines that are a distraction for
consumers, or reacts to headlines that simply are not based in good
social science and scientific methods.
Committee Request II--The dispute resolution process for consumers.
Before we delve into the systems our members have designed to
assist consumers with disputes regarding information in their credit
reports, some context for the accuracy of credit reports is helpful.
In May of 2011 the PERC completed and released a CDIA-commissioned
study of the quality of data found in the databases of nationwide
consumer credit reporting agencies. This work was groundbreaking. The
research was truly an arms-length, let-the-chips-fall-where-they-may
project which was the only condition under which Dr. Turner would agree
to conduct the study. Our members had no reservations about this
requirement. Consumers wanted answers from a trusted source regarding
the accuracy of credit reports and we wanted to make sure we gave them
an answer, particularly since the General Accountability Office has
rejected all consumer advocate efforts to measure accuracy due to
serious flaws in their methodologies and lack of sound statistical
practices. The CFPB's recent white paper on the credit reporting eco-
system added to these GAO criticisms in its discussion of the failure
of a consumer group to develop a statistically representative, unbiased
study population.
PERC designed its study using a peer review process that included
reviews of methodology conducted by leading academics from the Wharton
School of Business at the University of Pennsylvania, the University of
North Carolina and Chapel Hill and Duke University. As an indication of
the openness of Dr. Turner to engage in the dialogue about accuracy,
when PERC published its results, it also made the raw data and research
findings available to the CFPB and the FTC so that these agencies could
replicate the findings and not merely depend on PERC's interpretation
of the data.
Dr. Turner and his team used two measures of what might be a
material error in a consumer's credit report. First they used
VantageScore to measure the point change between credit reports before
and after a dispute and reinvestigation process. In this instance they
found that only 0.93 percent of all credit reports examined had one or
more disputes which resulted in a credit score increase of 25 points.
However, Dr. Turner recognized that in a risk-based-pricing context
even a single point change could make a difference for a consumer who
is on the edge of qualifying for a better rate. Thus the PERC team also
measured material errors by considering how often a consumer moved from
a higher priced pricing tier to a lower one (an approach the CFPB has
used in a study of credit scores). Only one half of 1 percent (0.51
percent) of all credit reports examined by consumers had a credit score
change that resulted in the consumer likely receiving a lower-priced
product. This study puts to rest the debate about the accuracy of our
members' data.
As a further statement of our members' confidence in their systems
and the quality of their data, they not only provided a grant to fund
the PERC research, they also provided, free of charge, the data the
Federal Trade Commission needed to fulfill its mandate under the FACT
Act to study the accuracy of nationwide credit reporting systems.
Release of the FTC's full research findings is imminent.
CDIA applauds its members for facing the hard questions about data
quality and engaging in responsible, sound research. The results of our
members' decisions are impressive and expected.
As for the question of dispute resolution procedures, consumers'
rights are very clear under the FCRA. Below is an explanation of those
rights prepared by the Federal Trade Commission:
You have the right to know what is in your file. You may
request and obtain all the information about you in the files
of a consumer reporting agency (your ``file disclosure''). You
will be required to provide proper identification, which may
include your Social Security number. In many cases, the
disclosure will be free. You are entitled to a free file
disclosure if:
a person has taken adverse action against you because of
information in your credit report;
you are the victim of identity theft and place a fraud
alert in your file;
your file contains inaccurate information as a result of
fraud;
you are on public assistance;
you are unemployed but expect to apply for employment
within 60 days.
In addition, [since] September 2005 all consumers [have been]
entitled to one free disclosure every 12 months upon request
from each nationwide credit bureau and from nationwide
specialty consumer reporting agencies. See www.ftc.gov/credit
for additional information.
You have the right to dispute incomplete or inaccurate
information. If you identify information in your file that is
incomplete or inaccurate, and report it to the consumer
reporting agency, the agency must investigate unless your
dispute is frivolous. See www.ftc.gov/credit for an explanation
of dispute procedures.
Consumer reporting agencies must correct or delete inaccurate,
incomplete, or unverifiable information. Inaccurate, incomplete
or unverifiable information must be removed or corrected,
usually within 30 days. However, a consumer reporting agency
may continue to report information it has verified as accurate.
The staff and systems used by our members to handle consumer
requests for reinvestigations of data reported to them are first-class
and this is not merely an opinion. The PERC data quality study
discussed above measured consumer satisfaction with the reinvestigation
process and fully 95 percent of consumers were satisfied with the
results. These data are facts and not merely anecdotes and set aside
unfounded accusations by consumer advocates that our members' systems
fail to meet consumer expectations.
Further indication of our members' success in meeting consumers'
needs can be found in a 2008 report to Congress regarding complaints
submitted to the Federal Trade Commission. Note in the excerpt below
that consumers appeared to be complaining to the FTC concurrent with
the submission of a dispute directly to a consumer credit reporting
agency. More than 90 percent of the disputes were resolved when
submitted directly to the CRA, a percentage that is very consistent
with the findings of PERC:
The data indicate that a significant number of disputes were
resolved in the consumer's favor (i.e., the disputed
information was either removed from the file or modified as
requested). The data further indicate, however, that in most
cases, the favorable resolutions took place as part of the
normal dispute process, and not as a result of the referral
program. Specifically, the CRAs' reports show that over 90
percent of disputes that were resolved ``as requested by the
consumer'' were resolved before the CRA processed the referral
from the Commission.\1\
---------------------------------------------------------------------------
\1\ See page 5 of the FTC Report to Congress Submitted on December
29, 2003: http://www.ftc.gov/os/2008/12/P044807fcracmpt.pdf.
It is also important to note that in 2003 consumers were given the
right to dispute information furnished to a consumer reporting agency
directly with the furnisher of the data (e.g., lender, etc.). A March
2012 FTC report on a survey of consumers indicated that 46 percent
chose to dispute an item of information directly with the data
furnisher rather than with a consumer credit reporting agency. It is
our view that consumers will continue to grow in their understanding of
this right and will more often dispute with the data furnisher.
The 95 percent satisfaction rate and the FTC's analysis of
complaints received are strong, empirical evidence of our members'
commitment to getting it right for all consumers.
Committee Request III--Communication between Furnishers and Credit
Reporting Agencies
New data furnisher--All of our members have specialized staff,
policies and procedural systems in place to evaluate each new data
furnisher. Common practices include reviews of licensing, references,
and site visits. All apply robust tests to sample data sets and all
work with the furnisher to conform data reporting to the Metro 2 data
standard. Once a furnisher is approved, there may be ongoing monitoring
of this data reporting stream during a probationary period of time.
The CFPB's newly released report, ``Key Dimensions and Processes in
the U.S. Credit Reporting System: A review of how the Nation's largest
credit bureaus manage consumer data'', provides additional details on
our members' efforts at Section 4.1 on pages 18-19.
Ongoing furnishing--Our members employ a variety of practices; some
of these are listed below:
Producing reports for data furnishers which outline data
reporting problems, including errors in loading data and data
which is not loaded. This reporting process ensures data
furnishers are receiving feedback regarding the quality of
their data furnishing practices.
Cross-referencing data in certain fields to look for
logical inconsistencies are often used as a data quality check.
Historical data reporting trends, at the database level or
data furnisher level, are used as baseline metrics upon which
to evaluate incoming data.
Manual reviews of data can occur when anomalous data
reporting trends are identified.
Reviewing incoming data for consistency with the Metro 2
data standard.
Beyond the extensive, individual corporate strategies for ensuring
data quality, our members have undertaken industry-level strategies as
well. Central to these efforts has been the development of a data
reporting standard for all 10,000 data sources which contribute to
their databases. The latest iteration of this standard is titled
Metro2. Standardizing how data is reported to the consumer is a key
strategy for improving data quality. Consumer advocates appear to
agree. The National Consumer Law Center, writing on behalf of a range
of consumer groups, appears to agree with this point when it stated in
its letter to the Federal Reserve Board:\2\
---------------------------------------------------------------------------
\2\ Comments of the National Consumer Law Center, ANPR: Furnisher
Accuracy Guidelines and Procedures Pursuant to Section 312 of the Fair
and Accurate Credit Transactions Act, Pp. 16.
However, the failure to report electronically or to use Metro2
---------------------------------------------------------------------------
creates even more inaccuracies.
CDIA provides free access to a ``Credit Reporting Resource Guide''
which is the comprehensive overview of the Metro2 Format. This guide is
designed for all types of data furnishers, but it also provides
specific guidance for certain types of furnishers to encourage proper
use of the format. Target audiences include collection agencies,
agencies which purchase distressed debt, all parties which report data
on student loans, child support enforcement agencies and utility
companies. CDIA and its Metro2 Task Force have administered telephonic
and in-person workshops for thousands of data furnishers representing
the majority of all data furnished to their systems. These programs
include a range of specialized topics including, for example:
Reporting Requirements for Third Party Collection Agencies
and Debt Purchasers.
Reporting Requirements Specific to Legislation & Accounts
Included in Bankruptcy.
The CFPB report also discusses oversight of ongoing data furnishing
at Section 4.2, page 19 and an outline of the Metro 2 Data Format
(Section 3.1.2, page 15 and following). Our members' efforts to audit
incoming data and to work with both new and current data furnishers are
well-documented. However, the Congress recognized that data furnishers
have to have duties to ensure that accuracy of what they report which
is why, in 1996, the FCRA was amended to create an accuracy duty for
data furnishers and again in 2003, the Congress enacted new FCRA
requirements on data furnishers via the issuance of regulations
regarding the ``accuracy and integrity'' of information furnished to
consumer reporting agencies.
Committee Issue IV--Nationwide Specialty Consumer Reporting Agencies
Some consumer reporting agencies regulated under the FCRA are
further defined a ``nationwide specialty consumer reporting agency.''
This term is defined as follows:
603. Definitions; rules of construction [15 U.S.C. 1681a]
(x) The term ``nationwide specialty consumer reporting agency''
means a consumer reporting agency that compiles and maintains
files on consumers on a nationwide basis relating to----
(1) medical records or payments;
(2) residential or tenant history;
(3) check writing history;
(4) employment history; or
(5) insurance claims.
NSCRAs have to provide a free annual disclosure. Below is the
section of law which establishes this duty:
612. Charges for certain disclosures [15 U.S.C. 1681j]
(C) Nationwide Specialty Consumer Reporting Agency
(i) In general. The Bureau shall prescribe regulations applicable
to each consumer reporting agency described in section 603(w)
to require the establishment of a streamlined process for
consumers to request consumer reports under subparagraph (A),
which shall include, at a minimum, the establishment by each
such agency of a toll-free telephone number for such requests.
(ii) Considerations. In prescribing regulations under clause (i),
the Bureau shall consider----
(I) the significant demands that may be placed on consumer
reporting agencies in providing such consumer reports;
(II) appropriate means to ensure that consumer reporting agencies
can satisfactorily meet those demands, including the efficacy
of a system of staggering the availability to consumers of such
consumer reports; and
(III) the ease by which consumers should be able to contact
consumer reporting agencies with respect to access to such
consumer reports.
(iii) Date of issuance. The Bureau shall issue the regulations
required by this subparagraph in final form not later than 6
months after the date of enactment of the Fair and Accurate
Credit Transactions Act of 2003.
(iv) Consideration of ability to comply. The regulations of the
Bureau under this subparagraph shall establish an effective
date by which each nationwide specialty consumer reporting
agency (as defined in section 603(w)) shall be required to
comply with subsection (a), which effective date----
(I) shall be established after consideration of the ability of
each nationwide specialty consumer reporting agency to comply
with subsection (a); and
(II) shall be not later than 6 months after the date on which such
regulations are issued in final form (or such additional period
not to exceed 3 months, as the Bureau determines appropriate).
Committee Issue V--Differences in Credit Scores Available to Clients
versus Consumers
In September of 2012 the CFPB issues a reported entitled ``Analysis
of Differences between Consumer- and Creditor-purchased Credit
Scores.'' The findings of this report were very favorable to consumers
and set aside any concerns regarding which score a consumer chooses to
purchase. Four out of five consumers get exactly the same result
regardless of the score they choose and where this isn't the case it is
a result of how lenders set their prices in the market place. No one
credit score will every match up with all lender pricing strategies or
with their internal underwriting systems which include customized
credit scores designed uniquely for them. From a statistical/scientific
perspective the CFPB reports that all scores they studied were highly
correlated (.9 out of 1). In a competitive credit scoring marketplace
correlations could not likely be better, and this is good news for
consumers, as well.
Because, as the CFPB itself reports, there is no one score in the
marketplace (some commonly used score brands have as many as 49
different versions operating in the current marketplace) and lenders
make different offers to the same consumer, we agree with the CFPB that
the lesson learned from this study is that it is essential that
consumers shop around for a deal. Consumers should never take the first
offer on the table. Consumers should take advantage of the availability
of credit scores and set aside unfounded concerns about the variety of
high-quality credit scores available in today's competitive
marketplace.
CDIA issued a release in support of the CFPB's report and we have
included it below. It captures our industry's reaction to the study.
______
WASHINGTON, Sept. 25, 2012 /PRNewswire-USNewswire/--``We
applaud the Consumer Financial Protection Bureau's credit score
report that was released today. We think it puts an end to the
debate over the value of educational scores versus those scores
lenders use,'' said Stuart K. Pratt , president and CEO of the
Consumer Data Industry Association.
The CFPB study concluded that ``correlations across the results
of the scoring models were high.'' As a result, it determined
``that for a majority of consumers the scores produced by
different scoring models provided similar information about the
relative creditworthiness of the consumers. The study found
that different scoring models would place consumers in the same
credit-quality category 73-80 percent of the time.''
``The study sheds new light on why consumers can trust the
credit score disclosures they receive and the products in the
commercial marketplace that help consumers build a deeper
understanding of their credit scores and how they affect their
financial decisions. Consumers want to be proactive in learning
about their scores. Unfortunately, too many mixed messages have
made them hesitant to access the data currently available that
will help them better understand the scoring process. This
study is good news for consumers who can now be confident that
the disclosures and services they are getting today are helping
to empower them to receive better prices tomorrow in the credit
market,'' stated Pratt.
The study was built on the foundation of two key facts made
clear in the Bureau's 2011 report and reiterated again in this
study:
``Given this complexity it is unlikely that a consumer
will often be able to know the exact score that a particular
lender will use to evaluate them.''[1]
``Lenders use credit scores produced by many different
scoring models.''[2]
``The CFPB is right,'' said Pratt, ``no one score is used by
all lenders. However, the credit score is a valuable
educational tool and can enable consumers to better understand
their creditworthiness relative to other consumers.'' As the
CFPB's report notes, the many credit score options in the
marketplace today will help consumers answer these questions.
CDIA recommends that when consumers obtain their credit scores
they should ask these important questions:
1. What credit scoring model was used?
2. What's the scale?
3. What does the score I received mean in terms of lending risk?
4. What are the key factors affecting my credit score?
5. How might my future financial decisions affect my credit score?
CDIA's members are global leaders in the development of credit
score technology. While the CFPB was not charged by Congress
with studying every effective and reliable credit score in the
marketplace, this report shows that all such scores designed
using the same common principles will help educate consumers
with equal effectiveness.
In support of the CFPB's study, the CDIA will fund a new series
of public service announcements focused on encouraging
consumers to read the CFPB's report, obtain their credit scores
and also, in support of the Consumer Federation of America's
latest credit score poll, avail themselves of resources that
are available to better understand what does and doesn't affect
a credit score.
------------------------
[1] July 19, 2011 CFPB Report, ``The impact of differences
between consumer- and creditor-purchased credit scores,'' Pg.
18.
[2] July 19, 2011 CFPB Report, ``The impact of differences
between consumer- and creditor-purchased credit scores,'' Pg.
1.
SOURCE: Consumer Data Industry Association
______
Conclusion
I am grateful of this opportunity to testify and for your interest
in our members. They are a vital and successful part of our U.S.
economy. I am happy to answer any questions.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM COREY
STONE
Q.1. One theme in credit reporting issues has been that, even
if consumers are vigilant and try to check their credit reports
(or purchase credit scores), they can still miss substantive
credit issues that arise when a consumer goes to use a line of
credit.
Consumers may not be able to understand the information
contained in their credit reports, and, as the CFPB has
reported, consumers who purchase their credit scores see a
materially different score than a creditor would see 19-24
percent of the time.
Is this lack of clear information consistent with the
spirit of the FACT Act?
A.1. The FACT Act has provisions to make the information in
credit reports and the scores derived from them more accessible
to consumers. The FACT Act entitles consumers to obtain a free
credit report annually from each of the nationwide consumer
reporting agencies and from nationwide specialty consumer
reporting agencies, as well as additional free reports from
nationwide consumer reporting agencies in connection with
initial fraud alerts and extended alerts. Additionally, the
FACT Act gives consumers the right to purchase a credit score
at a reasonable fee and requires mortgage lenders who use
credit scores in connection with consumer mortgage applications
to provide the scores to the consumers. Subsequent amendments
to the FCRA in Dodd-Frank further expanded consumer access to
credit scores by requiring lenders to disclose credit scores
with adverse action and risked based pricing disclosures.
In October 2012, the CFPB published a study, ``Analysis of
Differences between Consumer- and Creditor-Purchased Credit
Scores,'' comparing credit scores obtained by consumers with
those used by lenders. For the study, the CFPB analyzed 200,000
credit files from each of the three major nationwide consumer
reporting agencies.
While the CFPB found that the educational scores sold by
the credit bureaus generally correlate highly with the score
most widely used by creditors, the correlations are not
perfect, so as you point out, a substantial minority of
consumers could find themselves with educational scores that
would not be reflective of the score a lender would be looking
at (most likely a FICO score).
Given this variation in outcome, the CFPB concluded in the
report that ``firms that sell scores to consumers should make
consumers aware that the scores consumers could purchase could
vary, sometimes substantially, from the scores used by
creditors.''
Q.2. How can we improve access and information for consumers
given the discrepancies?
A.2. Improvements can be made in several areas.
In the CFPB's recent study on credit reporting, the CFPB
found that only about one in five people with a credit history
(44 million consumers) check their free credit report from the
nationwide consumer reporting agencies each year or obtain
reports through paid credit monitoring services or notices of
adverse action or risk-based pricing decisions. Regardless of
the credit scoring model used by a lender, a consumer can
benefit by reviewing the underlying information in his or her
credit report. Consumers who identify and successfully dispute
incorrect derogatory information in their credit files (e.g.,
an account reported as delinquent that was not in fact
delinquent, an incorrect collection) will likely improve their
standing with creditors regardless of the credit scoring model
used. The CFPB encourages consumers to exercise their legal
right to review their credit files.
Improvements can also be made in the disclosure of
information to consumers who purchase credit scores. The CFPB
noted in its October 2012 report that providers of educational
credit scores should ensure that the potential for score
differences is clear to consumers. As we noted in the report:
. . . for a substantial minority of consumers, the scores that
consumers purchase from the nationwide CRAs depict consumers'
creditworthiness differently from the scores sold to creditors.
It is likely that, unaided, many consumers will not understand
this fact or even understand that the score they have obtained
is an educational score and not the score that a lender is
likely to rely upon. Consumers obtaining educational scores may
be confused about the usefulness of the score being sold if
sellers or scores do not make it clear to consumers before the
consumer purchases the educational score that it is not the
score the lender is likely to use.
Q.3. Does the variability in credit reports make it more
difficult for consumers to monitor and correct their
information?
A.3. The CFPB study on credit scores found that for most
consumers, the scores produced by different scoring models
provide similar information about the relative creditworthiness
of the consumers. For 19 to 24 percent of consumers, variations
in scoring models could lead to consumers having an inaccurate
perception of how lenders see their creditworthiness. In the
cases where educational scores were higher than a score used by
lenders, consumers may overestimate their creditworthiness, and
might be lulled into a false sense of confidence. In cases
where consumers have an educational score that is lower than
what a lender might see, consumers could be motivated to
improve the information in their credit file, both by changing
behavior and correcting errors.
Q.4. Is there any evidence that a person's credit history has
any connection with their job performance?
A.4. We are not aware of evidence on this topic.
Q.5. Would it be practicable or advisable for each credit
inquiry listed on a credit report--whether a hard or soft
inquiry--to include the inquiring party's contact information,
the nature of their business, and the purpose of their inquiry?
A.5. File disclosures to consumers currently provide the
contact information for hard inquiries (inquiries that would
impact a consumer's credit score). The contact information for
soft inquiries (e.g., account reviews, pre-screening inquiries)
is not provided. Since soft inquiries do not impact a
consumer's credit rating, it is not clear that adding contact
information for soft inquiries would assist consumers in
improving their credit standing.
Q.6. Do you agree that FACTA inadvertently repealed the
existing right of consumers and State officials to sue for any
violations of the adverse-action provisions of the FCRA?
A.6. FACTA amended section 615 of the FCRA so that sections 616
and 617, which create civil liability for certain violations of
the FCRA, do not apply to failures to comply with section 615.
Q.7. Would you support or oppose restoring the original intent
of the FCRA by restoring this private enforcement right?
A.7. As an independent regulatory bureau, the CFPB is focused
on carrying out, implementing, and enforcing the laws that
Congress and the President enact. If there is a specific
legislative proposal we are asked to review for purposes of
providing technical advice on its likely consequences, we would
be happy to do so.
------
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM STUART K.
PRATT
Q.1. Is there any evidence that a person's credit history has
any connection with their job performance?
A.1. A 2008 study by Edward Oppler, et al., showed a
correlation between using a credit report for employment
purposes and what Oppler described as ``counterproductive work
behavior,'' defined as theft and related behaviors. In short,
Oppler concluded that employees with financial history concerns
were significantly more likely to engage in counterproductive
work behavior than those without financial concerns. In fact, a
job applicant with a troubled financial history was almost
twice as likely to engage in theft as an applicant who lacked
any financial history issues.
Additionally, an Eastern Kentucky University study
conducted by Jerry Palmer and Laura Koppes stated that there
are reasons why a credit report could be useful as part of an
employment check, especially when considering potential losses
due to theft or concerns about negligent hiring liability.
Palmer has noted, ``These all seem like good reasons to include
a credit check when considering a candidate for employment.''
The importance of managing risks via the use of a credit
report becomes evident in the context of data released by the
Association of Certified Fraud Examiners. It notes that
employee thefts account for nearly $1 trillion annually. The
average theft totals more than $175,000, but that number
increases to $200,000 for organizations with less than 100
employees. The top two red-flag warnings present in these
crimes were instances where the fraudster was living beyond his
or her financial means or experiencing financial difficulties.
That's important because employee fraud and theft can very well
determine whether a small business survives or not.
As I discussed during the question and answer period it is
important to remember that employers' use of credit reports is
responsible. A survey of human resources professionals
conducted by the Society for Human Resource Management (SHRM)
found the following is true with regard to use:
L80 percent of those surveyed had hired someone
despite a poor credit history.
L87 percent use a credit report for positions with
financial responsibilities.
L42 percent use a credit report for senior executive
positions.
L34 percent do so for positions with access to
highly confidential employee information.
In a survey of our own members we found that employers
ordered credit reports as part of only an average of 10 percent
of all background screening products.
In summary, credit reports are used responsibly based on
SHRM data. They are used discretely based on CDIA data. They
are useful when you review the academic literature. Finally the
fact that the FCRA permits the use of a credit report does not
absolve an employer from its duty to comply with Title VII of
the Civil Rights Act and to consider guidance issued by the
EEOC regarding this Title. Employers are also subject to
enforcement and investigative actions by the EEOC.
Q.2. Would it be practicable or advisable for each credit
inquiry listed on a credit report--whether a hard or soft
inquiry--to include the inquiring party's contact information,
the nature of their business, and the purpose of their inquiry?
A.2. No. CDIA believes that Congress has already struck the
right balance regarding the amount of information that should
be disclosed to consumers when an inquiry is included in their
credit file disclosures.
The law states that ``the name of the person or, if
applicable, the trade name (written in full) under which such
person conducts business'' must be disclosed and then, upon
request, the consumer reporting agency must provide the address
and telephone number of the person. By layering the amount of
information a consumer sees, it is far more likely that
consumers will take the time to review inquiries and to then to
seek additional information regarding only those for which they
have questions.
The theory that more information being immediately
available is better is simply not true. It is very likely that
when presented with a large volume of information a consumer
may find the task of reviewing inquiries too great and simply
skip this section of the credit file disclosure. This would be
a bad policy result.
In terms of expanding the data made available to consumers
regarding an inquiry to include ``the nature of their business,
and the purpose of their inquiry'' we believe these data are
best provided by the company that made the inquiry. This is why
Congress requires consumer reporting agencies to provide
contact information upon request in the first place. CDIA
believes that FCRA Section 609(a)(3)(B) strikes the right
balance and the result is a success for consumers in terms of
transparency and effective, meaningful disclosure.
Q.3. Do you agree that FACTA inadvertently repealed the
existing right of consumers and State officials to sue for any
violations of the adverse-action provisions of the FCRA?
A.3. CDIA believes that Congress itself is in the best position
to speak to its intent when it repealed the right described in
the question.
Q.4. Would you support or oppose restoring the original intent
of the FCRA by restoring this private enforcement right?
A.4. At this time the CDIA would oppose opening up the FCRA to
any amendment. The Consumer Financial Protection Bureau is
midstream in the exercise of its considerable powers with
regard to the FCRA and our members. We should not expose the
FCRA to open debate which would insert unhelpful and
unnecessary legislative uncertainty.
------
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM CHI CHI WU
Q.1. Is there any evidence that a person's credit history has
any connection with their job performance?
A.1. The overwhelming weight of evidence is that people with
impaired credit histories are not more likely to be bad
employees or to steal from their employers. The earliest study
on this issue, conducted by Professors Jerry Palmer and Laura
Koppes of Eastern Kentucky University, concluded there is no
correlation between credit history and an employee's job
performance.\1\
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\1\ Jerry K. Palmer and Laura L. Koppes, Further Investigation of
Credit History as a Predictor of Employee Turnover. Presentation to the
American Psychological Society, 2003. See also Press Release, Society
for Industrial and Organizational Psychology, Credit History Not a Good
Predictor of Job Performance or Turnover, January 16, 2004, available
at http://www.newswise.com/articles/credit-history-not-a-goodpredictor-
of-job-performance-or-turnover (summarizing study by Drs. Palmer and
Koppes).
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A more recent study from 2011 also failed to find a link
between low credit scores and theft or deviant behavior at
work.\2\ Indeed, the study found a correlation between low
credit scores and an agreeable personality.
---------------------------------------------------------------------------
\2\ Jeremy B. Bernerth et al, An Empirical Investigation of
Dispositional Antecedents and Performance-Related Outcomes of Credit
Scores, Journal of Applied Psychology, Oct. 24, 2011. See also Ann
Carrns, Bucks Blog: No Link Seen Between Low Credit Scores and Bad Job
Behavior, New York Times, November 8, 2011, available at http://
bucks.blogs.nytimes.com/2011/11/08/no-link-seen-between-low-credit-
scores-and-bad-job-behavior/ (summarizing study by Dr. Bernerth).
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A representative of TransUnion, one of the three major
nationwide credit reporting agencies, has admitted that: ``At
this point we don't have any research to show any statistical
correlation between what's in somebody's credit report and
their job performance or their likelihood to commit fraud.''\3\
Richard Tonowski, the Chief Psychologist for the Equal
Employment Opportunity Commission, agreed. In 2010, he
testified that there is ``very little evidence that credit
history is indicative of who can do the job better'' and it is
``hard to establish a predictive relationship between credit
and crime.''\4\
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\3\ Andrew Martin, As a Hiring Filter, Credit Checks Draw
Questions, New York Times, April 9, 2010, available at http://
www.nytimes.com/2010/04/10/business/10credit.html.
\4\ Statement of Richard Tonowski, EEOC Chief Psychologist, EEOC
Meeting on Employer Use of Credit History as a Screening Tool, October
20, 2010.
---------------------------------------------------------------------------
Promoters of the use of credit histories in employment have
tried to link credit history to job performance by citing an
Association of Certified Fraud Examiners report noting that two
warning signs exhibited by some fraudsters were living beyond
their financial means or experiencing financial difficulties.
However, while some thieves may have had financial
difficulties, it is a far cry to say that any worker with
financial difficulties has a propensity to be a thief. This
conclusion would imply that the 25 percent of American workers
who have impaired credit are likely thieves.\5\ Note that the
same study found that men are responsible for twice as much in
fraud losses than women; that fraud from workers over 50
resulted in losses twice as high as fraud by younger workers;
and another significant warning sign for fraud is divorce. Yet
no one is suggesting screening out men, older workers, or
divorced workers because they are supposedly prone to
committing theft.
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\5\ Press Release, FICO, Growing Number of Consumers Nearing the
Perfect FICO Score, Apr. 30, 2012 (chart showing that number of
consumers with FICO scores under 600 was 24.7 percent in 2011).
---------------------------------------------------------------------------
Finally, there are a number of other problems with the
issue of credit history by employers, such as:
LCredit checks create a fundamental ``Catch-22'' for
job applicants. A worker who loses her job is likely
fall behind on paying her bills; with the increasing
use of credit reports, this worker now finds herself
shut out of the job market.
LUse of credit checks in hiring could prevent
economic recovery for millions of Americans. The use of
credit history for job applicants is especially absurd
in the midst of still-too-high unemployment and the
aftermath of the Great Recession.
LThe use of credit in hiring discriminates against
African American and Latino job applicants. Study after
study has documented how, as a group, African Americans
and Latinos have lower credit scores than whites. If
credit scores are supposed to be an accurate
translation of a consumer's credit report, that means
these groups fare worse when credit history is
considered in employment.
LCredit reports suffer from unacceptable rates of
inaccuracy, especially for a purpose as important as
use in employment.
These issues are discussed in greater depth in our written
testimony for the December 19, 2012 hearing before the
Subcommittee on Financial Institutions and Consumer Protection,
as well as hearings before the House Financial Services
Committee \6\ and the Equal Employment Opportunity
Commission.\7\
---------------------------------------------------------------------------
\6\ Legislative Hearing on H.R. 3149, the Equal Employment for All
Act: Hearing before the Subcomm. on Financial Inst. and Consumer
Credit, House Comm. on Fin. Servs., 110th Congr. (2010) (written
statement of Chi Chi Wu, Staff Attorney, National Consumer Law Center);
Use of Credit Information Beyond Lending: Issues and Reform Proposals:
Hearing before the Subcomm. on Financial Inst. and Consumer Credit,
House Comm. on Fin. Servs., 110th Congr. (2010) (written statement of
Chi Chi Wu, Staff Attorney, National Consumer Law Center).
\7\ Barriers to Employment: Employer Use of Credit History as a
Screening Tool: Hearing before the Equal Employment Opportunity
Commission (October 20, 2010)(written statement of Chi Chi Wu, Staff
Attorney, National Consumer Law Center).
Q.2. Would it be practicable or advisable for each credit
inquiry listed on a credit report--whether a hard or soft
inquiry--to include the inquiring party's contact information,
---------------------------------------------------------------------------
the nature of their business, and the purpose of their inquiry?
A.2. We do not see any barriers to including more information
about the entity that obtained a credit report--referred to as
the ``user'' of the credit report--for each inquiry on that
report. This information could include the user's contact
information, which is already required to be disclosed upon the
consumer's request under the Fair Credit Reporting Act (FCRA).
It should not be difficult to automatically include this
information instead of requiring a consumer request.
The additional information could also include the nature of
the user's business, and under what provision of the FCRA did
the user have a statutorily permitted purpose to obtain the
credit report. The credit reporting agency should have this
information, because it should have screened the user to ensure
it had a permissible purpose. This information would help
consumers understand for what reason their credit reports were
obtained, and would ensure that users actually do have a
purpose that is legally permitted under the FCRA.
Q.3. Do you agree that FACTA inadvertently repealed the
existing right of consumers and State officials to sue for any
violations of the adverse-action provisions of the FCRA?
A.3. Yes, we agree. A number of courts have held that FACTA
repealed the existing right of consumers and State officials to
sue for any violations of the adverse-action notice provisions
of the FCRA.\8\ We believe that this repeal was inadvertent,
unintentional, and not part of FACTA's legislative bargain.
---------------------------------------------------------------------------
\8\ For a list of cases, see National Consumer Law Center, Fair
Credit Reporting 8.5.5 (7th ed. 2010 and Supp.).
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FACTA itself clearly indicates that Congress had absolutely
no intention of abolishing the consumer's right to seek redress
of this important right. The uncodified version of FACTA
states:
Rule of Construction.--Nothing in this section, the amendments
made by this section, or any other provision of this Act shall
be construed to affect any liability under section 616 or 617
of the Fair Credit Reporting Act (15 U.S.C. 1681n, 1681o) that
existed on the day before the date of enactment of this Act.
Pub. L. 108-159, 117 Stat. 1960, 312(f) (2003).
This provision expressly preserved all private enforcement
rights that existed under the FCRA as of the date of FACTA's
passage, and indicates Congress's intent to retain all existing
consumer remedies under the Act.
Indeed, after FACTA's enactment, the credit industry did
not claim to have eliminated the consumer remedy for the
adverse-action disclosure, with the American Banker only noting
that FACTA ``perhaps inadvertently eliminates the existing
right of consumers and State officials to sue for any
violations of the adverse-action provisions of the FCRA.''\9\
Had Congress intended FACTA to carve private damages suits
wholesale out of the user liability section of the FCRA, the
banking and credit industry would have trumpeted that change in
the days following the President's signature.
---------------------------------------------------------------------------
\9\ M. Heller, Regulators Scurry to Close FACT Act Loophole,
American Banker (Dec. 12, 2003), at 3.
Q.4. Would you support or oppose restoring the original intent
---------------------------------------------------------------------------
of the FCRA by restoring this private enforcement right?
A.4. We absolutely and unequivocally support restoration of the
ability for consumers to seek relief in the courts when their
right to an adverse action notice under the FCRA is violated.
Consumers have been deprived of an important remedy because of
this scrivener's error, which needs to be corrected.
We note that in previous testimony, industry
representatives declined to claim that FACTA had intentionally
abolished this private enforcement remedy or to oppose its
restoration. In a 2007 hearing before the House Committee on
Financial Services, then Chairman Barney Frank engaged in the
following colloquy with Stuart Pratt, President and CEO of the
Consumer Data Industry Association, and Anne Fortney of Hudson
Cook, another industry representative:\10\
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\10\ Credit Reports: Consumers' Ability to Dispute and Change
Inaccurate Information: Hearing Before the H. Comm. on Fin. Serv., 110
Congr. 50 (2007).
The CHAIRMAN. We will look into that. Let me just ask, the
other question is to Ms. Fortney and Mr. Pratt, because both
Ms. Wu and Mr. Bennett talked about the interpretation that we
had sub silentio repeal of the private right of action. Do you
agree that was something that was not done intentionally? And
what would your view be to our restoring it? Mr. Pratt?
Mr. PRATT. We didn't work on that section of the FACT Act. It
relates to the date of furnishers and the date of----
The CHAIRMAN. OK. Ms. Fortney?
Ms. FORTNEY. I think the statute is clear, and that is why the
vast majority----
The CHAIRMAN. That wasn't the question.
Ms. FORTNEY. OK. I know.
The CHAIRMAN. Then why don't you answer it?
Ms. FORTNEY. The answer is, I don't know that whoever drafted
that----
The CHAIRMAN. Fair point. But would you like to leave it the
way it is?
Ms. FORTNEY. I am sorry?
The CHAIRMAN. Would you object if we restored the right of
action that is in the bill?
Ms. FORTNEY. I don't have an opinion on that, sir.
The CHAIRMAN. Oh, OK. Then it is two to nothing, two
abstentions.
It was not until several years later that industry
representatives began opposing restoration of this private
remedy.
Additional Material Supplied for the Record
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