- CREDIT REPORTS: WHAT ACCURACY AND ERRORS MEAN FOR CONSUMERS

[Senate Hearing 113-060]
[From the U.S. Government Publishing Office]

S. Hrg. 113-060

CREDIT REPORTS: WHAT ACCURACY
AND ERRORS MEAN FOR CONSUMERS

=======================================================================

HEARING

before the

SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE

of the

COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE

ONE HUNDRED THIRTEENTH CONGRESS

FIRST SESSION

__________

MAY 7, 2013

__________

Printed for the use of the Committee on Commerce, Science, and
Transportation

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_____

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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED THIRTEENTH CONGRESS

FIRST SESSION

JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington ROY BLUNT, Missouri
FRANK R. LAUTENBERG, New Jersey MARCO RUBIO, Florida
MARK PRYOR, Arkansas KELLY AYOTTE, New Hampshire
CLAIRE McCASKILL, Missouri DEAN HELLER, Nevada
AMY KLOBUCHAR, Minnesota DAN COATS, Indiana
MARK WARNER, Virginia TIM SCOTT, South Carolina
MARK BEGICH, Alaska TED CRUZ, Texas
RICHARD BLUMENTHAL, Connecticut DEB FISCHER, Nebraska
BRIAN SCHATZ, Hawaii RON JOHNSON, Wisconsin
WILLIAM COWAN, Massachusetts
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
John Williams, General Counsel
David Schwietert, Republican Staff Director
Nick Rossi, Republican Deputy Staff Director
Rebecca Seidel, Republican General Counsel and Chief Investigator
------

SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY,
AND INSURANCE

CLAIRE McCASKILL, Missouri, DEAN HELLER, Nevada, Ranking
Chairman Member
BARBARA BOXER, California ROY BLUNT, Missouri
MARK PRYOR, Arkansas KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota DAN COATS, Indiana
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
BRIAN SCHATZ, Hawaii DEB FISCHER, Nebraska
WILLIAM COWAN, Massachusetts

C O N T E N T S

----------
Page
Hearing held on May 7, 2013...................................... 1
Statement of Senator McCaskill................................... 1
Prepared statement of Brenda Faith Campbell, Nixa, Missouri.. 2
Letter dated May 7, 2013 to Hon. Claire McCaskill and Hon.
Dean Heller from Hon. Sherrod Brown, Chairman, Subcommittee
on Financial Institutions and Consumer Protection, Senate
Committee on Banking, Housing and Urban Affairs............ 102
Statement of Senator Heller...................................... 8
Statement of Senator Schatz...................................... 47
Statement of Senator Klobuchar................................... 49
Statement of Senator Nelson...................................... 50

Witnesses

Maneesha Mithal, Associate Director, Division of Privacy and
Identity Protection, Federal Trade Commission.................. 9
Prepared statement........................................... 11
Corey Stone, Assistant Director, Deposits, Cash, Collections, and
Reporting Markets, Consumer Financial Protection Bureau........ 15
Prepared statement........................................... 16
Judy Ann Thomas, Consumer........................................ 55
Prepared statement........................................... 56
Stuart K. Pratt, President and CEO, Consumer Data Industry
Association.................................................... 61
Prepared statement........................................... 62
Ira Rheingold, Executive Director, National Association of
Consumer Advocates............................................. 71
Prepared statement........................................... 73
J. Howard Beales III, Professor, Strategic Management and Public
Policy, George Washington University School of Business........ 80
Prepared statement........................................... 82

Appendix

Response to written questions submitted by Hon. Claire McCaskill
and Hon. Bill Nelson to Maneesha Mithal........................ 105
Response to written questions submitted by Hon. Claire McCaskill
to:
Corey Stone.................................................. 108
Stuart K. Pratt.............................................. 111
J. Howard Beales III......................................... 116

CREDIT REPORTS: WHAT ACCURACY
AND ERRORS MEAN FOR CONSUMERS

----------

TUESDAY, MAY 7, 2013

U.S. Senate,
Subcommittee on Consumer Protection, Product
Safety, and Insurance,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:33 p.m. in
room SR-253, Russell Senate Office Building, Hon. Claire
McCaskill (Chairman) presiding.

OPENING STATEMENT OF HON. CLAIRE McCASKILL,
U.S. SENATOR FROM MISSOURI

Senator McCaskill. I want to welcome everyone today to the
first subcommittee hearing in the Subcommittee on Consumer
Protection, Product Safety, and Insurance and Athletics. We're
going to talk today about credit reports, what accuracy and
errors mean for consumers. I want to welcome my ranking
colleague, Senator Heller from Nevada. I think we're going to
have a great working relationship during this Congress trying
to do our very best work in the area of protecting consumers
primarily.
I will bring this hearing to order. This is the first
hearing. This Congress, this subcommittee will use our hearings
to serve as a watchdog for consumers, with particular focus on
misleading and deceptive marketing to consumers and practices
of the financial products industry. I look forward to working
with Ranking Member Heller and other members of the
Subcommittee to hold scammers and others who prey on consumers
accountable, as well as ensuring that regulators are doing
their job.
Today's hearing will focus on the important role of credit
reports and what it means for consumers when errors occur.
America's credit reporting system plays an important role in
our economy and a critical role for consumers. From a business
perspective, credit reports promote access to responsible
credit for consumers.
Right now, the nationwide consumer reporting agencies--
Equifax, Experian, and TransUnion--have files on more than 200
million Americans, which represents a great deal of
opportunity. From a consumer perspective, though, credit
reports can quite literally change lives. They are the deciding
factor in determining whether individuals can obtain credit
cards, mortgages, or car loans, as well as how much they will
pay for those loans. Credit reports are also often used as part
of non-credit decisions about consumers that are no less
important, such as whether an individual can rent an apartment
or even obtain a job.
The credit reporting industry is also unique. Unlike most
industries, where consumers can walk away if they don't like
the deal, most Americans are trapped and cannot avoid having a
credit history and have no say as to whether or not their
information is part of this system.
Given the huge impact that credit reports have, it's
imperative that credit reports are accurate, and if they aren't
that consumers can easily and successfully dispute errors in
their credit reports. Errors can mean the difference between
obtaining a car loan or not, or paying a higher price for a
mortgage. Errors can result in credit issuers, like a small
town bank, declining credit to a potentially valuable customer,
or issuing credit to a riskier customer than intended.
Recently there have been a number of troubling reports
about the accuracy of credit reports, as well as consumers'
inability to correct errors when they find them. In February
2012, the FTC released a study finding that 5 percent of
consumers had significant errors on at least one of their three
major credit reports that could lead to them being denied or
paying more for their access to credit.
The FTC isn't the only one raising these concerns. Also in
February 2012, 60 Minutes aired a segment about the credit
reporting industry that depicted disturbing levels of
inaccurate information on credit reports, as well as an
industry dispute system for consumers that is best described as
Kafka-esque. This news report told stories of consumers who had
all the right documentation, who even had lawyers to help them,
spending years of their lives to resolve obvious errors in
their credit reports, with little success.
One of those consumers is here with us today to share her
story. Judy Thomas of Ohio first learned of errors in her
credit report in 1999. The credit bureaus had mistakenly
included information belonging to Judith Kendall of Utah on her
reports, what is referred to as a ``mixed file.'' Ms. Thomas
filed her disputes and expected this mistake to be quickly
corrected. But what should have been a simple fix instead
became a nightmarish process for Ms. Thomas, who is still
fighting to fix these inaccuracies today.
We also have a statement from one of my constituents,
Brenda Campbell of Nixa, Missouri, who unfortunately could not
be with us today, but provided written testimony. I ask
unanimous consent that Ms. Campbell's statement be included in
the hearing record.
[The information referred to follows:]

Prepared Statement of Brenda Faith Campbell, Nixa, Missouri
I accessed my credit for the first time knowing there was a
problem; I had been denied a Discover credit card and had been told
that there was a ``Midland'' judgment on my report that affected my
credit rating when I applied for a car loan. I was approaching
retirement age and knew that life changes were coming up that would
make my credit important.
I began researching the credit report process and what to do with
incorrect information before I even saw my credit report for the first
time. When I finally obtained my free credit report, it was a mess!
There were so many companies, names, addresses and a lot of information
that was unfamiliar to me. I couldn't believe what I was seeing! Most
upsetting was the fact that one report contained three Social Security
Numbers (in addition to mine) and a personal statement in the comment
section that suggested someone else had been in my credit report. I was
shocked to think that someone was using my personal information and
terrified at what that would mean.
Immediately, I contested all of the inaccurate information on-line
with the Credit Bureaus in an effort to get the report straightened
out. Despite my efforts-following the on-line instructions for
resolution--incorrect information remained on my reports. I was
contesting incorrect addresses and places of employment because I KNEW
they were not mine. In no time at all, I determined that contesting
with the Credit Reporting Agencies on-line was not going to
successfully remove the inaccurate information from my report. I began
sending Certified Letters with return receipts with all my requests to
the CRAs in effort to get an investigation completed. Upon further
research, I found that a company reporting and/or verifying inaccurate
information [or a company inquiring with incorrect information] would
keep inaccurate information on my file. I was horrified!
In April 2007, I personally spoke to TransUnion regarding their
continued refusal to remove the Midland Credit Management (MCM) trade
line and judgment. They told me that MCM verified the account
information as mine and told me that I would have to contact MCM
directly to resolve the issue. Research suggested that all business
with debt collectors should be handled using Certified Mail--with a
return receipt requested. The hurricane of activities that resulted
from my acting on this advice is unbelievable even to me--and I lived
it!
I sent MCM a debt validation request (in accordance with the FDCPA)
for information regarding the account that they had verified as mine. I
expected that they would either validate by giving me the information
(i.e., copy of account information and judgment) or by removing the
information from my report. This is was what the Federal Law requires.
About two weeks later, I was served papers (May 2007) by the Cole
County Sherriff at work!! It appeared to me that MCM answered my demand
with a writ of sequestration to garnish my wages. Although I can only
surmise, I would liken the emotional impact of reading this garnishment
to be what a victim of any crime-against-the-person experiences. I felt
violated; it was an intrusion of my privacy; and as I read the writ
again, my hands were shaking. I was terrorized!
Frustrated that the ``system'' designed to help was not helping at
all, I spent the weekend searching the Internet in an attempt to figure
out how this could happen and any information about this company. I was
able to find a case filed by Midland against another Brenda Campbell in
Greene County posted on CaseNet (MO based court system). The judgment
had been issued in September of 2006. The record showed that the
defendant, Brenda Campbell, personally appeared and agreed to make
payments on the judgment. The uneasy feelings I had the Friday I had
been served only escalated over the weekend when it was obvious that I
was able to find this information through public websites -put two and
two together- and figure out whose problem this was. I felt that MCM
had taken advantage of me because I had asked them to give me
information regarding this judgment or get it off of my credit report.
Instead of following the duty (according to FDCPA), they were taking
steps to take my wages!
Very late that Sunday night, I wrote to the Circuit Clerk at the
Greene County Court to let the Judge know, ``You have the wrong
person''. As a matter of fact, the day I was served papers, the actual
defendant was in court before the same Judge. On Monday, the Judge's
secretary called to tell me any action needed would have to be
initiated by an attorney (of course). In response to my questions, it
was determined that there were several attorneys attached to the case
(varying among on the writ, court case, filing, etc.) and contact
information included addresses in Kansas City, St. Louis and
Springfield. When I contacted one of the offices of the law firm
representing MCM, I was directed back to the judge--and told the judge
would have to vacate the order. I spoke with the court and the law firm
several times over a two-day period and was pushing up against the
payroll deadline.
My job was a gubernatorial appointment requiring personal integrity
and sound character. The threat of legal action on my record was
causing me to fear for my job. I was further concerned that if the
Greene County Court attached even one paycheck, the garnishment on my
record might never get removed and I would have to fight to get my
money back. Fearing that any kind of legal action that called my
integrity into question could result in a decision to end my
appointment, I believed I had no choice but to hire an attorney. I
needed to ensure I could prevent the garnishment because my job was on
the line. The law firm was able to get the sequestration dismissed in
the 11th hour based on the verification that I provided to my attorney.
Sadly, as a last act regarding the garnishment, the MCM attorney mailed
the court document releasing the garnishment--not to me--but to the
[actual] Brenda Campbell who lives in Willard, MO.
I opened a credit report from TU in July 2007 to find a new
Washington Mutual credit card had been issued in my name in June. The
garnishment papers (served on me in Jefferson City in May) included my
SSN. I am unshaken in my belief that this error is what alerted another
Brenda Campbell to my existence; a person with the same name/different
SSN and who had already been mistaken once to be ``her''. Using her
identifiers and my SSN, she applied and received a credit card which
was maxed out according to my report. Coincidence? I don't think so!

Once I found the Brenda Campbell that was having financial
difficulties, I was able to monitor activity occurring on
several bad-check cases pending in the Greene County Court via
the Internet. I pulled it up frequently to see what was going
on--if anything. After each of the dates that she was scheduled
to appear in court, I would review the activity. On more than
one occasion, failure to appear resulted in arrest warrants
being issued until she appeared and/or made payment. Her cases
were deleted some time in March 2008 for reasons that were
presumably related to impending identity theft charges--but it
made me nervous because I can no longer see what is going on
with her.

Late in August 2007, Brenda missed a court date and a
warrant issued for her arrest was outstanding when a business
meeting took me through Greene County. I was apprehensive and
had to explain the situation to my Deputy (who was traveling
with me) and put my husband on alert. I felt it was reasonable
to assume that if we were pulled over for any reason or had an
accident in Greene County, it would likely result in me being
incarcerated in the Greene County jail. The feeling was very
disconcerting and for the entire trip to Joplin, the
possibility of being mistaken as her never left my mind.

During the two-year battle, I learned a lot regarding the credit
reporting process. Despite the enormous importance of credit
information, I would never have anticipated how difficult it would be
to try and clean up or correct your report, resolve issues, or
communicate with Credit Agencies and/or Debt Collectors. As a result of
my experience, I have little respect for the Credit Reporting Agencies
and absolutely no regard for debt collectors. If I owned a company that
extended credit, the last piece of information I would consider
trustworthy would be an individual's credit report!
The traumatic impact of this experience was intensified when, at
about seven months into the turmoil, I realized that shouldering the
burden of fixing this problem was mine--even though the problem
essentially was the lack of action and/or communication between several
large companies--it became mine to carry. It was clear that none of
these entities had any interest in me as a person. All of these
companies are okay leaving me with never knowing the truth about what
actually happened--and are certainly not interested in explaining their
role in causing the problem. All along, I felt the attitude with which
they responded to me made it apparent that they did not care just how
much my life was ruined over this.

The system requires that these entities talk among their
selves about whether or not what I am saying about ME is true.
In the end, however, the very person continuing to report
(false) information has the power to make the final
determination as to what stays and what goes off of my report!
You would think there would be no better expert on the truth
about me than me. In the credit report world, however, that is
simply not true.

Incorrect information including Social Security Numbers that
were not mine continued to be on my Experian credit report
until we entered the Federal court house. No doubt, numerous
letters were believed to be lying on someone's desk to be
``investigated'' by an electronic machine that does not lend
itself to be bothered by reality and is oblivious to personal
pleas.

I hired a second team of excellent attorneys to help me
figure out how to fix the issues, what the problems are and how
to fix information on my report. During this process, I learned
a lot about how information travels among companies, what
investigations are really like, etc. It was obvious that there
was not a way--short of a law suit--that these issues would
have been resolved.

One CRA, Experian had not deleted any credit lines nor
attempted to fix my credit report. This initial report was
especially concerning as it contained two other SSNs from
two other Brenda Campbells. I knew that if I had their
SSNs, they likely had mine.

During a deposition for court in Kansas City, it was
explained to me that I was sending the certified letters
with return receipt requested to the wrong Experian
address. The address (which was from the website named
``Customer Care'') was not the official address for filing
disputes.

As I heard this information for the first time--far
into the lawsuit--my blood pressure skyrocketed!! The point
of sending certified letters is to assure that the letter
is received by the addressee; in this case addressed to
Experian. Every letter was signed as received and there was
NEVER any communication to me telling me to use another
address!! Are we talking mail fraud? A subsidiary of
Experian? The entity in the lawsuit--the official Experian
LLC--was not responsible for one of their ``divisions''? So
the crux of the reason that all of this information was
still on my report--

) Information put there by someone else;

) Contested by me twice using THEIR on-line dispute
process;

) Contested twice via certified letter to an Experian
address;

) Certified letters accepted twice by Experian;

) Letters containing copies of my social security card,
driver's license and
utility bill as proof of address;

) Letters NOT returned as being sent to wrong address;

) Letters that had no follow-up to my requests for
investigation;

. . . was because I had sent the letters to the wrong address!!!
Because of this, it was my fault that my credit report was
a mess. I was furious at the audacity of this CRA calmly
explaining to me that I messed up.

I can't imagine working for a company that has a policy that if
you SIGN for a certified letter. . .and find it requests
actions outside of your responsibility; you can ignore the
contents therein. Apparently, however, that is the policy
of this CRA!

Although the lawsuits ended in settlements, I still have
consequences from this nightmare. I was very committed to my
responsibilities as State of MO Division Director, Senior and
Disability Services. My job generally required me to work from 50-70
hours per week. When the time required to conduct personal research
began to interfere with my thoughts and work, I would stay up all night
trying to get everything done. My life during these months consisted of
hours and hours of research. . .deciding what to do next. After all, I
had followed the process and found myself immersed in a lie against
which I could find no relief. My problem spiraled out of control
because I had asked for verification or removal of incorrect
information to fix my report.
Work schedules were always busy and mine was an enormous
responsibility. At one time, I wondered what would have happened if I
had left the reports in chaos. It certainly would have been less
intrusive. I was challenged to reconcile the overwhelming feelings of
inadequacy. Occasionally I would cry for no apparent reason . . . I
could only say that I felt personally violated, disrespected and
expendable.
The personal life of a credit report victim who--without having
contributed in any way--wakes up in the middle of a nightmare such as
this becomes entrenched in the games and rules dictated by an industry
that has little or no value for seeking out the truth. Furthermore, the
rules aren't for public consumption. Had I not had an excellent
attorney, this would likely still be an issue for me. It is very
intimidating to know that the very Bureaus that gather personal
information for those with a business need to know, has little--if
any--interest in what one says about their own, very personal,
information. I have been a public servant for just shy of 30 years. I
have always trusted that any business--profit or not-for-profit--has an
inherent responsibility to care more about their customers than that.
But as I came to know, I was a commodity--not a customer. The customer
was the business feeding incorrect information about me and lying about
information that was not mine.
The behavior that results in the feeling of personal violation by
Credit Reporting Agencies is devastating because their only line of
business is handling my information. Yet, there I was two years later.
. .still living in a state of helpless desperation, at the mercy of
their decisions.

I secured an ongoing service (for which I paid monthly) to
let me know when derogatory information was added to my report.
I continued to receive reports of new derogatory information
and wondered how long I will continue to receive these. I
presumed I would never be able to stop this service. I thought
this was intrusive until I filed the lawsuit and was denied
access to the reports and notices that I was paying to see!

I have an older daughter that is married (with a surname
other than Campbell) that lives in Union, MO with her husband
and two young daughters. She received this message late in
2009: ``Brent Brown, wanting to ask some questions about Brenda
Campbell''. She never returned the call . . . and instead
called us. I assured her that her daddy and I are fine.

As it turns out, I had spoken to Brent Brown in
January 2008. I assured him that I was not the Brenda
Campbell for whom he is searching on behalf of Chase
regarding a defaulted vehicle loan. That day in January he
understood--but today, in the midst of his ``skip-tracing
activities'' I am his main target--again. I know it goes in
vicious circles and the experience is so humiliating. All I
can do is tell the world, I am not able to stop this
insanity!

When I tell my story, and I used to do that quite often, I find
that most people are in awe. It is a twilight-zone kind of story when
you think that something that would appear so easily verifiable went on
and on uncorrected for no apparent reason! I cannot make sense of what
has happened and why there isn't some sense of urgency to fix the
problem. The tendency to abort the mission was even stronger as we
found ourselves incurring over $17,000 in attorney fees to stop the
sequestration--yet the issues with the CRs remained unresolved. It
became blatantly obvious that it was going to take thousands of dollars
and a full press through the legal system to generate any possible hope
in recovering what is left or in repairing my now dishonored
professional and personal character profile.
I find coming to terms with this entire experience extremely
difficult. Needless to say, living with this kind of continuous
anxiety, constant fear, and worry leaves you with some unspeakably bad
days. At times, I found it difficult to function--yet always impossible
to discuss. It is a kind of void that you simply can't explain to
anyone. My experience has led me to conclude that the system that
houses credit reports is very broken.
Any intent by Congress to offer citizens the tools they need to
keep information secure has been overshadowed by fact that large
corporations that buy and sell information as a commodity ultimately
own and control the processes through which one would think integrity
would be crucial. I found fighting Credit Bureaus and Debt Collectors
to be an impossible feat. There is nothing that requires the ``system-
machine'' to yield to common sense when any reasonable person with
value in the integrity or honesty of another human being would have
given pause to at least attempt to define the problem. I would ask
anyone who felt stripped of this inherent thread of decency afforded
all men--how would you feel?
I made it through those years without using counseling, sedatives
or an official breakdown and subsequent hospitalization. Drawing from
an inner-strength that is grounded in the grace of God and the support
I received from my husband and family, I was able to talk through
circumstances without any immediate scarring. Although without a doubt,
this ``drama'' consumed most of our life and family discussions over
two years. It changed me though--and was a detriment to my confidence
and self-esteem.

In 2005, Mark and I began country partner dancing. We joined
and were active in a local club where I served a year as
President. Additionally, we generally attended dances
approximately 30 miles from home each Saturday evening. By the
summer of 2007, we had all but quit dancing. Two years later,
we were maybe dancing once per month and attending club
activities twice per year. I didn't want to go anywhere where
there were a lot of people. Mark worried about this . . . and I
didn't know what to tell him.

Although eligible, I was exhausted but felt I was not in the
position to take advantage of an early retirement. In the
process of seeking new employment or moving ``home'', I felt it
would be necessary to relay this entire disgusting story--which
I found personally degrading. Given the fact that telling the
story would be necessary, I felt that employers may not be
interested in an employee that comes with ``baggage'' in the
form of any story that must be told. It is despicable to think
that after 30 successful years of employment, my personal life
was negatively impacted to such a degree that I question my
ability to retire, relocate, and seek new career opportunities.

In cleaning up my reports, I had lost years of credit
history. Today, my credit history is six years. I am uncertain
why all my past credit and information was removed, but it
appears that I just financially arrived on the scene.

I could ramble on about the daunting impact that this experience
has had on me. What about my future? Will I ever be safe? I don't
believe that I will ever feel safe enough to remove the fraud alert
from my credit report. I can't reclaim my SSN from this lady; she will
always have it -it can't be taken out of her memory. I am haunted by
the fact that even now, though the lawsuit cleaned up errors, another
lady and the companies that refuse to pay attention to the details of
their own business will ultimately control the date and time that we
will play this game again. If there is ever a problem with my credit
report, will I be able to communicate the problems or am I flagged as
the problem in their ``system''?
I know that I will have to find a way to deal with the unknown--the
threat of fraud, forgery or falsification that may befall me any day--
since not doing so will surely result in a slow decline of my mental
health. I pray, however, that as the years pass, there may come a time
when I am not looking over my shoulder wondering if another bad-mark
has been documented against me or another credit application has been
granted using my SSN.

For the first time since the lawsuits settled, I accessed my
credit reports as I prepared this statement.

Although I was initially in my Equifax report, within
minutes I was told I could not access my report on-line and
must request a copy in writing.

I was unable to access any information on the
TransUnion report. I was told I would have to request by
phone or mail.

I was able to view and print my Experian report which
once AGAIN contains the address of the Brenda Campbell that
lives in Willard, MO. Not sure how or why it is back on my
report. . .but I will once again begin the process of
disputing this information.

Although it would seem likely that someone like me would
want to see my report often, the experience has had the
opposite effect on me for two reasons:

It terrifies me to think that my checking these
reports could start this nightmare over again; and

I learned that the information consumers are allowed
to see/review/dispute/correct is NOT all inclusive of the
information that is provided to ``customers'' that get a
copy of my credit report for a specific purpose. The truth
is . . . when a potential employer, insurance company,
creditor, etc. requests my credit report, I WILL NOT KNOW
what information is included in my report nor do I have an
opportunity to correct that information.

My personal information--my character if you will--in which I have
vested a lifetime of hopes and dreams as well as my financial security,
will forever be at risk. Any attempt to keep my identity separate from
another who has in the past used my information illegally will be an
ongoing battle that I will have to fight without the help of the Credit
Reporting Agencies. I am faced with the reality that the information I
once believed was so personal . . . will never again be mine and mine
alone.

Senator McCaskill. Ms. Campbell has also had a mixed file
with the credit bureaus. They had placed information belonging
to numerous other Brenda Campbell's in her file, including
multiple Social Security numbers. The real Ms. Campbell tried
to correct these obvious mistakes using the credit bureaus'
dispute processes, but was unsuccessful. She had trouble
obtaining credit, received calls from collection agencies, and
at one point, with her hands shaking, received a notice of wage
garnishment--all because the wrong Brenda Campbell's
information was in her file and no one would help her.
She ultimately had to hire a lawyer and sue to get this
fixed. But it took quite literally years and tens of thousands
of dollars to do it.
I know that the industry takes issue with some of the
figures used to highlight this problem and I'm interested to
hear what they have to say. In fact, the industry commissioned
its own study through the Policy and Economic Research Council,
which found that more than 99 percent of credit reports are
error-free. It would be easy to use this hearing to argue about
that number and the prevalence of errors in consumer credit
reports. But at the end of the day, both studies show errors
exist. Whether you trust the 1 percent figure, the 5 percent
figure, or something in between, it might sound like a small
number, but in real terms we're talking about anywhere from 2
to 10 million Americans with errors in their credit reports
that could impact whether they can obtain credit or how much
they will have to pay for it.
We are talking about 2 to 10 million people who have to
turn to a dispute process that I think most of us have serious
concerns about. We are talking about Judy Thomas and Brenda
Campbell times millions. That is simply too many.
As Brenda put it, consumers are not the credit reporting
agencies' customers; they are their commodity. Things need to
change.
This hearing will explore the prevalence of errors and
whether the credit reporting industry's existing dispute
procedures meet consumers' needs. We will also examine whether
the current system complies with existing laws and regulations,
namely the Fair Credit Reporting Act, commonly known as
``FCRA,'' and what the FTC and Consumer Financial Protection
Bureau, CFPB, are doing to ensure the industry is meeting its
legal obligations. Finally and most importantly, we will hear
about the real impact these errors have on real people's lives
and what the current dispute system is really like from a
consumer's perspective.
I thank the witnesses all for being here and I look forward
to their testimony, and I will defer now to Senator Heller.

STATEMENT OF HON. DEAN HELLER,
U.S. SENATOR FROM NEVADA

Senator Heller. Madam Chairwoman, thank you very much, and
it's a pleasure to serve with you. Thank you very much for this
opportunity. Thanks for holding this hearing today.
Thank you to the witnesses for being here and those in the
audience that are concerned as much as we are about this
particular issue.
Credit is a critical issue for the nation because it fuels
the economy. Nothing's more important to the state of Nevada,
especially Las Vegas, than fueling our economy. As some of you
may know, the economic collapse hit my state particularly hard,
especially at the southern end in Las Vegas. Tourism to Las
Vegas fell dramatically and thousands of jobs were lost. In
fact, we led the nation in unemployment for 2 years and
currently hold that title.
The ripple effect from this also caused home values to
plummet and since 2008 we've experienced more than 400,000
foreclosures. While there are many small signs of recovery,
much more needs to be done, and responsible credit lending is
one of the tools that we need to get more positive--we need to
get to get more positive economic growth in the state.
We simply cannot have economic growth without lines of
credit being issued. The credit reporting agencies play a vital
role by collecting information on consumers furnished by the
private sector and producing a score on creditworthiness.
Ensuring that this information is accurate is needed so that
responsible decisions can be made by both borrowers and
lenders.
But the fact is we're looking at over 200 million Americans
who have three credit reports each. Any significant errors
could have an impact on the score you receive and subsequently
the amount of interest you will pay or whether you qualify for
a loan at all. That is why I'm pleased we're having this
discussion today.
My office, like Senator McCaskill's, routinely hears from
individuals who are frustrated with their credit score and feel
that their credit report is inaccurate or unfair. For example,
one constituent from Las Vegas wrote that his credit score has
always been mixed with his father's. They have the same first
and last name and their middle names both start with the letter
``J,'' but those middle names are different. He has told my
office that the three credit bureaus have never been able to
figure this out. Because of this, he has to go back and forth
with the agencies and fight for them to fix the mistakes they
have made. I don't think this should happen.
The Federal Trade Commission's report to Congress last
December touched on these types of issues and highlighted the
percentage of times when errors were found and the impact these
errors have on credit scores. The report shed valuable light on
credit reports and how well consumers are and are not being
served by them.
I hope the hearing today will provide the Committee some
answers to the things credit reporting agencies are doing on a
proactive level to try to eliminate errors. When you have so
many records and you do not control the data furnished to you,
I know that reaching 100 percent perfection may be impossible.
But understanding how we can continue to improve is important,
and I look forward to the hearing today.
So, Madam Chairwoman, thank you very much. I appreciate you
calling this hearing today.
Senator McCaskill. Thank you.
I welcome our other colleagues here and we're glad to have
you.
Our first witnesses are: Ms. Maneesha Mithal--am I saying
that correctly?
Ms. Mithal. Perfect.
Senator McCaskill. She is the Associate Director for the
Division of Privacy and Identity Protection at the Federal
Trade Commission; and Mr. Corey Stone, who is Assistant
Director of Deposits, Cash, Collections, and Reporting Markets
at the Consumer Financial Protection Bureau. Welcome to both of
you and we look forward to your testimony.
Ms. Mithal.

STATEMENT OF MANEESHA MITHAL, ASSOCIATE DIRECTOR,

DIVISION OF PRIVACY AND IDENTITY PROTECTION,

FEDERAL TRADE COMMISSION

Ms. Mithal. Thank you. Chairman McCaskill, Ranking Member
Heller, and members of the Subcommittee: I'm Maneesha Mithal
with the Federal Trade Commission. I appreciate the opportunity
to discuss credit report accuracy today.
An array of businesses buy data from credit bureaus to make
critical decisions about consumers, including whether they can
get credit, insurance, employment, and housing. Complete and
accurate credit reports allow these businesses to make informed
decisions, thereby benefiting both consumers as well as
creditors. On the other hand, errors in these reports can
result in consumers being denied credit and other benefits or
paying a higher price for them. In today's tough economic
times, we all need to do what we can to make sure that credit
reports are as accurate as possible.
In my oral statement I will address three topics: first,
how the law promotes accuracy of credit reports; second, what
our recent study shows about the rate of accuracy; and third,
what we're doing to improve accuracy.
First, what are the legal requirements? The Fair Credit
Reporting Act contains several important protections. First,
credit bureaus must undertake reasonable efforts to assure
maximum possible accuracy of credit reports. Second, they must
allow consumers to access their credit reports for free at
least once a year, so that consumers can check their reports
and spot errors. Third, they must allow consumers to dispute
and correct information in their credit reports. Fourth, those
who provide information to credit bureaus, such as banks and
other lenders, have certain obligations to make sure
information they report is accurate. And finally, if a creditor
uses a report to deny credit or charge a higher rate to a
consumer, the creditor must provide the consumer with an
adverse action notice explaining that their credit report was
used to make an adverse credit decision. This way the consumer
has an opportunity to check their credit report and if
information is inaccurate to correct it.
The second topic I'd like to discuss is our recent study on
the accuracy of credit reports. The study involved obtaining
the reports and credit scores of over a thousand consumers.
Trained study associates worked with the participants to review
their credit reports, and if they found errors participants
were encouraged to file disputes with the relevant credit
bureau.
The study tracked the percentage of consumers that found
material errors and the number of errors that were corrected.
We also worked with the Fair Isaac Corporation, the company
that develops scoring models, to score the initial report that
consumers received and to rescore the report as corrected. This
helped us determine the degree to which any error had affected
the consumer's credit score.
So here's what we found. One in four study participants
found a material error in one of their credit reports and filed
a dispute with at least one credit bureau. One in five
consumers had a credit bureau make a change to their credit
report in response to the dispute. 13 percent had a change made
to their credit report that caused a change in their credit
score, and 5 percent of the study participants had their credit
risk tier decreased as a result of having errors corrected. So
in other words, one in 20 of the study participants had an
error that lowered their credit score to a degree that the
error likely made getting credit more expensive.
So that brings me to the third topic: What are we doing to
improve accuracy? The FTC focuses its efforts on two main
areas, enforcement and education. On the enforcement front,
we've recently undertaken several actions to police the
accuracy requirements of the FCRA. For example, we sued an
employment background screening company for its failure to
reasonably ensure the accuracy of its consumer reports. We also
sued a debt buyer for providing stale information about
delinquent consumer accounts to credit bureaus despite the fact
that the debt buyer didn't have a reasonable basis to believe
the information was accurate.
In addition, there are many companies that compile credit
or employment-related information, but may not believe they're
covered by the FCRA. We seek to educate these types of
companies and inform them of their obligations to make sure the
information they maintain is accurate. Just today we announced
that we issued warning letters to ten data brokers that
appeared willing to sell consumer information for FCRA-covered
purposes without complying with the FCRA's accuracy and other
requirements.
Finally, we seek to educate consumers and businesses about
credit reports, credit scores, and their rights and obligations
under the FCRA. We've issued publications designed to explain
to consumers how to obtain their free credit report and how to
dispute any errors. Through our legal services collaboration we
disseminate these and other educational materials to local
organizations and pro bono clinics so they can help some of our
nation's most vulnerable consumers. We also offer publications
to businesses on how to comply with the FCRA.
We appreciate your holding this important hearing and thank
you for your time, and I'd be happy to answer any questions.
[The prepared statement of Ms. Mithal follows:]

Prepared Statement of Maneesha Mithal, Associate Director, Division of
Privacy and Identity Protection, Federal Trade Commission
I. Introduction
Chairman McCaskill and members of the Subcommittee, my name is
Maneesha Mithal, and I am the Associate Director for the Division of
Privacy and Identity Protection at the Federal Trade Commission
(``Commission'' or ``FTC'').\1\ I appreciate the opportunity to appear
before you today to discuss the Commission's most recent Report to
Congress under Section 319 of the Fair and Accurate Credit Transactions
Act of 2003 (``FACT Act''), concerning the accuracy and completeness of
consumer credit reports.\2\
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\1\ While the views expressed in this statement represent the views
of the Commission, my oral presentation and responses to questions are
my own and do not necessarily reflect the views of the Commission or
any individual Commissioner.
\2\ Fair and Accurate Credit Transactions Act of 2003, Pub. L. No.
108-159.
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The FACT Act was enacted in 2003 to provide consumers with several
new rights and protections related to their credit reports.\3\ Consumer
credit reports, which contain data compiled and maintained by consumer
reporting agencies (``CRAs''), are used to make critical decisions
about the availability and cost of credit, insurance, employment, and
housing. The FACT Act amended the Fair Credit Reporting Act \4\
(``FCRA''), a statute enacted to (1) prevent the misuse of sensitive
consumer information by limiting recipients to those who have a
legitimate need for it; (2) improve the accuracy and integrity of
credit reports; and (3) promote the efficiency of the Nation's banking
and consumer credit systems.
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\3\ Among other things, the FACT Act allows consumers to place
fraud alerts with the CRAs, notifying potential creditors that they may
have been victims of identity theft (Sec. 112), to obtain free annual
credit reports from the national CRAs (Sec. 211) and to dispute
information on their credit reports directly with information
furnishers (Sec. 312).
\4\ 15 U.S.C. Sec. Sec. 1681-1681x.
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Today, data compiled and maintained by CRAs is used to make
critical decisions about the availability and cost of various consumer
products and service, including credit, insurance, employment and
housing. Credit reports are often used to evaluate the risk of future
nonpayment, default, or other adverse events. For example, complete and
accurate credit reports enable creditors to make informed decisions,
benefitting both creditors and consumers. Errors in credit reports,
however, can cause consumers to be denied credit or other benefits, or
pay a higher price for them, and may lead credit issuers to make
inaccurate decisions that result in the issuers declining credit to a
potentially valuable customer or issuing credit to a customer who
otherwise would not have been approved. Therefore, the FCRA serves the
vital goals of promoting informed decision-making by lenders and
protecting consumers from credit-related determinations based on
erroneous information.
The FCRA, as modified by the FACT ACT, imposes numerous
requirements to improve the accuracy of credit reports, including that
CRAs make reasonable efforts to assure the ``maximum possible
accuracy'' of credit reports,\5\ and maintain procedures through which
consumers can dispute and correct inaccurate information in their
consumer reports.\6\ In addition, the FCRA imposes obligations on those
who furnish information about consumers to CRAs (``furnishers'') and on
users of credit reports, such as entities extending credit. For
example, if a furnisher determines that information it provided to a
CRA is incomplete or inaccurate the furnisher must promptly notify the
CRA and provide any corrections that are necessary to make the
information complete and accurate. In addition, if a user of a credit
report takes an adverse action against a consumer based on information
in a consumer report--such as a denial of credit or employment--the
user must provide an adverse action notice to the consumer, which
explains that the consumer can obtain a free credit report from the CRA
that provided the report and dispute any inaccurate information in the
report.\7\
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\5\ Id. Sec. 1681e(b)
\6\ Id. Sec. 1681i (a)-(d).
\7\ Id. Sec. 1681m(a).
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In order to assess the accuracy of credit reports, and pursuant to
Section 319 of the FACT Act, the FTC has been conducting an ongoing
study of the accuracy and completeness of consumer credit reports.\8\
In December 2012, the Commission submitted to Congress its fifth
interim report pursuant to this provision. This testimony describes the
FTC study and its results. It then discusses the Commission's efforts,
through law enforcement and consumer and business education, to improve
the accuracy of credit reports.
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\8\ Pub. L. No. 108-159, Sec. 319.
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II. The FTC Study
The Commission's accuracy study was the first national study
designed to engage all the primary groups that participate in the
credit reporting and scoring process: consumers, lenders, data
furnishers, the Fair Isaac Corporation (``FICO''), and the CRAs. The
FTC contracted with a research team, including members from the
University of Missouri, St. Louis (``UMSL''), the University of Arizona
(``UA''), and FICO. UMSL and UA interacted with consumers through study
associates, who were trained to review consumer reports. The study
called for randomly-selected consumers to review their credit reports
with a study associate, who helped them identify potential errors.
Ultimately, 1,001 consumers reviewed a total of 2,968 credit
reports (approximately three per participant). All study participants
gave their permission to have study associates access their credit
reports from each of three national CRAs as well as their FICO credit
score. Then, each participant engaged in an in-depth review of his or
her credit reports with a study associate. The review focused on
identifying potential errors that could have a material effect on a
person's credit standing. Any participant that identified a potentially
material error on his or her credit report was then encouraged to use
the FCRA dispute process to challenge any potentially erroneous
information.
After the dispute process was complete, study participants' credit
reports were drawn again and reexamined. If changes had been made to
the reports, then the errors were treated as confirmed and a new FICO
score based on the changes was obtained. This process allowed a
determination of which reports contained confirmed errors and the
degree to which any error had affected the consumer's credit score.
The study found that of the 1,001 consumers who participated in the
study, 262 (26 percent) reported a potential material error in one or
more of their three reports and filed a dispute with at least one CRA.
Most of the errors reported by participants resulted in at least some
modification to their credit reports, which, as noted, the study
treated as confirming the errors. Of the 262 participants who reported
an error, 206 (79 percent) were successful in having some change made
to their report in response to their dispute, which corresponds to 21
percent of all of the study participants.
In addition to examining how many consumers had confirmed errors on
their reports, the study also looked at what effect those errors had on
consumers' credit scores. One hundred and twenty-nine consumers, or 13
percent of the total study participants and nearly half (49 percent) of
those that reported a potential material error, had an error on their
credit report that resulted in a change in their credit score. The main
types of confirmed material errors found in this study were errors
involving the consumers' credit accounts with businesses, such as
incorrect balances or late payments, and past-due accounts referred to
collection agencies. Such errors can potentially produce significant
differences in consumers' credit scores. Indeed, the study found that
five percent of the study participants had their credit risk tier
decreased as a result of having errors corrected. In other words, one
in 20 of the study participants had an error on his or her credit
report that lowered the credit score to a degree that the error likely
made getting credit more expensive. For example, consumers with errors
of this magnitude would likely pay higher interest rates on auto loans
or mortgages than the rates to which their accurate credit score would
normally entitle them.
The study focused exclusively on identifying the level of accuracy
in the credit reporting system and its impact on consumer credit
scores. Under the FACT Act, the Commission's final report to Congress
on credit report accuracy is due in 2014.
It is important to note that CRAs cannot guarantee 100 percent
accuracy; however, existing law requires credit bureaus to have
reasonable procedures to assure ``maximum possible accuracy'' of credit
reports.\9\ The Commission is committed to ensuring that obligation is
met.
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\9\ 15 U.S.C. Sec. 1681e(b)
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III. FTC Efforts to Increase Accuracy of Consumer Credit Reports
The Commission recognizes the importance of accurate and complete
credit reports, both to businesses that use them to make decisions and
to the consumers who are affected by those decisions. The FTC focuses
its efforts to improve credit reporting accuracy on two main areas:
enforcement and education.
A. Enforcement
Vigorous enforcement of the FCRA is a high priority for the
Commission. In the last decade, the Commission has brought over 30
actions to enforce the FCRA against CRAs, users of consumer reports,
and furnishers of information to CRAs. It has recently undertaken
several actions to enforce the accuracy provisions of the FCRA. The
Commission recently sued and obtained a stipulated final judgment and
order against HireRight Solutions, Inc. (HireRight), an employment
background screening company that provides consumer reports containing
information about prospective and current employees to companies
nationwide.\10\ The Commission charged that HireRight failed to take
reasonable steps, such as expunging criminal records, to ensure that
information in the reports was accurate and reflected current updates.
In addition, the Commission alleged that HireRight failed to prevent
the same criminal offense information from being included in a consumer
report multiple times, failed to follow reasonable procedures to
prevent obviously inaccurate consumer report information from being
provided to employers, and in numerous cases included the records of
the wrong person. The FTC alleged that these failures led to consumers
being denied employment or other employment-related benefits. The FTC's
stipulated order imposed a $2.6 million civil penalty against the
company and enjoins HireRight from violating the FCRA.
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\10\ United States v. HireRight Solutions, Inc., No. 1:12-cv-01313
(D.D.C. filed Aug. 8, 2012) (stipulated final order), available at
http://www.ftc.gov/opa/2012/08/hireright.shtm. See also In re
Filiquarian Publishing, LLC, FTC File No. 112 3195 (May 1, 2013)
(consent order), available at http://www.ftc.gov/opa/2013/01/
filiquarian.shtm.
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The Commission has also taken action against a company that
provided inaccurate information to CRAs. Last year, the Commission sued
and obtained a consent decree against Asset Acceptance, LLC \11\
(``Asset Acceptance''), one of the Nation's largest debt buyers. Asset
Acceptance buys unpaid debts from credit originators such as credit
card companies, health clubs, and telecommunications and utilities
providers and attempts to collect them. Asset Acceptance has purchased
tens of millions of accounts for pennies on the dollar. It targets
accounts that other collectors have pursued and are more than a year
past due, and in some cases attempts to collect on debts that are over
ten years old. The Commission alleged, among other things, that Asset
Acceptance was providing information to CRAs that it knew or had
reasonable cause to believe was inaccurate. The Commission's consent
order imposed a $2.5 million judgment for Fair Debt Collection
Practices Act and FCRA violations and prohibits the company from
violating the FCRA or the Fair Debt Collection Practices Act.
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\11\ United States v. Asset Acceptance, LLC., No. 8:12-CV-182-T-
27EAJ (M.D. Fla. filed Jan. 30, 2012) (stipulated final order),
available at http://www.ftc.gov/opa/2012/01/asset.shtm.
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The FTC also takes proactive steps to help ensure that companies
are aware that they are functioning as CRAs and are subject to the
FCRA. For example, the Commission staff conducted ``test shops'' of
dozens of information brokers to see if they would be willing to sell
consumer information for employment, credit, or insurance purposes, in
which case they would then fall within the definition of a CRA, and be
subject to the FCRA. As announced earlier today, the Commission has
issued warning letters to ten companies that appeared willing to sell
their consumer information for these FCRA-covered purposes without
complying with the FCRA's requirements, including the accuracy and
dispute requirements discussed above.\12\ The letters to the companies
describe the FCRA's requirements and urge the companies to review their
business practices to ensure their compliance with the law.
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\12\ Available at http://www.ftc.gov/opa/2013/05/databroker.shtm.
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Similarly, last month the Commission issued warning letters to the
operators of six websites that share information about consumers'
rental histories with landlords. The letters informed the website
operators that they may be subject to the requirements of the FCRA.\13\
Among the requirements cited in the letters are the companies'
obligation to protect the privacy of tenants whose information they
collect, including by ensuring that those requesting information about
tenants have a legitimate reason to acquire it. The letters reminded
the companies of their obligation to ensure that the information they
provide is accurate, to give consumers a copy of the information about
them on request, and to allow consumers to dispute information they
believe is inaccurate. The letters also noted that the companies must
notify landlords of their obligations if using the data to deny housing
to a tenant, and to notify the sources of their information of the
requirement that they provide accurate information.\14\
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\13\ Available at http://www.ftc.gov/opa/2013/04/tenant.shtm.
\14\ Pursuant to the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. No. 111-203, the FTC now shares enforcement
authority with the Consumer Financial Protection Bureau (``CFPB'') with
respect to credit report accuracy requirements. In addition, last year,
the CFPB issued regulations that allow it to supervise CRAs with more
than $7 million in annual receipts from consumer reporting activities,
which includes the authority to examine issues relating to credit
report accuracy.
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B. Consumer and Business Education
In addition to bringing enforcement actions against CRAs and
information furnishers, the FTC works to educate consumers and
businesses about consumer reports, credit scores, and their rights and
obligations under the FCRA.\15\ Consumers are often in the best
position to determine whether their credit reports are accurate, and it
is important that they regularly obtain and review their free annual
credit reports. If consumers find errors in their reports, they may
dispute those errors with either the CRA that reported it or the
furnisher that provided the information. The Commission has produced a
number of publications to assist consumers through this process.
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\15\ See generally http://www.consumer.ftc.gov/topics/credit-and-
loans.
---------------------------------------------------------------------------
For example, the Commission's publication, Disputing Errors on
Credit Reports,\16\ explains the importance of accurate credit reports
in determining the price and availability of credit. This publication
instructs consumers on how to obtain their free annual credit reports,
advises them of other times they may be entitled to free credit
reports, and provides detailed instructions on how to dispute any
errors found, including a sample letter to be used. Another publication
explains how credit scoring works and how it is used by lenders and
insurance companies.\17\ The Commission also offers videos directing
consumers to annualcreditreport.com to obtain their free annual credit
reports.\18\ Finally, through the Commission's Legal Services
Collaboration,\19\ the agency is disseminating consumer education
materials to some of our nation's most vulnerable consumers.
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\16\ Available at http://www.consumer.ftc.gov/articles/0151-
disputing-errors-credit-reports.
\17\ How Credit Scores Affect the Price of Credit and Insurance,
available at http://www.consumer.ftc.gov/articles/0152-how-credit-
scores-affect-price-credit-and-insurance.
\18\ See generally http://www.consumer.ftc.gov/media.
\19\ Through this program, the FTC is working with legal services
providers to distribute consumer education materials and gather
complaints about pernicious practices affecting at-risk and indigent
communities.
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Business education is also a priority to the FTC. The Commission
has developed and distributed free guidance relating to compliance with
the FCRA, including Credit Reports: What Information Providers Need to
Know,\20\ which informs businesses that provide information to CRAs
about their obligations to provide accurate information and to update
and correct previously submitted information. This publication, as well
as other business education materials, are available through the FTC's
Business Center website, which averages one million unique visitors
each month.\21\ The Commission also hosts a Business Center blog,\22\
which has featured topics related to credit reports, including a post
on the HireRight case that discusses CRAs' obligations to ensure
maximum possible accuracy in their credit reports.\23\
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\20\ Available at http://business.ftc.gov/documents/bus33-credit-
reports-what-information-providers-need-know.
\21\ See generally http://business.ftc.gov.
\22\ See generally http://business.ftc.gov/blog.
\23\ Where HireRight Solutions went wrong, available at http://
business.ftc.gov/blog/2012/08/where-hireright-solutions-went-wrong.
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III. Conclusion
Thank you for the opportunity to discuss the Commission's study on
the accuracy of consumer credit reports. We look forward to continuing
to work with Congress and this Subcommittee on this important issue.

STATEMENT OF COREY STONE, ASSISTANT DIRECTOR,

DEPOSITS, CASH, COLLECTIONS AND REPORTING

MARKETS, CONSUMER FINANCIAL PROTECTION BUREAU

Mr. Stone. Thank you, Senator. Chairman McCaskill, and
Ranking Member Heller, 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 to
our economy. It promotes access to credit that consumers can
afford to pay. Without credit reporting, many consumers likely
would not be able to get credit.
Credit reports are also often used in a number of non-
credit decisions about consumers. They can be used to determine
whether a consumer is offered a job or rental housing or what
rates a consumer might pay for insurance.
The CFPB is the first Federal agency to supervise both
credit reporting companies and the largest furnishers of
consumer credit information. This responsibility is a priority
for us. In 2011 and 2012, the CFPB published reports to
Congress on credit scores--the three-digit numbers used to
summarize consumers' creditworthiness. Last year we published a
Consumer Advisory about credit reports. And last July, the CFPB
adopted a rule to extend its supervision authority to cover
larger participants in the credit reporting market.
The Fair Credit Reporting Act sets out an ambitious goal to
ensure that credit reporting companies meet, ``the needs of
commerce for consumer credit, personnel, insurance, and other
information in a manner which is fair and equitable to the
consumer.'' In this context, we are exercising our supervisory
and enforcement authorities to make sure that the consumer
financial laws are being followed. And 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 families 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.
So this past December, the CFPB issued a report based on
information provided by the three credit reporting companies--
Equifax, Experian, and TransUnion--and their industry
association. Our report characterizes the three key processes
that affect credit report accuracy. These are: how creditors,
debt collectors, and other parties furnish consumer information
to the credit reporting companies; how these companies screen
incoming consumer data and match it to a consumer file in their
databases; and how the credit reporting companies and
furnishers handle consumer disputes about the accuracy of
information in consumers' credit reports.
Our report, along with the latest study of credit report
accuracy from the FTC, represents a significant step in
advancing understanding of this industry and making it more
transparent for consumers and users of credit reports. Some key
findings from our report:
First, more than three-quarters of the trade lines in the
credit reporting companies' databases come from the top 100
furnishers of information. These are largely the large bank and
non-bank financial services providers that fall under the
CFPB's supervision. This means that, 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 reporting
companies themselves.
Another finding: More than one-third of consumer disputes
relate to collection items.
Another: Only a relatively small percentage of consumers--
approximately 20 percent--look at their credit reports each
year. This is a shame as it is likely that many additional
consumers could identify and correct inaccuracies if they
reviewed their credit reports.
Another finding: Most complaints to the CRAs are forwarded
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.
Our report's three areas of focus--accuracy of the
information received from creditors and other furnishers, how
the credit reporting companies assemble and maintain the
information, and the processes that govern error resolution--
are just a start. They are the obvious and essential basics. As
we learn more about the credit reporting system from consumers,
from the supervised firms, and from others, we will adapt and
adjust to ensure that the system meets the FCRA's aspiration of
treating consumers fairly and equitably.
Thank you for inviting me to testify today. I look forward
to answering your questions.
[The prepared statement of Mr. Stone follows:]

Prepared Statement of Corey Stone, Assistant Director, Deposits, Cash,
Collections, and Reporting Markets, Consumer Financial Protection
Bureau
Chairman McCaskill, Ranking Member Heller, 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 non-credit
decisions about consumers. They can be used to determine whether a
consumer is offered a job or rental housing, or what rates a consumer
might pay for homeowner's, renter's, or auto insurance.
The CFPB is the first Federal agency to supervise both credit
reporting companies and the largest furnishers of consumer credit
information. This responsibility is a priority for us. In 2011 and
2012, the CFPB published reports to Congress on credit scores--the
three-digit numbers used to summarize consumers' creditworthiness. Last
year, we published a Consumer Advisory about credit reports. And last
July, the CFPB adopted a rule to extend its supervision authority to
cover larger credit reporting companies.
The Fair Credit Reporting Act sets out an ambitious goal to ensure
that credit reporting companies meet ``the needs of commerce for
consumer credit, personnel, insurance, and other information in a
manner which is fair and equitable to the consumer.'' In this context,
we are exercising our supervisory authority to make sure that the
consumer financial laws are being followed. And 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 families 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.
So this past December, the CFPB issued a report based on
information provided by the big three credit reporting companies--
Equifax, Experian, and TransUnion--and their industry association. Our
report characterizes three key processes that affect credit report
accuracy. These are how creditors, debt collectors, and other third
parties furnish consumer information to the credit reporting companies;
how these companies screen incoming consumer data and match it to
consumer files in their databases; and how the credit reporting
companies and furnishers handle consumer disputes about the accuracy of
information in consumers' credit reports.
Our report, along with the latest study of credit report accuracy
from the FTC, represents a significant step in advancing understanding
of this industry and making it more transparent for consumers and users
of credit reports.
Some of the key findings in our report are that:

More than three quarters of the trade lines in the credit
reporting companies' databases come from the top 100 furnishers
of information. These are largely the large bank and non-bank
financial services providers that fall under the CFPB's
supervision. This means that 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 reporting
companies 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 as 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. 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.

Our report's three areas of focus--accuracy of the information
received by the credit reporting companies, how they assemble and
maintain that information, and the processes that govern error
resolution--are just a start. They are the obvious and essential
basics. As we learn more about the credit reporting system from
consumers, from the supervised firms, and from others, we will adapt
and adjust to ensure that it meets the FCRA's aspiration of treating
consumers fairly and equitably.
Thank you for inviting me to testify today. I will be happy to
answer questions you may have about my testimony.
______

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Table of Contents
Purpose and Executive Summary

1. Introduction

2. Credit Bureaus, Credit Files, Credit Reports, and Credit Scores

3. Furnishers and Users

4. Furnisher and Data Screening

5. Compiling Credit Files: ``Matching''

6. Inaccuracies in Credit Files and Credit Reports

7. Disputing Credit Report Errors

8. Monitoring and Measuring Credit Reporting Accuracy

Glossary

Appendix
______

Purpose and Executive Summary
This paper describes the credit reporting infrastructure at the
three largest nationwide consumer reporting agencies (NCRAs)--Equifax
Information Services LLC (Equifax), TransUnion LLC (TransUnion), and
Experian Information Solutions Inc. (Experian)--with a special focus on
the infrastructure and processes currently used by the NCRAs to
collect, compile, and report information about consumers in the form of
credit reports.
Credit reports play an increasingly important role in the lives of
American consumers. Most decisions to grant credit--including mortgage
loans, auto loans, credit cards, and private student loans--include
information contained in credit reports as part of the lending
decision. These reports are also used in other spheres of decision-
making, including eligibility for rental housing, setting premiums for
auto and homeowners insurance in some states, or determining whether to
hire an applicant for a job.
As the range and frequency of decisions that rely on credit reports
have increased, so has the importance of assuring the accuracy of these
reports. These three NCRAs occupy the hub of what can best be described
as a national credit reporting system. They, the entities who report
information about borrowers to them (furnishers), providers of public
records information, and consumers all play roles which affect the
accuracy of the information reported in consumer credit reports.
In its supervision of large banks, the Consumer Financial
Protection Bureau (CFPB) has already begun examining the processes
institutions use to assure accuracy when furnishing information to the
NCRAs and when responding to consumer disputes about information
contained in their credit reports. On July 20, 2012 the CFPB published
its larger participant rule permitting it to supervise companies with
annual receipts from ``consumer reporting,'' as defined in the rule, of
over $7 million. Prior to the rule's effective date, the CFPB's Office
of Deposits, Cash, Collections and Reporting Markets (DCCR) consulted
existing reports, industry, and public sources in order to be able to
depict key dimensions of, and processes in, the reporting and disputing
of information in the U.S. credit reporting system.
This paper summarizes learnings from DCCR's research and analysis.
It is intended as a public service to provide basic descriptions of,
and statistics regarding, the underlying processes by which consumer
data is reported, matched to consumer files, and reviewed when
consumers dispute its accuracy. The CFPB has not sought to verify
information contained in this paper through its supervisory
authorities. Nor does the paper represent any learnings or conclusions
about whether any specific market participants are in compliance with
particular statutes or policies pertaining to consumer reporting.
This paper depicts the types of information movements and processes
that are most essential to the compiling of credit reports and to the
management of credit report accuracy. The Fair Credit Reporting Act
(FCRA) and its implementing regulations impose legal duties both on
NCRAs and on data furnishers relating to the accuracy of credit report
information.\1\ All parties to the credit reporting system have a vital
interest in achieving accuracy in credit reports. Those who use these
reports to make decisions rely upon the accuracy of the information
they receive. To the extent the information is inaccurate, that can
lead to incorrect decisions to the detriment of decision makers and
consumers alike.
---------------------------------------------------------------------------
\1\ See, e.g., 15 U.S.C. 1681e(b) (requiring consumer reporting
agencies to ``follow reasonable procedures to assure maximum possible
accuracy of the information concerning an individual about whom the
report relates''); 15 USC 1681i (requiring a consumer reporting agency
to reinvestigate upon receiving a consumer dispute); 15 U.S.C. 1681s-
2(a)(1)(A) (prohibiting a furnisher from furnishing information that it
``knows or has reasonable cause to believe that the information is
inaccurate''); 15 U.S.C. 1681s-2(a)(1)(B) (prohibiting the furnishing
of information where the consumer has notified the furnisher that the
information is inaccurate and the information is in fact inaccurate).
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Key Learnings

The U.S. credit reporting system encompasses a vast flow and
store of information. The NCRAs each maintain credit files on
over 200,000,000 adults and receive information from
approximately 10,000 furnishers of data. On a monthly basis,
these furnishers provide information on over 1.3 billion
consumer credit accounts or other ``trade lines.''

Furnishing credit information to the NCRAs is a highly
concentrated activity, both by institution and by product. The
10 largest institutions furnishing credit information to each
of the NCRAs account for more than half of all accounts
reflected in consumers' credit files. Likewise, retail and
network-branded revolving credit cards account for nearly 60
percent of all trade lines.

The NCRAs have designed a number of processes to
standardize, automate, and perform quality controls on incoming
data. The NCRAs report that before accepting information from
data furnishers, they perform certain background and quality
control checks on would-be-furnishers. Most furnishers--and all
new furnishers--provide consumer credit information
electronically to one or more NCRAs using a standardized format
called Metro 2 that the Consumer Data Industry Association
(CDIA) developed and refined over time. When data files are
received, the NCRAs also perform quality checks prior to adding
the data to credit files.

The ``matching'' process by which the NCRAs assign incoming
trade line data to consumer-specific credit files represents
the central step in the organization of credit data to permit
the creation of credit reports on individual consumers. The
NCRAs manage this process through unique data architectures
each has developed and which vary from each other. The
challenge of accurately matching trade line information to the
correct consumer is made complex by the absence of any
objective, third party source of information, by similarities
in consumers' names and addresses (particularly among family
members), and by limitations, colloquial variations, and
inaccuracies in the personally identifying information provided
by consumers and furnishers that occur when consumers first
apply for credit products.

Inaccuracies can enter into credit reports in a number of
ways. Inaccuracies can occur if consumers provide inaccurate
data when applying for a loan or if the creditor who furnishes
data to the credit bureau inputs consumer information to its
systems inaccurately. Inaccuracies can occur when the bureaus
match information about a consumer from a particular data
furnisher to the wrong individual consumer's file. Inaccuracies
can also come from errors or the lack of identifying
information in government records. Inaccuracies can occur when
consumers have become victims of identity fraud or identity
theft.

The extent to which credit reports contain material
inaccuracies is uncertain. There have been conflicting reports
on this issue. The Federal Trade Commission (FTC) is expected
to release results from its decade-long study on credit report
accuracy later this year.

Consumers' right to dispute information contained in their
credit reports under the FCRA--and furnishers' and the NCRAs'
obligation to respond--provide important checks on inaccurate
credit reports. Among other protections, consumers also have
the right to obtain a copy of their credit file and to receive
notice of adverse actions involving credit reports with a
resultant right to a free disclosure. These disclosures are one
way for consumers to dispute information in their file they
believe is not accurate or complete. The CFPB estimates that at
least 40,000,000 consumers obtain a copy of their credit file
from one or more of the NCRAs annually.

The NCRAs received approximately 8 million contacts from
consumers in 2011 to initiate disputes about the accuracy of
one or more items on their credit files. In total, these 8
million contacts resulted in 32-38 million disputed items on
consumers' credit files. The rate at which the credit account
information depicted in credit files is disputed varies widely
based upon the type of data furnished.

Collections items are a major source of disputes. Items
reported by collection agencies reportedly have the highest
dispute rates, averaging 1.1 percent of the trade lines they
furnish in a given year. Almost 40 percent of disputes handled
by the NCRAs on average can be linked to collections items.

The NCRAs have created an automated system for handling
consumer disputes and forwarding them to data furnishers.
Through this automated system--called e-OSCAR--the NCRAs
provide furnishers with one or two numeric codes indicating the
nature of the consumer's dispute and in a minority of cases (26
percent), explanatory text. At present, the NCRAs generally do
not forward documentation that consumers submit with mailed
disputes or provide a mechanism for consumers to forward
supporting documents when filing disputes online or via phone.
The NCRAs resolve an average of 15 percent of trade line
disputes internally (without furnisher involvement) and refer
the remaining 85 percent of the disputes they receive from
consumers concerning trade lines to data furnishers through e-
OSCAR. The furnisher of the disputed data is then required by
the FCRA to investigate the dispute and report back to the
NCRA.

The NCRAs' reliance on furnisher responses as the principal
means of resolving disputes is a source of controversy. The
NCRAs report that in seeking to maximize accuracy and in
resolving disputes, they rely on furnishers meeting their
obligations under the FCRA to report information accurately and
to respond to disputes appropriately. Consumer advocates have
argued that the NCRAs have an obligation to monitor and manage
furnisher practices as part of their broader obligation to
achieve credit report accuracy.

While the measurement of credit report accuracy and the
level and causes of inaccuracies present challenges, periodic
measurement of credit report accuracy holds promise for
establishing baseline accuracy levels and measuring
improvements over time.
1. Introduction
In most of the markets for consumer credit, including credit cards,
auto loans, mortgages, and student loans, lenders use credit reports as
part of their evaluation of a consumer's application for credit.
Companies use credit reports and credit scores derived from the
information in credit reporting files to assess a consumer's likelihood
of repaying the loan. Credit reports and scores can be delivered in
real time, permitting instant decisions at retailers, auto showrooms,
or online. Lists of consumers derived from credit reports are used to
make offers of credit. Underwriting processes stipulated by the FHA,
VA, Fannie Mae, and Freddie Mac require mortgage lenders to obtain
credit reports from a nationwide credit reporting agency (the NCRAs)
before these Federal agencies and government-sponsored enterprises will
insure, guarantee, or purchase their loans. For each of these forms of
credit and origination channels, credit reports are used by lenders to
help set interest rates and other key credit terms, or determine
whether the consumer is offered credit at all. Of 113 million credit
card and retail card accounts, auto loans, personal loans, mortgages,
and home equity loans originated in the United States in 2011, the vast
majority of approval decisions used information furnished by credit
reporting agencies.\2\
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\2\ Experian--Oliver Wyman, Comprehensive Consumer Credit Review,
Experian-Oliver Wyman Market Intelligence Report, at 7 (2011 Q4).
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Credit reports also are used in spheres of decision-making beyond
eligibility for credit. These include eligibility for rental
housing,\3\ setting premiums for auto and other property and casualty
insurance where permitted by law,\4\ and establishing (along with prior
account history) eligibility for checking accounts.\5\ When an
individual applies for a job, a prospective employer may examine his or
her credit report upon the individual's authorization.\6\ A recent
survey by the Society for Human Resource Management of its membership
database found that almost 60 percent of its member employers used
credit reports to screen applicants for at least some of their
positions.\7\
---------------------------------------------------------------------------
\3\ See, e.g., Experian Connect^SM, available at http://
www.experian.com/connect/landlord.html.
\4\ Federal Trade Commission, Credit-Based Insurance Scores:
Impacts on Consumers of Automobile Insurance, A Report to Congress
(2007), available at http://www.ftc.gov/os/2007/07/
P044804FACTA_Report_Credit-Based_Insurance_Scores.pdf.
\5\ Marcie Geffner, Banking and your credit score, Bankrate.com
(Mar. 17, 2011), available at http://www.bankrate.com/finance/savings/
banks-checking-credit-scores-more-often-1.aspx. Banks may retrieve a
credit report from a credit bureau as part of a review of a bank
account application. A bank may also contact a specialty consumer
reporting agency, like ChexSystems, a subsidiary of FIS, to see if the
consumer has history of bank-initiated account closures or other
negative activity in connection with previous checking accounts.
\6\ The FCRA allows for the sharing of credit reports for
employment purposes. See 15 U.S.C. Sec. 1681b(a)(3)(B).
\7\ Forty-seven percent of firms used credit checks for select job
candidates, while thirteen percent used credit checks for all job
candidates. The Society for Human Resource Management, SHRM Research
Spotlight: Credit Background Checks, Society Human Resource Management
(2010). Small, medium, and large employers were contacted as part of
the survey. http://www.shrm.org/Research/SurveyFindings/Articles/
Documents/CCFlier_FINAL.pdf. The CFPB, along with all other Federal
agencies, use credit reports in their employment screening process
(specifically to check for any debts owed to the Federal government).
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Because of the widespread use of credit reports--often along with
credit scores derived from them--in major personal financial decisions,
the accuracy of reports has remained an ongoing policy concern. In a
2007 report on credit scores used in lending decisions, the Federal
Reserve Board noted the importance of accurate credit reports: ``for
the full benefits of the credit-reporting system to be realized, credit
records must be reasonable, complete, and accurate.'' \8\ Credit
scoring models depend on the credit information contained in consumers'
credit files to be accurate to effectively predict a consumer's
relative risk of delinquency. Inaccurate credit information may cause
credit scoring models to understate or overstate a consumer's credit
risk to lenders. Accurate credit information helps decision makers
predict certain risks effectively, while inaccurate credit information
in credit reports has the potential to compromise the effectiveness and
consistency of decisions that rely on them, and the potential to cause
material harm to affected consumers. Ultimately, consumer and business
confidence in decisions based on credit reports and scores derived from
them depends on confidence in the accuracy of the credit information
they contain. ^a
---------------------------------------------------------------------------
\8\ Federal Reserve Board, Report to Congress on Credit Scoring and
its Effects on the Availability and Affordability of Credit (August
2007) (Board Credit Scoring Report), available at http://
www.federalreserve.gov/boarddocs/rptcongress/creditscore/
creditscore.pdf.
\a\ The issues raised in this discussion of credit report accuracy
also generally apply to consumer reports from consumer reporting
agencies as defined under the FCRA. Besides the NCRAs, there are other
consumer reporting agencies including the nationwide specialty consumer
reporting agencies with rental information databases, check writing/
bank databases, medical information databases, insurance claims
databases, employment databases, and background screening databases.
Each of these specialty databases has its own sources of consumer
information. There are also consumer reporting agencies that are not
nationwide.
---------------------------------------------------------------------------
When the FCRA passed in 1970, key provisions of the law focused on
assuring the accuracy of credit reports. These key accuracy provisions
of the FCRA remain as important today as when the law first passed.
They address the quality of data in credit files by requiring credit
reporting agencies to establish ``reasonable procedures to assure
maximum possible accuracy'' of their credit reports.\9\ The FCRA also
includes a number of other provisions that relate to the information in
consumer reports such as limits on the period of time during which
certain pieces of adverse information can generally be included in a
consumer report.\10\
---------------------------------------------------------------------------
\9\ 15 U.S.C. Sec. 1681e(b).
\10\ 15 U.S.C. Sec. 1681c.
---------------------------------------------------------------------------
Credit report accuracy relies on an ongoing ecosystem involving the
interaction of NCRAs and other consumer reporting agencies, furnishers
of information, public record repositories, users of credit reports,
and consumers. An understanding of how this ecosystem operates--
including the basic ``plumbing'' of data flows, the various
participants involved, and the economic incentives each group of
participants may bring to their respective roles--is foundational
knowledge in considering technical and policy options for improving and
assuring credit report accuracy.
This paper focuses on the databases of the three largest NCRAs--
Equifax, TransUnion, and Experian. It seeks to depict technical
processes involved in the collection, screening, and correction of
credit information and their broad impact on the accuracy of
information provided in credit reports from these NCRAs. It does not
seek to characterize or quantify either the general level of accuracy
of credit report information, or the harms that may result to consumers
affected by credit report inaccuracies. Additionally, the paper does
not attempt to weigh the costs and benefits that might be involved in
improving the accuracy of credit reports beyond their current levels.
2. Credit Bureaus, Credit Files, Credit Reports, and Credit Scores
2.1 Credit Bureaus
The consumer reporting system enables creditors and other providers
of consumer services to pool information about their respective
customers and use that pooled information to inform their credit and
other risk decisions about new applicants and existing customers.
Credit bureaus first emerged in the United States in the late 1800s
to support merchant lenders who extended credit to local businesses and
individuals.\11\ At that time, the ``credit bureau'' consisted of a
list of individuals who had not repaid their debts as agreed and were
therefore deemed poor credit risks. Prior to the use of such lists,
local merchants extended only very small amounts of credit, and these
credit decisions depended largely on the merchant's direct personal
knowledge of the individual borrower's personal character.
---------------------------------------------------------------------------
\11\ Evan Hendricks, Credit Scores and Credit Reports: How the
System Really Works, at 157 (2004).
---------------------------------------------------------------------------
The credit reporting industry grew steadily with growing interest
on the part of both consumers and merchants in using credit in purchase
transactions. In the 1920s and again in the 1950s, credit bureaus
experienced particularly rapid growth with the introduction of retail
installment credit and revolving credit accounts,\12\ in the 1970s and
1980s with the growth of bank credit cards, and in the 1990s with the
automation of mortgage underwriting. By the early 1970s, the industry
comprised over 2,250 firms, most with local or regional coverage. As
the 1970s progressed, the industry began to consolidate.\13\ With the
development of computer databases, nationwide credit card issuers, and
automated underwriting, the threshold of technological investment
required to distribute credit reports increased, as did the importance
of offering nationwide coverage. Many of the local bureaus sold their
records to the major national bureaus. Today, the consumer reporting
landscape includes large national bureaus like the NCRAs; bureaus with
credit information such as payday loans, utility and telephone
accounts, and other credit relationships; a number of specialized
consumer reporting agencies with medical information, employment
history, residential history, check writing history, checking account
history, insurance claims, and other non-credit relationships; as a
well as a few hundred resellers of credit reports.
---------------------------------------------------------------------------
\12\ Id. at 158.
\13\ Id.
---------------------------------------------------------------------------
By 2011, the NCRAs generated U.S. revenues of about $4 billion,\14\
including revenues from several ancillary businesses such as the sale
of lists and non-credit consumer information for marketing purposes,
the sale of credit monitoring services directly to consumers or through
resellers, and analytical services that provide credit scores and other
modeling tools to creditors.
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\14\ Based on CFPB calculations of industry publicly reported
revenues.
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2.2 The Contents of Consumer Credit Files
For purposes of this paper, credit reports are a form of ``consumer
report'' as defined by the FCRA. Consumer reports generally are
communications by a consumer reporting agency ``bearing on a consumer's
credit worthiness, credit standing, credit capacity, character, general
reputation, personal characteristics, or mode of living'' used or
expected to be used in determining a consumer's eligibility for credit
or insurance, for employment purposes, or other permissible purposes
listed in the statute.\15\ As defined by the FCRA, the ``file,'' when
used in connection with information on any consumer, means ``all of the
information on that consumer recorded and retained by a consumer
reporting agency regardless of how the information is stored.'' \16\
This paper refers to ``credit files'' as the information about a
consumer that is contained in the databases of the NCRAs.
---------------------------------------------------------------------------
\15\ 15 U.S.C. Sec. 1681a(d).
\16\ 15 U.S.C. 1681a(g).
---------------------------------------------------------------------------
2.2.1 File Components
Credit files have some or all of the following components.

1. Header/Identifying Information: The header of a credit file
contains the identifying information of the consumer with whom
the credit file is associated including an individual's name
(and any other names previously used), current and former
addresses, Social Security number (SSN), date of birth, and
phone numbers. Not all credit files contain all of these
identifying elements.\17\
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\17\ Identifying information in credit files is derived from
furnisher supplied data and from public records. Furnisher supplied
identity information often comes directly from the consumer, and may
vary depending on the identity information consumers provide on their
applications and how comprehensively the consumer and furnisher provide
updates when such things as marital status, address, or phone number
change. Identity information supplied in public records can also vary.

2. Trade lines: Trade lines are the accounts in a consumer's name
reported by creditors such as auto lenders, mortgage lenders,
or credit card issuers. For each trade line, creditors that
furnish information to consumer reporting agencies (referred to
as ``furnishers'' under the FCRA) generally provide the type of
credit (e.g., auto loan, mortgage, credit card), the credit
limit or loan amount, account balance, the account payment
history including the timeliness of payments, whether or not
the account is delinquent or in collection, and the dates the
account was opened and closed. If more than one consumer is
listed as a borrower on a given credit account, the trade line
information will appear in both consumers' credit files
ordinarily with information as to the relationship of the
consumer to the account, such as authorized user. Trade line
information may contain indicators such as whether the account
is individual or joint, the account is involved in a bankruptcy
filing, the device for accessing the account (e.g., a credit
card or PIN) was lost or stolen, and, if closed, the reason for
closure (e.g., paid off, closed at the consumer's request).
Credit files do not contain certain terms of the loans or
credit lines such as interest rates, points, or fees and do not
contain certain performance history such as purchases made
using the account or payments made on the account.
Additionally, credit reports do not contain information on a
---------------------------------------------------------------------------
consumer's income or assets.

3. Public record information: The NCRAs' files include public record
data of a financial nature including consumer bankruptcies,
judgments, and state and Federal tax liens. Records of arrests
and convictions generally do not appear on a consumer's credit
file, but other types of consumer reporting agencies, such as
employment background screening agencies, include them. Other
public records that do not appear in credit reports are
marriage records, adoptions, and records of civil suits that
have not resulted in judgments.\18\
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\18\ John Ulzheimer, Public Record Information and Credit Reports:
What's There?, Smartcredit.com, (March 3, 2011), available at http://
www.smartcredit.com/blog/2011/03/03/public-record-information-and-
credit-reports-whats-there/.

4. Collections: Third-party collection items, reported by debt
buyers or collections agencies on behalf of a creditor, are
considered a separate category on a credit report by at least
---------------------------------------------------------------------------
some of the NCRAs.

5. Inquiries: A consumer's credit file is required to list every
entity that accessed the file in the last two years for
employment-related uses and for at least the last year for
credit uses and most non-employment uses (e.g., tenant
screening, insurance, government licenses or benefits).\19\
Some of the NCRAs go beyond legal requirements and list credit
inquiries for two years.
---------------------------------------------------------------------------
\19\ 15 U.S.C. Sec. 1681g(a)(3)(A).
---------------------------------------------------------------------------
The NCRAs have two major classifications of inquiries: ``soft''
inquiries and ``hard'' inquiries. Hard inquiries are typically
the product of consumer-initiated activities such as
applications for credit cards, to rent an apartment, to open a
deposit account, or for other services. In contrast, soft
inquiries are generally user-initiated inquiries like
prescreening. ^b Only hard inquiries will appear in
credit reports obtained by creditors and other users.
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\b\ The NCRAs treat other types of inquiries as soft inquiries
based on business rules--certain insurance inquiries, utility, and
government inquiries relating to licenses or government benefits may be
categorized as soft, depending on the business rules for that entity.
Employment inquiries are commonly placed in the soft inquiry section.
Each listed inquiry will include the date and type of inquiry (e.g., by
consumer, review of existing account, for pre-screening). Federal Trade
Commission and the Federal Reserve Board, Report to Congress on the
Fair Credit Reporting Act Dispute Process, at 4 (August 2006).

A consumer's file also has information on whether the consumer has
initiated a security freeze, fraud alert, active duty alert, or filed a
consumer statement on his or her file.
2.3 Credit Reports
Credit reports are consumer reports provided by NCRAs or other CRAs
to lenders and other users. Credit reports generally contain
information in the consumer file that is reportable to the end user.
The FCRA limits with some exceptions how long a credit bureau can
communicate certain adverse information in a credit report.\20\ Many
adverse items including records of late payments, delinquencies, or
collection items typically stay on a credit report for up to seven
years.\21\ Likewise, civil suits and civil judgments typically stay on
the report for no more than the longer of seven years or the governing
statute of limitations, while paid tax liens typically cannot be
reported more than seven years after the date of payment.\22\ Credit
reports generally cannot list bankruptcies for more than 10 years after
the order for relief or date of adjudication, except that repayment
plans are only reported for seven years.\23\ There are also
restrictions on communicating a medical service provider's name,
address, and telephone number pertaining to medical debts in a credit
report.\24\
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\20\ The FCRA's time limits on the reporting of derogatory
information do not apply to certain large financial transactions,
namely (1) a credit transaction involving, or which may reasonably be
expected to involve, a principal amount of $150,000 or more; (2) the
underwriting of life insurance involving, or which may reasonably be
expected to involve, a face amount of $150,000 or more; or (3) the
employment of any individual at an annual salary which equals or which
may reasonably be expected to equal $75,000 or more. 15 U.S.C.
Sec. 1681c(b).
\21\ 15 U.S.C. Sec. 1681c(a)(4)-(5).
\22\ 15 U.S.C. Sec. 1681c(a)(2)-(3).
\23\ 15 U.S.C. Sec. 1681c(a)(1). As discussed supra, in note 20,
reports may be exempted from these time restrictions in certain
circumstances. In practice, the NCRAs do not utilize these exemptions,
and cease reporting negative information after the standard time limits
have elapsed.
\24\ 15 U.S.C. Sec. 1681c(a)(6).
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Users vary in how they evaluate credit reporting information. For
users who view reports for employment purposes, the NCRAs provide a
modified credit report, which removes birth date and other information
that is sensitive in the employment context and does not include credit
scores. Financial services users rely on credit reports as well as
proprietary or third-party algorithms--``scoring'' models--to interpret
the information in a credit report. These algorithms use variables or
``attributes'' derived from the credit report.
2.4 Credit Scoring
The NCRAs deliver credit reporting information to users in
standardized electronic formats so that lenders' underwriting systems
can use reports from more than one bureau interchangeably and so that
analytical credit risk models used by the lenders can identify and
retrieve relevant pieces of information. More often than not, a credit
bureau will also deliver a credit score calculated from the information
in a credit report along with variables derived from the credit report
(often called attributes).\25\ The lender will pay the bureau a fee for
the credit report information and an additional amount for the score.
The model used to generate the credit score is selected by the lender
as the user.
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\25\ A credit score is a defined term in the FCRA which generally
means ``a numerical value or a categorization derived from a
statistical tool or modeling system used by a person who makes or
arranges a loan to predict the likelihood of certain credit behaviors,
including default . . .'' See 15 U.S.C. Sec. 1681g(f)(2) for full
definition.
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Lenders use credit scoring systems to assess the relative risk of
consumers going delinquent on a loan. For most credit scoring models in
use today, the higher the numerical value of a credit score, the lower
the credit risk of a consumer. Consumers with very high scores thus are
likely to get more favorable interest rates and other more favorable
loan terms. In contrast, consumers with lower numerical scores present
higher risks of default and may only be able to get loans at higher
interest rates or other less favorable terms, if lenders are willing to
lend to them at all.
Large national lenders have widely used credit scoring since the
1970s to inform their loan underwriting.\26\ The NCRAs did not start
providing credit scores based on credit bureau data until the late
1980s. In the late 1980s, one bureau built a bankruptcy prediction
model. Models supplied by Fair Isaac Corporation (FICO) for use with
credit bureau data appeared in 1990 and 1991. Today, scores using
models supplied by FICO account for a substantial majority of third-
party generic credit scores purchased with credit reports by financial
institutions for loan origination decisions.\27\ In 2006 the NCRAs
formed a joint venture, VantageScore, which offers competing scoring
solutions. Additionally, the NCRAs and other third-party development
companies develop both generic and custom scoring models. Many lenders
also develop and use proprietary scoring models derived from credit
report information.
---------------------------------------------------------------------------
\26\ Board of Governors of the Federal Reserve System, Report to
the Congress on Credit Scoring and Its Effects on the Availability and
Affordability of Credit: Submitted to the Congress Pursuant to Section
215 of the Fair and Accurate Credit Transactions Act of 2003 (Aug.
2007), at O-4.
\27\ One industry observer estimates that FICO had over 90 percent
of the market share in 2010 of scores sold to firms for use in credit
related decisions. Consumer Financial Protection Bureau, The impact of
differences between consumer-and creditor -purchased credit scores:
Report to Congress, at 6 (July 19, 2011).
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The most common credit scores rank the relative probability that a
consumer will become 90 days delinquent on a new loan within two years.
There are a wide variety of credit scores offered by the NCRAs that
vary by score provider, by model, and by target industry.\28\ FICO,
alone, has 49 different scoring models.\29\ Regardless of the version,
credit scoring models tend to share common ``attributes'' derived from
credit reports, such as a consumer's bill paying history (e.g., on
time, delinquent, in collections), the number and type of credit
accounts a consumer has (e.g., bank cards, retail credit cards,
installment loans), the amount of available credit that a consumer is
using, how long a consumer has had a credit account, and recent credit
activity, including inquiries.
---------------------------------------------------------------------------
\28\ For more detailed information on the variety of credit score
models sold to lenders and to consumers, see CFPB, ``Analysis of
Differences between Consumer-and Creditor-Purchased Credit Scores,''
(September 2012).
\29\ New York Times, ``Why you have 49 different FICO Scores,''
available at http://bucks.blogs.nytimes.com/2012/08/27/why-you-have-49-
different-fico-scores/.
---------------------------------------------------------------------------
Creditors use credit scores to enhance the efficiency and
consistency of credit decisioning.\30\ Credit scores may also reduce
the possibility of subjective decision making by lenders based on
impermissible factors under fair lending laws such as the Equal Credit
Opportunity Act (ECOA), like marital status, age or national origin.
The Federal Reserve noted in its 2007 study on credit scoring, ``By
providing a low-cost, accurate, and standardized metric of credit risk
for a pool of loans, credit scoring has broadened creditors' access to
capital markets, reduced funding costs, and strengthened public and
private scrutiny of lending activities.'' \31\
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\30\ See supra note 26 at O-5.
\31\ Id.
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Some have argued that credit scores derived from credit reports
have the potential to reinforce the effects of discrimination. They
argue that where lending discrimination occurs, minority and other
disadvantaged borrowers can wind up in credit products that make
default more likely. As a result of higher default rates, their credit
reports and scores depict them as bad credit risks, when in fact they
would have performed better if they were in better, less expensive
products.\32\
---------------------------------------------------------------------------
\32\ Deirdre Swesnik and Lisa Rice, National Fair Housing Alliance:
Discriminatory Effects on Credit Scoring on Communities of Color,
Prepared for the Symposium on Credit Scoring and Credit Reporting
[forthcoming].
---------------------------------------------------------------------------
NCRAs can deliver credit reports and scores (using proprietary or
third-party models) to those authorized to access a credit report
instantly upon request. This makes it possible for lenders to grant
instant credit in venues where obtaining credit is often an important
part of a consumer's purchase decision, such as at an auto dealer or a
department store. Additionally, incorporating the use of credit scores
as a factor in underwriting has enabled the government-sponsored
entities, Fannie Mae and Freddie Mac, to introduce automated
underwriting systems that allowed mortgage originators to streamline
the mortgage underwriting process and provide rapid mortgage approvals.
Because credit scores are derived from the information in credit
reports, inaccuracies in credit report information can affect
consumers' credit scores. Some inaccuracies matter more than others. An
error in a consumer's address, the misspelling of a maiden name, or
other errors in the consumer's identification information are generally
unlikely to have an impact on a consumer's credit score or perceived
credit worthiness by lenders. However, a public record that
inaccurately indicates a consumer is subject to a tax lien, or a trade
line that incorrectly states a consumer had a severe delinquency, could
cause a lender to deny credit to a consumer altogether, or to treat a
consumer it would otherwise consider eligible for a loan at prime
interest rates as only eligible for sub-prime rates, costing the
consumer thousands of dollars in interest.
Below is a table showing how credit scores may be affected when
specific adverse information appears in a credit report using different
starting scores from VantageScore and FICO, two credit score providers.
FICO scores generally have a range of 300 to 850, while Vantage scores
range from 501 to 990. It is worth noting that these score impacts are
hypothetical, and that the impact of an adverse event in any
individual's case varies by the unique characteristics of that
consumer's credit history, including the number and timing of such
events.
Figure 1: Example Score Impacts

----------------------------------------------------------------------------------------------------------------
Score Impact Range
---------------------------------------------------------------------------------------
Financial Data Consumer with 900 Consumer with 760 Consumer with 780 Consumer with 680
Vantage Score Vantage Score FICO Score FICO Score
----------------------------------------------------------------------------------------------------------------
Bank card--30 days 70-90 point drop 60-80 point drop 90-110 point drop 60-80 point drop
delinquent
----------------------------------------------------------------------------------------------------------------
Mortgage charge-off or 130-170 point drop 80-110 point drop 140-160 point drop 95-115 point drop
foreclosure
----------------------------------------------------------------------------------------------------------------
Filing bankruptcy 350+ point drop 200+ point drop 220-240 point drop 130-150 point drop
----------------------------------------------------------------------------------------------------------------
Sources: VantageScore: Sara Davies, Introduction to the VantageScore Model, Ways Consumer Credit Scores Are
Impacted and Methods for Score Improvement, Presentation at the Symposium on Credit Scoring and Credit
Reporting at Suffolk University Law School (June 6, 2012). FICO: http://www.myfico.com/crediteducation/
questions/Credit_Problem_Comparison.aspx.

Other than credit scores, the NCRAs also provide lenders with
analytical models using credit report data. These include models that
predict the likelihood of accepting a credit offer, of future account
utilization, of consumers leaving an existing account, or of
collectability on an outstanding debt.
3. Furnishers and Users
In addition to the NCRAs and other CRAs, the most important
participants in the credit reporting system are furnishers, users, and
consumers. All of these participants have defined roles with specific
obligations under the FCRA.
Most furnishers of credit information to NCRAs are creditors who
are also users of credit reports. Public records (e.g., judgments,
bankruptcy filings, tax liens) are also important sources of
information for NCRAs.
Figure 2 below is a simplified diagram of the information flows in
the credit reporting system.
Figure 2: The Credit Reporting System

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Source: CFPB 2012.

3.1 Trade Line Furnishers
Each NCRA has a consumer database with over 1.3 billion active
trade lines.\33\ Financial institutions furnish the bulk of these trade
lines. Approximately 40 percent of all trade lines of an NCRA's files
are bank card trade lines. Of the remaining trade lines, 18 percent
came from banks that issue retail cards, 13 percent are accounts in
collection reported by collections agencies and debt buyers, 7 percent
from the education industry,^c 7 percent from sales finance
providers (e.g., closed-end loans including auto loans), 7 percent from
mortgage lenders or servicers, 4 percent from auto lenders, and 4
percent from other unspecified creditors.\34\
---------------------------------------------------------------------------
\33\ Industry figures.
\c\ Education furnishers are comprised of furnishers from business
education schools, colleges, private educational lenders, technical
education universities, vocational and trade schools, and government
furnishers including the Department of Education and Federal student
loan servicers.
\34\ Industry figures.
---------------------------------------------------------------------------
While the NCRAs receive trade lines from approximately 10,000
furnishers, a small number of very large institutions (typically with
multiple lines of business) supply a majority of trade lines. For the
NCRAs, the top 10 furnishers provide approximately 57 percent of the
trade lines, the top 50 furnishers provide 72 percent of the trade
lines, and the top 100 furnishers provide 76 percent of the trade lines
in their databases.\35\ The institutions' credit offerings can include
bank credit cards, retailer credit cards, auto loans, student loans,
and mortgages.\36\ Other furnisher industries, such as collections
agencies, tend to be more fragmented.\37\
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\35\ Industry figures. It is likely that the NCRAs do not uniformly
define an institution as a furnisher in the same way (e.g., some large,
complex institutions may be treated as a single furnisher by one NCRA
but as multiple furnishers by another); hence estimates cited in this
report from industry sources about the number of furnishers and shares
of tradelines by furnishers and industries are approximations.
\36\ Industry information.
\37\ The 2007 Economic Census provides the most comprehensive
recent assessment of industry revenue concentration. The survey
identifies 4,506 collection agencies. The largest of these firms (those
with over $100 million in annual revenue) take in a minority proportion
of overall industry revenue (32 percent). See http://
factfinder2.census.gov/faces/tableservices/jsf/pages/
productview.xhtml?pid=ECN_2007_US_56SSSZ4&prodType=table# (scroll to
NAICS code 56144).
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Furnishers typically report trade line updates monthly in batch
files transmitted electronically to one or more of the NCRAs. Most of
the largest furnishers report all or nearly all of their trade lines to
each of the largest NCRAs.^d These updates generally include
changes in balances owed, whether or not payments were received,
changes in available credit lines (in the cases of revolving credit
card accounts), and the status of the account (e.g., current, 30+ days
late, 60+ days late). The NCRAs provide a standardized data format,
called Metro 2, which most of their furnishers use to submit
data.^e
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\d\ The NCRAs do have some variations in their source data. Some
smaller banks and many debt collection agencies do not send information
to all three of the largest NCRAs. See Federal Trade Commission and
Federal Reserve Board, Report to Congress on the Fair Credit Reporting
Act Dispute Process, at 5 (August 2006).
\e\ Innovis, a credit bureau, also is a participant in the Metro
reporting system. It offers portfolio management solutions, fraud
solutions, and authentication solutions, among other services.
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3.1.1 Furnisher Incentives and Disincentives
Reporting to credit bureaus and other consumer reporting agencies
by creditors is voluntary and historically has been. Not all creditors
report information about their borrowers. Some creditors report
information about users of some of their credit products, but not
others. For example, credit card issuers who issue revolving credit to
consumers usually report trade line information monthly on consumer
cards but are less likely to report on small business cards even when
these are owed by, and underwritten based on, the personal credit
history of the business owner. Furnishers have multiple incentives to
contribute data to the NCRAs. Individual contributors recognize that
the cross-company, cross-industry visibility into credit risk offered
by a credit bureau depends on widespread creditor participation. If a
company elects not to contribute data, it runs the risk that its peers
will not contribute data, thus reducing a common resource from which
creditors benefit. As indicated above, most furnishers of trade line
information to the NCRAs are also large users of credit reports.
A second reason creditors furnish information on their accounts is
to maintain an incentive for their borrowers to make timely repayments.
Consumers are more likely to repay creditors if they are aware that a
creditor may report late payments or delinquent accounts to the NCRAs,
which could negatively affect their credit history and/or credit score.
Consumers also get the benefit of having their timely payments
reported, which will positively impact lenders' views of their credit
worthiness.
There are also disincentives for creditors to report on their
borrowers to the NCRAs.\38\ For example, the names of individuals who
borrow and make loan payments on time may be included in prescreened
lists that NCRAs and other CRAs sell, providing these borrowers with
account offers from competing lenders. Reporting to one or more of the
NCRAs may require investment in specialized information systems.
Further, data furnishers must follow FCRA requirements such as
investigating disputes submitted directly \39\ or indirectly through
the NCRAs. Since furnishing data is voluntary, furnishers must consider
whether the overall benefits of furnishing outweigh its costs.
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\38\ Historically, some furnishers have declined to provide certain
fields. For example, omitting credit limits prompted the inclusion of
I(b)(2) (iii) in App. E to the Furnisher Rule. 74 Fed. Reg. 31484 (July
1, 2009), available at http://www.gpo.gov/fdsys/pkg/FR-2009-07-01/pdf/
E9-15323.pdf. The Furnisher Rule is now codified in 12 C.F.R. pt. 1022.
76 Fed. Reg. 79308 (Dec. 21, 2011). The practice of some furnishers of
omitting account opening date and other fields also prompted the
Federal banking agencies, the National Credit Union Administration
(NCUA), and the FTC to issue an advance notice of proposed rulemaking
focused on whether furnishers should be required to provide this
information, 74 Fed. Reg. 31529 (July 1, 2009), available at http://
www.gpo.gov/fdsys/pkg/FR-2009-07-01/pdf/E9-15322.pdf.
\39\ 74 Fed. Reg 31484 (July 1, 2009). This rule was required by
section 623(e) of FCRA, as added by section 312 of the Fair and
Accurate Credit Transaction Act of 2003.
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3.1.2 Reporting Format
CDIA developed the Metro 2 guidelines in 1997, on behalf of the
NCRAs and Innovis, as their standard for the electronic reporting of
consumer trade line information. Metro 2 replaced the original Metro
format developed in the late 1970s.\40\ The format forms the basis by
which furnishers provide updates on their borrowers' account status in
bulk file submissions to one or more of the NCRAs, generally on a
monthly basis. An obvious benefit of a shared data format is that all
furnishers can report trade line information the same way. This
simplifies the creation of standardized credit files by each of the
NCRAs and simplifies the interpretation of credit information into
risk-based credit scores.
---------------------------------------------------------------------------
\40\ Industry information.
---------------------------------------------------------------------------
Each Metro 2 electronic file submission has a furnisher header
record, a series of base records on each borrower, supplementary
records describing updates to the furnished trade lines, and a trailer
record. A description of the various types of record segments and the
information that Metro 2 allows furnishers to provide is offered below.

Metro 2 Header and Trailer Records: Header and Trailer
records form the bookends of a Metro 2 file submission. The
header record is the first record provided in the Metro 2 file
submission and is used to identify the furnisher and the
activity period. It also contains the furnisher's unique
identifier at the NCRA receiving the file, the activity date,
name, address, and other contact information for the furnisher.
Note that this type of header record should be distinguished
from the header record on a consumer file maintained by an NCRA
that has the consumer's personal identification information.
The trailer record, meanwhile, is the last record in a
furnisher's Metro 2 submission. It includes the sum totals of
all the base and supplementary segments submitted.

Base Segment: The Base segment is used to identify the
primary borrower and to provide relevant account information
for each trade line. Identification information for the
borrower includes first, middle, last name, suffix, generation
code, phone number, address, SSN, and date of birth. Account
information includes account type (e.g., revolving,
installment, mortgage), credit limit, highest credit or
original loan amount, duration of credit extended, frequency
with which payments are due, account status, ^f stage
of delinquency, date of first delinquency, and date the account
closed and conditions under which it was closed (e.g., closed
by consumer, paid full amount due, closed by creditor and paid
less than full amount). Additionally, the Base segment contains
up to 24 months of the consumer's payment history on the
account. Contrary to a frequent assumption, the Metro 2 format
does not contain fields for interest rate information on
particular loans or revolving accounts.
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\f\ Account status reflects the current or final disposition of the
account. If the account is delinquent, Metro 2 allows furnishers to
report the level of delinquency such as 30-59 days past due, 60-89 days
past due, and up to 180 days or more past due. Where the account is
closed, a furnisher can report whether the account closed with a zero
balance, was a voluntary surrender, closure surrender, repossession,
charge-off, or entered into foreclosure.

Supplementary Segments: Depending on the furnisher and the
type of trade line, the furnisher may have additional data
segments to supplement the data in the base segment. These
---------------------------------------------------------------------------
include:

Associated Consumer Segment: Contains information on
consumers who are associated with a credit account besides
the primary user, including name, SSN, date of birth,
telephone number, and the relation of the consumer to the
account. Associated consumers can include authorized users,
guarantors, persons with joint contractual liability, or
others.

Original Creditor Name Segment: Has the name of the
original credit grantor, which is necessary to link a
consumer debt to the original creditor even after it is
outsourced to a third-party collection agency.

Segment for Accounts Sold to/Purchased from Another
Company: Used to report the name of the companies which
respectively bought and sold a portfolio of consumer debt.

Mortgage Information: Used to report any Fannie Mae or
Freddie Mac loan number associated with a mortgage account.

Specialized Payment Information: Has information on
deferred payments or balloon payments, if applicable.

Account Number/Identification Number: Used to report
new identification or account numbers.

Employment Segment: Contains employment information on
the primary borrower, which may come from the consumer's
application for credit or from employment information that
the creditor obtained in approving the account.

The Metro 2 format specifies that base segments be reported for
each account submitted. Supplementary segments are reported when
relevant to the particular trade line or other data that is furnished.
3.2 Public Record Collection
While the NCRAs rely on a multitude of furnishers to supply
creditor trade line information, they also receive public records
including bankruptcy records, civil court monetary judgments, and
government tax liens from publicly available government sources. They
obtain these records primarily through LexisNexis Risk Data Retrieval
Services LLC (LNRDRS). The use of LNRDRS followed the NCRAs' decisions
to move from direct collection from hundreds of sources and suppliers
to a single data retrieval vendor. The NCRAs report they do not use
criminal records in their credit reports. Rather, the NCRAs utilize
public records representing derogatory items in their credit files.
Derogatory is defined as negative information that will likely hurt a
consumer's credit (e.g., late payments, collection accounts,
foreclosures, civil judgments).\41\ While each NCRA has its own
criteria, public records are generally removed from credit reports once
the reportable event becomes obsolete (between seven and ten years
depending on the type of information and the applicable statute of
limitations).
---------------------------------------------------------------------------
\41\ Credit Advice from The ``Ask Experian'' Team, available at
http://www.experian.com/ask-experian/20120118-what-derogatory-
means.html.
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3.2.1 LNRDRS Data Retrieval
LNRDRS retrieves and sends to each of the three NCRAs between 10
and 20 million public record events per year (roughly one third of
which are bankruptcies, tax liens, and civil monetary judgments
respectively).\42\ All bankruptcy records are pulled electronically
from the PACER system, an electronic public access service that allows
users to obtain case and docket information from Federal appellate,
district and bankruptcy courts. Monetary judgments and tax liens are
obtained from 10,000 to 12,000 state and local courts and county and
state government offices. LNRDRS reports it obtains information on 30
percent of judgments and liens electronically. For the remaining 70
percent, LNRDRS deploys a network of independent contractors who
manually access public records at government sources and type the local
records into a proprietary software system, which screens for
duplicates and minimizes typographical errors. A single record
collector can typically record approximately 200 events in a day.
---------------------------------------------------------------------------
\42\ Industry figures.
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In retrieving records for the NCRAs, LNRDRS provides the data in
its ``raw'' form. The NCRAs undertake the responsibility of assigning
records to particular consumer files, and adjusting matching criteria
for possible errors. Assignment of a court record to a particular
consumer can be challenging for the NCRAs because, according to one
estimate, SSNs appear on court records only 3 percent of the time.
4. Furnisher and Data Screening
The NCRAs employ a number of methods to screen furnishers and
incoming information for inaccuracies and anomalies. This section
examines the vetting and approving of furnishers and various quality
screens performed on data files received from furnishers. These methods
focus on identifying formatting errors, logical errors, internal
inconsistencies, and anomalies.
4.1 New Furnisher Screening
The NCRAs' data quality processes start with their screening of new
furnishers.
The NCRAs report that a prospective furnisher can initiate a
relationship with them by sending a letter of intent to furnish. Due to
the resource and economic costs associated with adding a furnisher, the
NCRAs will generally require prospective furnishers to report a minimum
of 100 to 200 active accounts per month.\43\ Each NCRA reportedly puts
prospective furnishers through an initial security screening. Screening
generally includes an inspection of features of each business such as
its physical headquarters, phone number, website, and business license,
as well as company records such as annual reports. Individual NCRAs
also may hire third-party investigation services to screen for illegal
or unethical business history. Sole proprietorships and new businesses
(e.g., in business less than a year) may receive more specialized
screening. An NCRA may require the furnishers to submit test files
which it will examine to make sure they are Metro 2 compatible.
Approved furnishers are trained on Metro 2.
---------------------------------------------------------------------------
\43\ Industry figures.
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After these initial inspections, NCRA policies may trigger
reinspections after risk events such as consumer complaints, suspicious
trade lines, variations in data submissions, odd anomalies, and changes
in company ownership. At least one NCRA has policies to reinspect new
furnishers six months after they start submitting data to assess for
data quality and fraud risk.
The NCRAs report that they continue to monitor for data quality and
fraud once a furnisher starts contributing live trade line data. One
example of furnisher fraud is when a supposed credit repair
organization represents itself as a furnisher and attempts to boost the
credit scores of consumers with bad credit by reporting fictitious
trade lines that the consumers purportedly used and paid back on time.
Overall, the objective of furnisher screening is to reduce the risk
of fraud or of poor data quality by screening out furnishers whose
systems are not able to report accurate data on customers or report it
in the Metro 2 format.
4.2 Checking Furnished Data
Having passed this initial screening, furnishers can start
providing data. Furnishers generally provide monthly trade line updates
through data file transfers that conform to the Metro or Metro 2 format
and contain trade line updates on all of the furnishers' active
accounts. All new furnishers are being added under the Metro 2 format,
which was first introduced in 1997. Data submitted by a furnisher to an
NCRA generally goes through a multi-stage process to identify data
irregularities.
Typical data quality checks will identify issues such as blank
fields or logical inconsistencies in the data--both at the level of the
data file and at the individual consumer's trade line. If a furnished
account is reported as closed, and then in a subsequent data feed the
furnisher reports a new account balance, the NCRA might flag that
inconsistency. Other inconsistencies might be account balances higher
than the maximum credit line, duplicate instances of information on the
same account being furnished, or data patterns inconsistent with the
furnisher's historical pattern of transactions. It is not uncommon for
furnishers' bulk files to be initially rejected by the NCRAs.\44\ The
NCRAs report that furnishers tend to correct most of the problems
causing the file rejection, leaving only a small percentage of files
permanently rejected. Some data rejections might not result from an
error in the data but from format incompatibility when the furnisher
uses the wrong codes to update accounts, or the furnished data shows
unfamiliar formats because of system changes at the furnisher.
---------------------------------------------------------------------------
\44\ Industry information.
---------------------------------------------------------------------------
Within file submissions, individual consumer base records and
tradeline updates are similarly screened for formatting errors, logical
errors, internal inconsistencies, and anomalies. The rejection rates
for incoming trade line data from furnishers appear to vary across
multiple dimensions (e.g., by individual furnisher, by furnishing
industry, by the NCRA receiving the data). For example, submissions
from collections agencies tend to have a higher rejection rate than
rejections for credit card trade lines.\45\
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\45\ Industry figures.
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While the NCRAs' data screens do find errors by identifying
anomalies and inconsistencies, these checks rely on underlying
furnisher data to be valid. The NCRAs do not conduct independent checks
or audits to determine if the data is accurate, such as contacting a
consumer to ask if she is properly associated with an account or if the
balance reported on an account is true, or checking the record-keeping
practices of a furnisher. The NCRAs generally rely on furnishers to
report information on consumers that is complete and accurate.
4.3 The Furnisher Rule
In 2009, the Federal Trade Commission, the Federal Reserve Board,
the Federal Deposit Insurance Corporation, the National Credit Union
Administration, the Office of the Comptroller of the Currency, and the
Office of Thrift Supervision issued a joint rule (``Furnisher Rule'')
implementing the accuracy and integrity and direct dispute provisions
for furnishers mandated by the Fair and Accurate Credit Transactions
Act (FACTA).\46\ The CFPB has since restated this rule.\47\
---------------------------------------------------------------------------
\46\ 74 Fed. Reg 31484 (July 1, 2009).
\47\ 76 Fed. Reg. 79308 (December 21, 2011).
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As a result of FACTA and the Furnisher Rule, furnishers have
enhanced obligations to supply accurate data. Each furnisher is
required to ``establish and implement reasonable written policies and
procedures concerning the accuracy and integrity of the information it
furnishes to consumer reporting agencies.'' \48\ The procedures should
address ``deleting, updating, and correcting information in the
furnisher's records, as appropriate, to avoid furnishing inaccurate
information.'' \49\ The procedures must be appropriate to the ``nature,
size, complexity, and scope of each furnisher's activities.'' \50\
Appropriate procedures include using standard data reporting formats,
maintaining records for a reasonable period of time, providing
appropriate oversight of service providers (e.g., companies that
provide core processing systems or software used for recordkeeping and
account management), furnishing information in a way that prevents re-
aging,^g duplicative reporting, association of information
with the wrong consumer, and providing sufficient identifying
information about consumers.\51\
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\48\ 12 C.F.R. Sec. 1022.42, (2012).
\49\ 12 C.F.R. pt. 1022, Appendix E, III(h) (2012).
\50\ 12 C.F.R. Sec. 1022.42(a) (2012).
\g\ Re-aging in this context refers to erroneously extending the
reporting period of derogatory consumer information by creating a new,
later start date when the derogatory event occurred, thus pushing back
the clock for removing the derogatory item from the credit report.
\51\ 12 C.F.R. pt. 1022, Appendix E, III (2012).
---------------------------------------------------------------------------
5. Compiling Credit Files: ``Matching''
Once the NCRAs have received trade line information from a
furnisher they must assign it to a specific consumer's identity. Each
of the NCRAs has over 200 million active files on individual consumers
which are non-duplicative within the particular NCRA.\52\ The average
credit file contains 13 past and current credit obligations, including
nine bank and retail cards and four installment loans (e.g., auto
loans, mortgage loans, student loans).\53\ In a typical month, an NCRA
receives updates on over 1.3 billion trade lines.\54\ With this much
information included in and added to their databases, the NCRAs face
technical and operational challenges in attributing information to the
proper consumer's file.
---------------------------------------------------------------------------
\52\ Industry figures.
\53\ Ben Woolsey and Matt Schulz, Credit card statistics, industry
facts, debt statistics, available at http://www.creditcards.com/credit-
card-news/credit-card-industry-facts-personal-debt-statistics-1276.php
(updated February 28, 2012).
\54\ Industry figures. Since there are 1.3 billon trade lines
updated every month and 200 million consumers in each of the NCRA
databases, each consumer appears to have, on average, 6.5 active trade
lines.
---------------------------------------------------------------------------
5.1 Identifying the Correct Consumer
To locate and identify a consumer, NCRAs will use various
combinations of personal identifying information such as name, address,
phone number, date of birth, address, and SSN. A given trade line
reported by a furnisher may not contain all of this identifying
information. Typically, the furnisher reports the personally
identifying information that was provided by the consumer in the
consumer's original application for credit or through updates (such as
for current address or married name) that a consumer may provide in the
course of his or her relationship with the furnisher.
The fact that many consumers have the same or similar personal
identifiers presents further challenges when a credit bureau tries to
match an incoming trade line with the correct consumer's file. In the
United States, according to 2000 census figures (the most recent to
have last name statistics available), there are more than 2.3 million
Americans with the last name of Smith, 1.8 million Americans with the
last name of Johnson, 1 million Americans with the last name of Davis,
850 thousand Americans with the last name of Garcia, and 600 thousand
Americans with the last name of Lee.\55\ As one example, consider the
matching challenges posed by relatives with same first and last name,
but different middle names, who reside at the same address, and who do
not regularly use their middle name when applying for credit.
---------------------------------------------------------------------------
\55\ Genealogy Data: Frequently Occurring Surnames from Census
2000. United States Census Bureau. Available at http://www.census.gov/
genealogy/www/data/2000surnames/index.html.
---------------------------------------------------------------------------
Adding to the complexity, millions of individuals change how they
identify themselves over time or between furnishers. Each year, a
sizeable number of Americans change their name through marriage and
divorce. Separately, consumers do not necessarily refer to themselves
consistently in credit applications. For example, a woman named
Elizabeth may use her full name on one application and then refer to
herself with a nickname ``Betty,'' ``Beth,'' ``Liz,'' or ``Eliza'' on
another credit transaction. Finally, creditor practices may vary as to
the personally identifying information they require in their loan or
credit applications, with the result that the criteria one creditor
uses to identify a consumer in a trade line update may vary from how
another creditor identifies him or her.
5.2 Posting and Organizing Account Information in Consumer Files
Once a trade line has passed the NCRAs' initial vetting and
screening, the NCRAs assign or post that trade line to the credit file
of a specific consumer if they believe there is a match. As discussed
below, inaccuracies may result from this process.
The manner in which each NCRA posts incoming data to a consumer's
file, and the way its files are organized, depends on the particular
structure of its database, or its unique ``data architecture.'' The
NCRAs take two different approaches to organizing personal data in
their data networks: (1) flat file system and (2) ``PINning''
technology.
5.2.1 Flat File Systems
At least one NCRA organizes its database like a traditional flat
filing system so that each consumer is linked to one file.\56\
Consumers' files are distinguished through matching logic using a
consumer's personal identifiers such as name, address, SSN, and date of
birth. Multiple or fragmented files can occur for a single person when
information is reported with different identifying information such as
a different last name. Fragmented files on the same consumer will
remain distinct until the NCRA receives new information about the
fragments (e.g., a unifying name, address, phone number) that indicates
they should be combined. In some cases, matching algorithms will assign
the trade line to a file that, according to the algorithm, represents
the best match even when all of the identifiers do not match up
perfectly, or when only a limited number of identifiers are contained
with the trade line.
---------------------------------------------------------------------------
\56\ Industry information.
---------------------------------------------------------------------------
5.2.2 PINning Technology
Another method uses a unique personal identification number (PIN)
to organize consumer files.\57\ Instead of having a single file for
each consumer, it uses the consumer's assigned PIN to link information
on the consumer from multiple databases including inquiry, trade line,
employment, public record, and address databases. Each furnished trade
line data element, inquiry, or public record is entered into the
network with an associated PIN in a relational database. PINs are
assigned to trade lines based on algorithms that find the consumer that
best matches the personal (header) information accompanying the trade
line. When a consumer report is requested by a creditor or a consumer
requests a credit report, the NCRA assembles the consumer report in
real-time using the PIN as the central link to the different databases.
---------------------------------------------------------------------------
\57\ Industry information.
---------------------------------------------------------------------------
In this system, matching algorithms are used to assign a new
incoming trade line or public record to the PIN that represents the
best possible fit based on the personally identifying information
associated with the trade line.
The CFPB has no data on the relative accuracy of flat-file vs. PIN-
based architectures.
6. Inaccuracies in Credit Files and Credit Reports
Given the volume of data handled, the challenges of matching
tradelines to the correct consumer files, and the number and variety of
furnishers, inaccuracies in some credit files inevitably occur.
Inaccuracies in credit files and credit reports can occur where
information that does not belong to a consumer is attached to his or
her file, where information belonging to a consumer is omitted from the
file, or where there are factual inaccuracies in trade line or other
information in the consumer's file. Some of these inaccuracies can be
attributed to matching challenges in assigning a trade line to a
consumer's file. Other causes of inaccuracies include data and data
entry errors, NCRA system or process inaccuracies, furnisher system or
process inaccuracies, identity fraud, or time lags.
6.1 Types of Inaccuracies in Credit Files and Reports
The following are among the types of inaccuracies that appear in
credit files and the reports derived from them.

Inclusion of accounts or records in a credit file that do
not belong to the consumer, commonly called a mixed file:
Credit reports can contain trade lines or public records about
a consumer other than the one who is the subject of the credit
report.

Omission of accounts or records belonging to the consumer: A
credit account or public record that belongs to the consumer's
file can be erroneously placed in another consumer's file,
leading to a mixed file, as described above.\58\ Alternatively,
credit bureau matching algorithms or gaps in data can lead to a
consumer trade line being kept separate from the rest of the
consumer's file.
---------------------------------------------------------------------------
\58\ Federal Trade Commission, Report to Congress under Section 319
of the Fair and Accurate Credit Transaction Act of 2003, at 9 (December
2008).

Trade line or record inaccurately represents information
pertaining to the consumer's account with the creditor: A
credit file can inaccurately depict the terms and status of a
valid account such as inaccurately depicting the date an
account was closed, the credit limit for the account, or
whether a trade line is delinquent. Similarly, a collection
item on the report may inaccurately reflect the payment status
---------------------------------------------------------------------------
of the debt or the amount of money owed.

It is worth noting that in some cases consumers are mistaken about
the presence of inaccuracies in their account. For example, a
consumer may believe he or she paid a bill when it was not
paid. A consumer may believe that paying an item in collection
removes the collection history from one's credit report, which
it does not. A consumer may believe he or she paid an account
on time, when under the terms of the account, it was late. Or a
consumer may simply not recognize a trade line even though it
is legitimate.
6.2 Causes of Credit File Inaccuracies
The inaccuracies identified in Section 6.1 can come from a variety
of causes.

Data and data entry errors: Furnishers can input accurate
consumer information incorrectly or make typographical mistakes
(e.g., transposing two digits in an SSN, misspelling names,
transposing first and middle names).\59\ Consumers (when
applying for a loan) can provide inaccurate data to furnishers.
For both of these types of inaccuracies, the credit bureau
could pass along the inaccuracy to the consumer's file.
---------------------------------------------------------------------------
\59\ For a discussion of common credit reporting errors, see
Richard J. Hilman, Consumer Credit: Limited Information Exists on
Extent of Credit Report Errors and Their Implications for Consumers,
Statement for the Record Before the Committee on Banking, Housing, and
Urban Affairs, General Accounting Office at 11 (July 31, 2003).

Data errors can also lead to file matching problems by causing the
bureau to put the trade line into a separate or ``orphan'' file
distinct from the consumer's original credit file, and thus not
include it in the consumer's credit report. Alternatively, data
inaccuracy could cause a consumer's trade line to be mixed in
with another consumer's file (e.g., when the mistake causes the
consumer's header information to match or resemble the identity
---------------------------------------------------------------------------
of another consumer).

Bureau file matching inaccuracies: Inaccuracies can occur
when a bureau assigns a trade line to a consumer's file or when
it determines the credit file that matches the consumer named
in a creditor inquiry. A matching error can occur for a variety
of reasons.

Matching errors may result from creditor inquiries and
trade lines that contain a limited set of identifiers
relating to the consumer. For example, a lender inquiry may
omit information such as date of birth or SSN.

Family members with similar identity information such
as fathers and sons with common names (e.g., Jr., Sr.) can
experience commingling of files, especially if they reside
at the same addresses and distinguishing information is not
provided.

Unrelated individuals with similar names and identity
information get linked together because a name or SSN is
incorrectly inputted.

In some cases, when a consumer changes personal information (e.g.,
his or her name) the bureau will be unable to match the new
trade line to an existing file until the bureau has confidence
that the new information belongs to the existing consumer. A
common example occurs when a consumer changes names after
getting married or divorced. Until the bureau can link the
individual pre-and post-name change, that individual's
information might reside in two different files.

Bureau process errors: An example of a process error would
be if a credit bureau failed to prevent the reappearance in a
consumer's credit report of inaccurate data that was removed as
a result of a consumer dispute reinvestigation. Such errors can
occur despite the bureau maintaining procedures to permanently
remove or suppress identified inaccuracies as required by the
FCRA.\60\
---------------------------------------------------------------------------
\60\ 15 U.S.C. Sec. 1681i(a)(5)(C).

Identity fraud/theft: Identity thieves can compromise a
consumer's credit history by creating new credit, utility, or
health care accounts in the consumer's name and then letting
them go unpaid. As these accounts go delinquent and are pushed
to collections, the consumer victim's credit rating can
plummet. Fraudsters may also take over existing consumer
accounts, often disguising the account theft by changing the
billing address of the applicant with the lending institution,
or making purchases over the Internet. Additionally, fraudsters
can create synthetic identities using an innocent consumer's
SSN or other identifiers like last name and birthdate.\61\
---------------------------------------------------------------------------
\61\ In 2011, the FTC reported 279,156 complaints alleging identity
theft, which was the largest single complaint category of consumers to
the FTC. Federal Trade Commission, Consumer Sentinel Network Data Book
for January--December 2011, at 6 (February 2012). See http://ftc.gov/
sentinel/reports/sentinel-annual-reports/sentinel-cy2011.pdf.

Furnisher system or process inaccuracies: Inaccuracies can
occur because of limitations in the processes furnishers and
public records providers use in handling consumer transactions.
---------------------------------------------------------------------------
Examples include:

Attributing ownership to an account on which an
individual is only an authorized user;

Failing to post a payment;

Assigning a payment to the wrong account;

Failing to update records (e.g., tax liens or other
judgments that are still listed as open even though they
have been paid or resolved);

Failing to permanently change records when a consumer
successfully disputes an inaccuracy, with the result that
faulty information is re-reported;

Listing closed accounts as open;

Reporting an incorrect credit limit; and

Transfering loans from one owner or servicer to
another owner or servicer with different record-keeping
systems can result in lost data or lost payment records.

Furnishers and consumers can disagree on the status of credit
accounts (e.g., whether a payment was late). These
disagreements can be addressed, if not always resolved, through
the dispute processes that consumers have the right to initiate
under the Fair Credit Billing Act (e.g., for billing disputes
involving credit cards, department store accounts, other open-
end credit accounts)\62\ or the FCRA.
---------------------------------------------------------------------------
\62\ 15 U.S.C. Sec. Sec. 1666-1666j.

Additionally, certain trade lines may be reported by multiple
furnishers over time. Examples include trade lines reported by
a debt buyer that were previously reported by a creditor from
whom the debt buyer acquired the accounts, or mortgage loans
for which the servicing rights were sold from one servicer to
another. In these cases, the bureaus not only match the trade
line with the correct consumer's file, but may also determine
when the incoming trade line reflects the continuation of a
previously reported trade line in the consumer's file. To
facilitate correct depiction of such trade lines over time, the
Metro 2 policy is for furnishers who are new account owners to
list the name of the original creditor in file updates.
Omission of this information by a furnisher who has bought the
debt, and/or failure by account sellers to acknowledge when
accounts have been sold, may result in duplicate trade lines in
---------------------------------------------------------------------------
a consumer file.

Time lags: Differences can occur due to time lags between a
consumer transaction and its reporting to a credit bureau file
(e.g., paying a past due bill or opening a new account). Time
lags are a significant issue in the updating of public records.
According to one industry source, it takes some state courts,
on average, two months to transcribe a court judgment into a
written court decision.\63\
---------------------------------------------------------------------------
\63\ Industry figures.
---------------------------------------------------------------------------
6.3 Consumer Impact of Inaccuracies
Each of these types of credit report errors may affect how a
creditor or a credit score assesses the credit worthiness of a
consumer. Trade line errors can both hurt or help a consumer's credit
score. An omitted current trade line, for example, may lower a credit
score. Likewise, a credit score may be unfairly reduced by a negative
trade line that belongs to another consumer, or by duplicate trade
lines that are treated as two separate credit relationships. On the
other hand, if a delinquent trade line was inadvertently assigned to
another consumer's file or if a furnisher incorrectly marked a
delinquent trade line as current, the error could help the consumer's
score.
7. Disputing Credit Report Errors
Recognizing the possibility of inaccuracies, the FCRA gives
consumers the right to dispute information they deem inaccurate with an
NCRA, a furnisher (in cases covered by the Furnisher Rule), or both.
The FCRA requires NCRAs and furnishers to ``reinvestigate'' information
contained in a consumer's credit file when the consumer disputes its
accuracy.\64\ Further, the statute gives consumers several mechanisms
for obtaining the information contained in their credit files in order
to review them for possible inaccuracies. Consumers can get a free
credit report, that is, obtain a file disclosure for free, (i) once
every 12 months from the NCRAs and nationwide specialty consumer
reporting agencies,\65\ (ii) in connection with risk-based pricing and
adverse action notices,\66\ (iii) if they are unemployed and intend to
apply for employment within 60 days,\67\ (iv) if they are recipients of
welfare assistance,\68\ (v) if they have reason to believe their credit
file is inaccurate due to fraud,\69\ (vi) in connection with requested
initial or extended fraud alerts,\70\ or (vii) if permitted by state
law. Consumers can also review their credit files by purchasing them
directly or when they receive their credit files as part of a paid
credit monitoring service subscription. Consumers sometimes also
receive information from reports or copies of reports from a user such
as a bank, mortgage broker, or landlord.
---------------------------------------------------------------------------
\64\ 15 U.S.C. Sec. 1681i.
\65\ 15 U.S.C. Sec. 1681j(a) (requiring NCRAs and nationwide
specialty consumer reporting agencies to provide free annual reports
upon request if they have been providing consumer reports to third
parties on a continuing basis with respect to consumers residing
nationwide for the last 12 months).
\66\ 15 U.S.C. Sec. 1681j(b).
\67\ 15 U.S.C. Sec. 1681j(c).
\68\ Id.
\69\ Id.
\70\ 15. U.S.C. Sec. 1681j(d).
---------------------------------------------------------------------------
The CFPB estimates that as many as 44 million consumers obtained
copies of their consumer file disclosure annually in 2010 and 2011--
either as a result of obtaining free annual file disclosures through
annualcreditreport.com (15.9 million);\71\ through one of many various
credit monitoring services (26 million);\72\ obtaining disclosures
directly from the NCRAs after receiving adverse action notices or risk-
based pricing notices (approximately 1 million);\73\ or from lenders
directly or through fraud alerts, requests based on unemployment or
welfare status, and where free under state law (approximately 0.5
million for this catch-all category).\74\
---------------------------------------------------------------------------
\71\ Consumer Financial Protection Bureau, The Impact of
differences between consumer-and creditor-purchased credit scores: A
Report to Congress, at 9 (July 19, 2011).
\72\ Id. at 10.
\73\ Industry figures.
\74\ Industry figures.
---------------------------------------------------------------------------
In 2011, the NCRAs received approximately 8 million consumer
contacts disputing the completeness or accuracy of one or more trade
lines, public records, or credit header information (identification
information) in their files.\75\ ^h Based on these contacts,
the number of credit-active consumers who disputed one or more items
with an NCRA in 2011 ranges from 1.3 percent to 3.9 percent. On average
across the NCRAs, consumers filed 42 percent of their disputes online,
44 percent by mail, and 13 percent by phone. The remainder of consumers
communicated their disputes by fax, walk-ins, or other methods.\76\
Many of these consumers disputed information about more than one
tradeline or other item in their file, leading to approximately 32 to
38 million dispute reinvestigations.\77\ This volume has declined
significantly since 2007 when consumers were more active in applying
for credit, particularly in the mortgage market. In 2007, a high volume
year, the NCRAs received disputes on 47 to 53 million items.\78\
---------------------------------------------------------------------------
\75\ Industry figures.
\h\ This estimate counts contacts made by a single consumer to
multiple NCRAs as multiple contacts.
\76\ Industry figures.
\77\ Industry figures.
\78\ Industry figures.
---------------------------------------------------------------------------
The number of consumer dispute requests (8 million) appears high
relative to the total number of consumers who see their credit files
(44 million). However, the CFPB is unable to estimate a dispute rate
for consumers who see their files for several reasons. First, no data
is available on the overlap of disputes by consumers among the three
largest NCRAs. Thus the range of unique consumers who filed complaints
could be up to 8 million or substantially less if high volumes of
consumers filed complaints with multiple NCRAs. Second, it is unclear
how many consumers obtained copies of their credit reports or file
disclosures by more than one means in a given year. Additionally, an
unknown number of consumers may initiate disputes without their reports
after being advised by lenders of specific negative items appearing on
their reports.
7.1 Credit Bureau and Furnisher Disputes
Consumers can elect to dispute the completeness or accuracy of
their credit file through the NCRA or other bureau that provided their
report, directly with the furnisher who provided the disputed trade
line (in cases covered by the Furnisher Rule), or both. The nature and
timeframes for responses to disputes are specified in the FCRA.
Under Section 611 of the FCRA, if a consumer disputes the
completeness or accuracy of his or her credit file, the credit bureau
has an obligation to conduct a reasonable reinvestigation.\79\ The
bureau must generally complete a reinvestigation within 30 days, in
which it must consider all the relevant information supplied by the
consumer.\80\ Moreover, it has five business days to forward the
dispute to the relevant furnisher.\81\ The credit bureau notification
to the furnisher shall include all relevant information received from
the consumer.\82\ If the reinvestigation determines that the consumer's
data is inaccurate, incomplete, or cannot be verified, the bureau must
delete the disputed data.\83\ Furnishers have independent obligations
under the FCRA, after receiving notice from a CRA of a consumer
dispute, pursuant to Section 611 to conduct an investigation into the
disputed information, to review all the relevant information provided
by the CRA, and to report the results of the investigation to the
CRA.\84\
---------------------------------------------------------------------------
\79\ 15 U.S.C. Sec. 1681i(a)(1)(A).
\80\ 15 U.S.C. Sec. 1681i(a)(1)(B)-(C) and (a)(4).
\81\ 15 U.S.C. 1681i(a)(2)(A).
\82\ 15 U.S.C. 1681i(a)(2)(B).
\83\ 15 U.S.C. 1681i(a)(5).
\84\ 15 U.S.C. Sec. 1681s-2(b); 12 C.F.R. pt. 1022, App. E.2b
---------------------------------------------------------------------------
As stated above, consumers can also dispute the accuracy of
information directly with the furnisher of the information. Under the
Furnisher Rule, a furnisher must conduct a reasonable investigation of
a consumer's dispute about his or her liability for a debt to the
furnisher, the terms of the debt, the consumer's performance concerning
the account at issue, or ``other information contained in a consumer
report regarding an account or relationship with the furnisher that
bears on the consumer's credit worthiness, credit standing,'' or other
credit reporting factors.\85\ The furnisher also must ``review all
relevant information provided by the consumer'' and complete an
investigation and report the results back to the consumer in the same
time frame as if the dispute was sent to a consumer reporting
agency.\86\ If the investigation finds furnished information was
inaccurate, the furnisher must promptly notify each CRA that received
the information of its determination and provide corrected
information.\87\
---------------------------------------------------------------------------
\85\ 12 C.F.R Sec. 1022.43(a).
\86\ 12 C.F.R. Sec. 1022.43(e)(3).
\87\ 12 C.F.R Sec. 1022.43(e)(4).
---------------------------------------------------------------------------
7.2 Trade Line Dispute Rates
The NCRAs see variations in dispute rate by furnisher, account
status, and industry. The dispute rates for the active trade lines
among the 100 largest furnishers generally fall within a range between
0.05 percent and 2.0 percent.\88\ The dispute rate reported by the
NCRAs on delinquent trade lines not yet in collections is approximately
1.1 percent.\89\ Dispute rates for specific industries vary widely as
well. Some of this variation may be due to variations in data quality
controls at individual furnishers. Other differences may simply be due
to the fact that some trade lines and industries, by their nature, are
likely to generate more disputes from consumers than others. One would
expect, for example, that consumers would be more likely to challenge
trade lines with reported delinquencies or collections actions than
trade lines that only reflect positive information. Likewise, one would
expect higher dispute rates in credit categories where delinquency
rates are high (e.g., on subprime loans as opposed to prime loans).
---------------------------------------------------------------------------
\88\ Industry figures.
\89\ Id.
---------------------------------------------------------------------------
Figure 3 describes the average trade line dispute rates for
different types of furnishers.\90\
---------------------------------------------------------------------------
\90\ Id.
---------------------------------------------------------------------------
Figure 3: Dispute Rates By Industry Type

----------------------------------------------------------------------------------------------------------------
Industry Type Disputes/Year per Active Trade Line
----------------------------------------------------------------------------------------------------------------
Bank Card and Retail Card 0.17%
Finance Companies \91\ 0.19%
Mortgage 0.21%
Auto 0.27%
Student Loans 0.29%
Collection/Debt Buyers 1.06%
----------------------------------------------------------------------------------------------------------------

Collection trade lines generate significantly higher numbers of
consumer disputes than other types of trade lines--four times higher
than auto and five times higher than mortgage dispute rates.
Collections and delinquent trade lines also reflect a disproportionate
percentage of all accuracy disputes by consumers with the NCRAs. Almost
40 percent of all consumer disputes at the NCRAs, on average, can be
linked to collections.\92\
---------------------------------------------------------------------------
\91\ Finance companies, also known as personal finance or sales
finance companies, are non-depository institutions that generally
provide loans to higher risk borrowers, often to purchase retail items.
An example might be a company that partners with a home retailer to
provide a loan to a consumer to purchase bedroom furniture.
\92\ Id.
---------------------------------------------------------------------------
Multiple factors likely converge to generate a high volume of
collections item disputes. First, in contrast to other types of trade
lines, 100 percent of collections trade lines correspond to negative
information on a consumer's credit record. Consumers have a greater
incentive to dispute information in a credit file that harms their
credit record than information that favorably reflects their ability
and willingness to pay back a loan.
Both the discontinuous nature of consumers' relationships with debt
collectors (the collector has limited interest in a long-term
relationship with the consumer) and the collections industry's data
management practices also may contribute to increased disputes.\93\
Collections debt can be placed with third-party collection agencies or
sold to debt buyers multiple times. With each assignment or sale there
are risks of account data being compromised or lost, and with multiple
transfers, the risk of errors may increase. Debt buyers and debt
collectors may lack the original documentation (e.g., consumer
applications, statement showing last payment made, charge-off
statement) underlying a debt, contributing to mistakes. Additionally,
other than the sale of mortgages, consumers generally are not required
to be notified when debt is sold or assigned to a collection agency, so
they may not associate the entity reporting negative trade line
information with the name of the original creditor account.\94\ While
the industry's standard Metro 2 data furnishing format has a field for
debt collectors to report the originating creditor associated with the
debt, collectors may not always report the field. Separately, some
consumers may knowingly (or with the encouragement of certain credit
repair organizations) dispute valid collection items or judgments in
the hopes of removing them from their credit files and increasing their
credit scores.
---------------------------------------------------------------------------
\93\ See The Federal Reserve, An Overview of Consumer Data and
Credit Reporting (2003), at). 69. See also Jennifer Steinhauer, ``Money
& Medicine; Will Doctors Make Your Credit Sick?'' The New York Times,
February 4, 2011.
\94\ See 12 C.F.R. Sec. 1026.39 (2012).
---------------------------------------------------------------------------
Below, Figure 4 contains the average dispute rates of the top 100
furnishers to two NCRAs in 2011 by furnisher size.
Figure 4: Trade Line Dispute Rates By Furnisher Size

------------------------------------------------------------------------
Furnisher
Size Average Percent of Trade Lines Disputed per Year
------------------------------------------------------------------------
Top 10 0.20%
Top 11-25 0.26%
26-50 0.35%
51-100 0.47%
------------------------------------------------------------------------
Source: Industry statistics.

As indicated earlier, the Top 10 furnishers provide a majority of
each of the NCRAs' trade lines. These furnishers are multi-line banks
and financial services providers with high proportions of prime
borrowers. Higher dispute rates among the smaller furnishers (ranked by
the number of trade lines each furnisher reports) may reflect that more
of them are collection agencies (a fragmented industry including many
small firms) or have proportionately larger subprime lending portfolios
(accounts that are more likely to be delinquent and to generate
consumer disputes).ⁱ
---------------------------------------------------------------------------
\i\ It should be possible to identify furnishers who are
disproportionately responsible for tradeline disputes relative to
furnishers of similar type and size. For example, using a common
measure of disputes per 1000 trade lines reported, a credit card
issuer's dispute rate could be compared to the average dispute rate for
credit card issuers, and an overall dispersion of dispute rates.
Furnishers who are outliers (i.e., have high dispute rates) in
industries that have a high dispute rate dispersion among furnishers
may be appropriate targets for a process review that may yield sources
of reporting inaccuracies, data omissions, or billing errors that
result in a high level of credit bureau disputes. Helping to identify
and address these furnishers' root causes of disputes might yield a
reduction in disputes and improvements in credit file accuracy.
---------------------------------------------------------------------------
At present, the NCRAs do not appear to regularly measure dispute
rates of furnished trade lines at the industry or individual furnisher
level and they do not all measure dispute rates in a consistent
fashion.
7.3 Resolving Trade Line Disputes: The e-OSCAR System
The NCRAs handle most consumers' trade line disputes they receive
through an electronic information network called e-OSCAR (the Online
Solution for Complete and Accurate Reporting). The e-OSCAR network
began in 1993 as a system run by the Associated Credit Bureaus, now the
CDIA. Four companies built and still own e-OSCAR--Equifax, Experian,
Innovis, and TransUnion. The current Internet-based system was created
in 2001; the CDIA created the Online Data Exchange (OLDE) in 2006 to
independently operate the system. In 2011, 16,000 furnishers connected
to these companies through e-OSCAR.\95\
---------------------------------------------------------------------------
\95\ Industry figures.
---------------------------------------------------------------------------
In the last three months of 2011, 33 percent of e-OSCAR disputes
related to claims by a consumer that an account in their file did not
belong to them, either because of error or identity theft. In another
15 percent of disputes, consumers claimed the information on a trade
line was inaccurate. About 4 percent of consumer disputes involved the
reporting of a consumer's current account balance, and another 4
percent of disputes involved collections items about which consumers
claimed not to be aware.\96\
---------------------------------------------------------------------------
\96\ Id.
---------------------------------------------------------------------------
7.3.1 The Dispute Process
According to the NCRAs, trade line disputes handled by them pass
through five steps.

1. Consumer initiates a dispute and reason codes are assigned: The
process starts with a dispute by a consumer to one of the
NCRAs. Consumers can initiate a dispute online, by phone, by
mail, by fax, or in person. When a consumer initiates the
dispute online the consumer may provide a narrative description
of the nature of the dispute and why the consumer believes the
information contained in the credit report to be in error. The
consumer must also select one or two reason codes from a list
of 29 different codes that characterize the nature of the
dispute.\97\ In mail and phone disputes, NCRA representatives
will assign the dispute codes they deem appropriate and may
occasionally supplement the dispute code with a narrative
statement.
---------------------------------------------------------------------------
\97\ Id.

2. NCRA internally reviews dispute: The NCRA then investigates the
dispute request using proprietary decision rules to see if it
can resolve the dispute internally without having to forward
the dispute to the furnisher. For example, the NCRAs will
internally resolve disputes they consider frivolous such as
resubmitted but previously resolved disputes where no new
information is provided.^j Separately, an NCRA may
resolve a dispute in a consumer's favor under certain
circumstances, such as if the documentation provided by the
consumer ``can be reasonably verified as authentic.'' \98\
Disputes over the consumer's identifying information (e.g.,
name, address, SSN) also tend to be resolved internally. In
such cases, an NCRA may simply adopt the consumer's correction
or use internal or external identity verification tools to
evaluate the consumer's claim. The NCRAs resolved or rejected
an average of 15 percent of the disputes they received in
2011.\99\ The CFPB does not know what percentage of these
resolutions was in the consumer's favor.
---------------------------------------------------------------------------
\j\ One NCRA reported that approximately 16 percent of disputes do
not result in an e-OSCAR transaction because the consumer had
previously submitted an identical dispute and the NCRA had recently
forwarded the dispute to the furnisher, who had investigated and
verified the data.
\98\ The Federal Trade Commission and the Board of Governors of the
Federal Reserve System, Report to Congress on the Fair Credit Reporting
Act Dispute Process, at 14 (August 2006).
\99\ Industry figures.

3. Dispute sent to furnisher: If the dispute cannot be resolved
internally, the NCRA will forward the dispute through e-OSCAR
to the appropriate furnisher with dispute codes through an
electronic form called automated consumer dispute verification
(ACDV). Supplementing the dispute code(s), the ACDV can provide
up to 255 characters of consumer-supplied text describing the
dispute in a free-form text field. In 2011, free-form text was
added, on average, to 26 percent of the NCRAs' e-OSCAR
transmission, although the percentage varies from NCRA to NCRA
based, in part, on whether the online form contains a text
field. Consumers can provide supplementary documentation (such
as billing or other records or letters to and from creditors)
regarding a dispute via mail to an NCRA, but it appears the
NCRAs generally do not pass these documents along to
---------------------------------------------------------------------------
furnishers.

4. Furnisher investigates and responds: The data furnisher
investigates the ACDV request and routes back the response
through e-OSCAR to the requesting NCRA. This typically involves
a furnisher representative reviewing the furnisher's electronic
records of the disputed account and then selecting a response
that reflects what the furnisher's records have shown. In e-
OSCAR, furnishers can make four different types of responses:
(a) verify account as accurate, (b) modify account/trade line
information as indicated, (c) delete account, or (d) delete
account due to fraud.

The CDIA reports that in a recent 120 day period in 2012, 22
percent of furnisher responses indicated that the initial data was
accurate (rejecting the consumer's claim), 61 percent modified a trade
line or other piece of information, 13 percent deleted a trade line or
other piece of information, and 0.5 percent deleted a trade line or
other piece of information due to fraud. The NCRAs deleted or modified,
as indicated by the consumer, 4 percent of disputed trade lines because
the furnisher did not provide a response within the statutory time
frame.\100\ The high percentage of furnishers who modify disputed data
should be qualified by noting that many larger furnishers will
automatically update a trade line with the latest account information
(e.g., a new balance) upon receiving a dispute, regardless of whether
the furnisher deemed reported information to be inaccurate; thus, a
modification may not necessarily reflect concurrence with the
consumer's dispute.\101\
---------------------------------------------------------------------------
\100\ Industry figures.
\101\ The Federal Trade Commission and the Board of Governors of
the Federal Reserve System, Report to Congress on the Fair Credit
Reporting Act Dispute Process, at 24 (August 2006).
---------------------------------------------------------------------------
As revealed in Figure 5 below, these figures are similar to those
reported by the CDIA to the FTC and the Federal Reserve Board for the
first five months of 2004 in those agencies' 2006 study on the FCRA
dispute process and in GAO testimony to Congress in 2003.\102\ The most
significant change has been that the percentage of trade lines that
were deleted as a result of furnishers not responding to disputes
within 30 days has dropped from 16 percent in 2002 to 4 percent in
2011.
---------------------------------------------------------------------------
\102\ Stephen J. Hill, GAO Director of Financial Markets and
Community Investment, Statement for the Record before the Committee on
Housing, Banking, and Urban Affairs, U.S. Senate, ``Consumer Credit:
Limited Information Exists on the Extent of Credit Report Errors and
their implications for Consumers, GAO-03-1036T (July 31, 2003).
---------------------------------------------------------------------------
Figure 5: Dispute Results

----------------------------------------------------------------------------------------------------------------
Percent of Disputes
Result -----------------------------------------------------------------------------
2011 (120 Day Period) 2004 (First 5 months) 2002 (First 3 quarters)
----------------------------------------------------------------------------------------------------------------
Data modified per 61% 54% 27%
furnisher's instructions
Information verified 22% 22% 46%
as reported
Data deleted per data 13% 18% 10.5%
furnisher's request
Data deleted due to no 4% 6% 16%
furnisher response
Trade line removed 0.5%
due to fraud
----------------------------------------------------------------------------------------------------------------
Sources: For 2011: Stuart Pratt, President, CDIA; For 2004: The Federal Trade Commission and the Board of
Governors of the Federal Reserve System, Report to Congress on the Fair Credit Reporting Act Dispute Process;
For 2002: Richard Hillman, GAO-03-1036T.

5. Referral: If an account is modified or deleted, the furnisher is
supposed to send copies of its modification to each CRA with
whom the data furnisher has a reporting relationship. This way
all the NCRAs can meet their responsibilities to update the
consumer's credit files, where applicable.

The CFPB has been unable to estimate the volume of disputes filed
directly with furnishers. To date, the NCRAs report little impact from
the Furnisher Rule on their volumes of consumer disputes.\103\
---------------------------------------------------------------------------
\103\ In-person briefing for CFPB staff on e-OSCAR with David
Vaughn, General Manager, Central Source LLC and Stuart Pratt,
President, CDIA (December 5, 2011).
---------------------------------------------------------------------------
7.3.2 Limitations of the e-OSCAR Process
Consumer advocates have raised compliance concerns with respect to
the adequacy or completeness of these transmissions to furnishers,
which are principally dispute codes along with supplementary text added
in a minority of cases. The FCRA requires NCRAs to send the data
furnisher a notice that includes ``all relevant information regarding
the dispute that the agency has received from the consumer.'' \104\ The
NCRAs argue that most disputes can be fairly and completely summarized
using the e-OSCAR numeric codes. The e-OSCAR system currently does not
permit documents provided by consumers, such as statements or letters
from creditors, to be forwarded to furnishers as attachments. Industry
sources cited technological limitations, challenges evaluating the
authenticity of consumer documents, and privacy concerns as impediments
to adding such attachments.
---------------------------------------------------------------------------
\104\ 15 U.S.C. Sec. 1681i (a)(2)(B) (emphasis added).
---------------------------------------------------------------------------
Consumer advocates further argue the NCRAs have a systemic bias
that defers to furnishers' records in determining whether or not
disputed information is accurate.\105\ They note that if a furnisher
verifies previously reported information as accurate, the NCRAs will
generally accord such a response greater weight than the consumer's
claims that the information is inaccurate. Likewise, when the furnisher
responds that the account should be modified, deleted, or deleted due
to fraud, the NCRAs generally implement these responses as received.
The advocates argue that NCRAs do not independently validate
information contained in furnishers' records.
---------------------------------------------------------------------------
\105\ National Consumer Law Center, Automated Injustice: How a
mechanized dispute system frustrates consumers seeking to fix errors in
their credit report, at 23 (January 2009).
---------------------------------------------------------------------------
However, the NCRAs have had occasion to adopt policies to suppress
information that is subject to high levels of disputes. For instance,
one NCRA developed special policies to address problems with certain
disputes about small dollar collection items.
7.4 Public Record Disputes
Consumers' disputes regarding the accuracy of public records in
their personal credit files are not investigated through the e-OSCAR
system. The NCRAs initiate their investigation of a public record
dispute by again collecting the public record directly from the
government source or, at their election, contracting for LNRDRS to
conduct this re-checking of the record. LNRDRS collects a combined 1-2
million public records annually at the NCRAs' request.^l
---------------------------------------------------------------------------
\l\ It is not known how many consumers generate these 1-2 million
public record reviews as the average number of disputes per consumer
file is unknown. It is also possible that consumers dispute the same
public record with multiple NCRAs.
---------------------------------------------------------------------------
When forwarding a dispute verification query to LNRDRS, the NCRAs
provide the company one of up to 24 reason codes explaining the
consumer dispute. In about 60 to 70 percent of the requests that LNRDRS
receives from the NCRAs for verification, the consumer asserts that the
public record is not his/hers. In another 20 to 25 percent of the
disputes, a consumer asserts that he or she has paid the judgment or
lien.\106\
---------------------------------------------------------------------------
\106\ Industry figures.
---------------------------------------------------------------------------
In response to a dispute verification query related to the status
of a public record, LNRDRS will typically send a data collector to the
public record source to re-check the record and look for updates.
LNRDRS will then report one of three statuses back to the NCRA: (1)
status has changed (e.g., lien paid off); (2) status is unchanged
(e.g., current record remains most accurate); or (3) unable to verify.
LNRDRS does not verify the content of the underlying public record as
accurate or determine if an NCRA appropriately linked the record to a
consumer. In the case of public records, the NCRAs retain
responsibility for determining whether a public record should or should
or not be attached to a consumer's file.
According to LNRDRS, it performs public record re-checks at the
request of the NCRAs, typically within five business days. LNRDRS
reports that in 99.5 percent of all dispute verification queries it
handles on behalf of the NCRAs, it is able to locate the record at
issue, re-check it, and respond to the request. Time lags are a factor
in many public record complaints as it reportedly can take, on average
in some state courts, two months between the time of a judgment and its
transcription into a public record.\107\
---------------------------------------------------------------------------
\107\ Id.
---------------------------------------------------------------------------
8. Monitoring and Measuring Credit Reporting Accuracy
In consideration of the importance of data accuracy to consumers
and to decision makers using credit reports, there have been several
recent initiatives to measure credit report accuracy.
8.1 The FTC's National Study of Credit Report Accuracy
The FTC is expected soon to complete a decade-long study on credit
report accuracy that the agency was mandated to undertake in FACTA. At
the end of 2012, the FTC expects to issue its fifth interim report of
its ``National Study of Credit Report Accuracy.'' The FTC expects to
issue a final report in 2014. It will attempt to estimate the
proportion of credit files that contain material errors, identify the
main types of errors and their frequency, as well as their impact on
consumers' credit scores and hence the errors' impacts on affected
consumers' access to and cost of credit. To accomplish this, the study
has recruited 1,000 consumer participants randomly selected from across
the country who have reviewed their reports from the NCRAs with experts
who help them understand their report, identify errors, and distinguish
material from non-material errors (in terms of potential impact on the
consumers' credit scores). Identified errors have been submitted to the
respective NCRAs as disputes for resolution. Reinvestigation resolution
results will be indicative of the overall error rate of trade lines and
public records, and the percentage of credit reports containing
corrected errors will indicate the overall rate of credit report
accuracy. Further, credit reports containing corrections will be re-
scored and differences between credit scores pre-and post-correction
will provide an indication of the materiality of the credit report
errors.
8.2 Industry Research
In May 2011, the Policy & Economic Research Council (PERC)
published a report commissioned by the CDIA, which generally followed
the FTC's planned methodology, with significant differences in sample
selection. Further, compared to the FTC study, the participating
consumers in the PERC study were not provided in-person coaching to
identify errors. The PERC study found that a sample of 2,338 consumers
viewing their credit reports identified potential errors in 19 percent
of credit reports.\108\ Of the potential inaccuracies, 37 percent were
about ``header'' information that would not affect a consumer's credit
score.\109\ Consumers chose to dispute one or more pieces of trade line
information for 7.4 percent of credit reports.\110\ In 45 percent of
the consumer disputes, the consumers' trade lines were modified. In
another 41 percent of the consumer disputes, the disputed trade lines
were deleted.\111\ The study defined corrections leading to a 25 point
or more change in the consumer's VantageScore as a material correction
that could shift the consumer's score into a different pricing tier.
The resultant CRA corrections in the relevant trade line information
resulted in credit score increases of 25 points or more in 0.93 percent
of credit reports examined or 10 points or more in 1.78 percent of the
credit reports examined.\112\ Extrapolating to one estimate of the U.S.
credit-scoreable population, approximately 3 million Americans would
experience score increases of 10 points or more if they reviewed and
disputed inaccuracies in their credit reports.\113\
---------------------------------------------------------------------------
\108\ Michael A. Turner, PhD et al., U.S. Consumer Credit Reports:
Measuring Accuracy and Dispute Impacts, the Policy & Economic Research
Council (PERC), at 33 (May 2011).
\109\ Id. at 37.
\110\ Id. at 38.
\111\ Id. at 39.
\112\ Id. at 43.
\113\ This calculation assumes that 200 million Americans have
credit reports, and of these, 32 million have files that are too thin
to score. Information Policy Institute, Giving Underserved Consumers
Better Access to the Credit System: The Promise of Non-Traditional
Data, at 7 (July 2005).
---------------------------------------------------------------------------
8.3 Consumer Advocate Sponsored Research
A consumer group-sponsored study produced different results. A 2004
survey by the U.S. Public Interest Research Group (PIRG) of its own
members concluded ``twenty-five percent (25 percent) of the credit
reports surveyed contained serious errors that could result in the
denial of credit, such as false delinquencies or accounts that did not
belong to the consumer.'' \114\ The results of the survey must be
qualified considering the small sample size (154 respondents) and the
potential biases in the selection of the respondents (surveys were
filled out by PIRG staff, coalition partners, friends and family).\115\
---------------------------------------------------------------------------
\114\ Allison Cassady and Edmund Mierzwinski, Mistakes do Happen: A
Look at Errors in Consumer Credit Reports, National Association of
State PIRGs, at 4 (June 2004).
\115\ Id. at 16.
---------------------------------------------------------------------------
8.4 Future Accuracy Measurement and Related Metrics
Ongoing efforts to measure credit report accuracy will likely
continue to rely on consumers to identify potential inaccuracies in
their credit reports and to rely on the dispute resolution system to
validate that inaccuracies have occurred. Because information contained
in credit files originates from diverse sources such as furnishers,
consumers (who respond to lender applications with certain personal
information), or public records providers, there is no single source of
comprehensive and reliable data regarding the precise identities of
consumers or the status of their credit relationships. For this reason,
efforts to measure overall credit report accuracy have necessarily
involved review of credit reports and individual trade lines by
consumers themselves who are most likely to know when information
reported about them is correct or incorrect, although consumers may not
always interpret their reports correctly.
Further, the consumer dispute process will not identify or
ameliorate certain types of errors that may be associated with the NCRA
matching processes. For example, it is difficult for consumers to
identify when their personal information is diverted to an ``orphan''
file because consumers wouldn't see such information in a file
disclosure. Additionally, trade lines inaccurately associated with a
consumer's files due to mismatching of consumers with similar
identifying information have high likelihoods of being confirmed as
accurate by furnishers. Finally, to the extent matching processes used
to compile credit reports yield different results in reports provided
to users from file disclosures provided to consumers (e.g., because
lenders and other users may provide more limited consumer-identifying
information in their inquiries) it is possible that consumers and users
may not always receive the exact same information.
On July 20, 2012 the CFPB published its larger participant rule
permitting it to supervise companies with annual receipts from
``consumer reporting,'' as defined in the rule, of over $7 million.
That rule became effective on September 30, 2012. In announcing the
Bureau's new authorities, Director Richard Cordray indicated that the
agency would treat as its initial priorities in examining consumer
reporting agencies for compliance with the FCRA and other consumer
financial protection laws ``accuracy of the information received by the
credit reporting companies, their accuracy in assembling and
maintaining that information, and the processes that govern error
resolution.'' ^k The CFPB is also now accepting consumer
complaints about credit reporting, giving consumers individual-level
complaint assistance for the first time at the Federal level with
consumer reporting agencies. Finally, as part of its supervision of
large financial institutions, it is examining the consumer reporting
practices of the furnishers that are responsible for a preponderance of
information contained in credit reports. These efforts will give the
CFPB an opportunity to further evaluate the potential roles of credit
report accuracy measurements and of metrics related to the NCRAs' and
furnishers' various business processes in improving overall accuracy in
the U.S. credit reporting system. As appropriate, the CFPB may consider
the development and implementation of data quality and accuracy metrics
to reduce risk to consumers and assure compliance with FCRA
obligations.
---------------------------------------------------------------------------
\k\ http://www.consumerfinance.gov/speeches/prepared-remarks-by-
richard-cordray-on-credit-reporting/.
---------------------------------------------------------------------------
Glossary
CDIA--Consumer Data Industry Association. The CDIA is an
international trade association that represents consumer data companies
including the nationwide consumer reporting agencies.
Consumer Report--Reports provided by consumer reporting agencies to
lenders and other users. The FCRA defines a consumer report as ``any
written, oral, or other communication of any information by a consumer
reporting agency bearing on a consumer's credit worthiness, credit
standing, credit capacity, character, general reputation, personal
characteristics, or mode of living which is used or expected to be used
or collected in whole or in part for the purpose of serving as a factor
in establishing the consumer's eligibility for (A) credit or insurance
to be used primarily for personal, family, or household purposes; (B)
employment purposes; or (C) any other purpose authorized under section
604 [of the FCRA].'' The FCRA provides a limited number of exclusions
to this definition.
Consumer Reporting Agency--The FCRA defines a consumer reporting
agency (CRA) as ``any person, which, for monetary fees, dues, or on a
cooperative nonprofit basis, regularly engages in whole or in part in
the practice of assembling or evaluating consumer credit information or
other information on consumers for the purpose of furnishing consumer
reports to third parties, and which uses any means or facility of
interstate commerce for the purpose of preparing or furnishing consumer
reports.''
Credit File/Consumer File--The information about a consumer that is
contained in the databases of credit reporting agencies. According to
the FCRA, the term ``file,'' when used in connection with information
on any consumer, means all of the information on that consumer recorded
and retained by a consumer reporting agency regardless of how that
information is stored.
Consumer File Disclosure--Information provided to a consumer when
that consumer requests a copy of the information in his or her file at
the NCRA.
Credit Report--Popular term for consumer reports used or purchased
by lenders.
Credit Reporting Agency/Credit Bureau--Popular term for consumer
reporting agencies in the business of providing consumer reports to
lenders.
ECOA--Equal Credit Opportunity Act.
e-OSCAR--The Online Solution for Complete and Accurate Reporting.
Web-based computer software system used by Equifax, TransUnion,
Experian, and Innovis to communicate with furnishers about consumer
disputes.
FCRA--Fair Credit Reporting Act.
Furnisher--Generally refers to an entity that provides information
relating to its own transactions or experiences with consumers to one
or more consumer reporting agencies for inclusion in consumer reports.
Inquiry--A request for a consumer report.
Metro 2--The industry standard format for furnisher data
contributions created in 1997 by the CDIA on behalf of Equifax,
TransUnion, Experian, and Innovis.
NCRA--Nationwide consumer reporting agency. For the purpose of this
paper, an NCRA means Equifax, Experian, or TransUnion.
Public Record--Generally, a record that a governmental body is
required to maintain, and which must be accessible to scrutiny by the
public. Definitions of public records can vary by federal, state, or
local jurisdiction.
Reinvestigation--An investigation by a consumer reporting agency or
a furnisher into the accuracy or completeness of information in a
consumer's credit file in response to a consumer dispute of such
information.
Trade Line--Information furnished by a creditor to a consumer
reporting agency that reflects the consumer's account status and
activity. Trade line information includes the name of companies where
the applicant has accounts, dates accounts were opened, credit limits,
types of accounts, balances owed and payment histories.
Appendix
e-OSCAR Dispute Codes
The 29 e-OSCAR dispute codes are as follows:

Not his/hers

Belongs to another individual with same/similar name

Not aware of collection

Late due to change of address--never received statement

Settlement or partial payment accepted

Claims paid the original creditor before collection status
or paid before charge-off

Credit limit and/or high credit amount incorrect

Included in the bankruptcy of another person

Claims account closed

Claims account closed by consumer

Contract cancelled or rescinded

Account included in bankruptcy

Claims active military duty

Insurance claim delayed

Account involved litigation

Claims victim of natural or declared disaster

Claims account deferred

Not liable for account (i.e., ex-spouse, business)

Account reaffirmed or not included in bankruptcy

Claims true identity fraud, account fraudulently opened

Claims account take-over, fraudulent charges made on account

Disputes dates of last payment/date opened/date of first
delinquency/date closed

Disputes present/previous account status/payment history
profile/payment rating

Disputes special comment/compliance condition code/narrative
remarks

Disputes account type or terms duration/terms frequency or
portfolio type disputed

Disputes current balance

Claims company will change

Claims company will delete

Consumer states inaccurate information

Senator McCaskill. Thank you.
I'm going to start a tradition on this committee. Because
I'm thrilled that other members of the Committee have come, I'm
going to defer my questioning until after all the members have
had an opportunity to question, following the lead of Senator
Nelson in his Committee on Aging. He's doing the same thing,
and I thought that was a good example he set for all of us.
So I will turn to Senator Heller first for questions.
Senator Heller. Madam Chairwoman, thank you.
Mr. Stone, I have a couple questions for you regarding the
amount of information that you guys collect, basically in real
time, and that your examiners are going to financial
institutions and are asking for customer files, purchasing
credit reports, asking banks to submit consumer accounts, and
on a voluntary basis they're collecting data when a consumer
files a complaint with the CFPB.
Here's my question: when the CFPB purchases credit reports
and when they ask banks to submit customer accounts, what is
the CFPB doing to ensure that this information does not become
identifiable?
Mr. Stone. There are two different processes at work here.
We purchase a set of anonymized credit report data, as do the
Federal Reserve and the New York Fed, for research purposes.
It's a sample of consumers who we can track over time who are
representative of the general population, and so we can see how
consumers are doing. There is no information about the
individual consumer, such as name or address, so there is no
way that that information could be traced back to the
individual consumer.
We have separate databases, which we obtain through
supervision, such as one that is also used by the OCC to track
the credit card industry. That database is similarly
anonymized. It does provide account-level data, but we don't
know who the individuals are.
Senator Heller. It's also my understanding that the CFPB
collects all this consumer data and assigns a unique number to
that file, and obviously connected with that file would be an
individual's American Express card, Mastercharge card, Visa
card, student loan accounts, checking accounts, mortgages, and,
frankly, your credit report.
So with all that information that's contained in these
accounts and the amounts, is it easy to identify these
individuals?
Mr. Stone. We have done everything we possibly can to not
be able to identify them. So the unique number is simply to
allow us to track the existence of a particular person for data
analysis purposes so when new trade lines come in or other data
is appended to that data set we can marry them to the same
individual. We never see information that would allow us to
identify the individual, and we never receive information that
would identify their card or other accounts.
Senator Heller. What keeps the agency from sharing this
information with other government agencies?
Mr. Stone. In the case of the first type of database, we
have the information under license solely for research
purposes, and we would only share findings from the analysis of
this information; our license agreements with the providers
prohibit sharing of the underlying data. In the case of data
collected through supervision, we accord these the protections
we place on all confidential supervisory information.
Senator Heller. Thank you.
To the other witness: Thank you for being here also. When
you have credit histories for over 200 million people--you
touched on this a little bit in your testimony about what an
individual can do--we sit here and ask what the agencies can
do--to make sure that these reports are accurate. Explain again
what an individual can do and what it would take?
In other words, I don't think the average American today
knows that they can check on their credit history or that they
have influence with the CRAs out there. Please explain again,
what's the best step a consumer can take to protect their
credit records?
Ms. Mithal. Several steps. First, we recommend that they go
to annualcreditreport.com. Each of the three major credit
bureaus must provide a copy of their free annual report to each
consumer once a year. So we think that's the best way to
proactively take a look at their credit report, try to spot any
errors, and if they see any errors they should dispute those
errors with the credit bureau.
Senator Heller. Is there an expense to that?
Ms. Mithal. No. No, there's no expense to that.
One of the things that we try to do at the FTC is we try to
educate consumers about that process. So we have a lot of
materials on our website about how to file disputes. We have
sample dispute letters. And as I mentioned in my testimony, we
try to get out to local organizations so that people on the
ground who are really trying to help consumers will be able to
have those tools and help consumers that need the help.
Senator Heller. What can we do more? What can we do more to
let consumers know that they have access to this kind of
information?
Ms. Mithal. I think we can do more outreach. I think we can
always do a better job of reaching out to community
organizations, financial institutions, and others to try to get
the word out to consumers, so that--currently only 20 percent
of the consumers may be checking their credit reports regularly
and we need to get that number higher.
Senator Heller. I agree, I agree.
Thank you, Madam Chairwoman.
Senator McCaskill. Senator Schatz.

STATEMENT OF HON. BRIAN SCHATZ,
U.S. SENATOR FROM HAWAII

Senator Schatz. Thank you, Chair McCaskill.
Good afternoon. Thank you for testifying.
Mr. Stone, it's not clear to me at all that consumers have
any degree of control over the information that's gathered
about them, how it's used and how it's shared. And even with
the right to a free annual credit report, consumers seem to
lack the basic knowledge of how this information is going to be
used by lending institutions, employers, landlords, and
insurance companies.
If a consumer had access to his or her credit report, would
the consumer be able to tell what his or her credit score is?
Mr. Stone. Right now the FCRA gives the consumer the
ability to purchase a score, but you don't automatically get a
score when you obtain your free annual credit report at
annualcredit
report.com.
Senator Schatz. So given the sort of lack of basic
understanding among the general public about the implications
of having flaws on your credit report and therefore a lower
credit score, doesn't it make sense to have this as an annual
free package, a credit report with your score, so you can
better understand how creditworthy you are and how to remedy
whatever problems there may be?
Mr. Stone. I can certainly say that having a credit score
is helpful and there is a nice piece recently from the Federal
Reserve Bank of Boston that showed that people who knew their
credit score were able to make better decisions about credit.
As far as having access to a credit score be free as part
of the package, I think right now that's a legislative issue
that I really can't comment on.
Senator Schatz. Thank you.
Another question for you, Mr. Stone. As you outlined in
your testimony, the CFPB report identified several flaws in the
credit dispute procedures that CRAs have in place. As you
mentioned 85 percent of consumer disputes to data furnishers--
excuse me. CRAs automatically send 85 percent of consumer
disputes to data furnishers without conducting any
investigation themselves. Second, CRAs accept the determination
of the furnisher without requiring any documentation or
evidence.
I understand CFPB has a successful mechanism for handling
consumer complaints with respect to mortgage lending and credit
cards. Perhaps you could briefly explain how that process works
and whether it might be applicable to credit reports?
Mr. Stone. Sure. Thank you, Senator. We rolled out a
process for accepting credit reporting complaints in October of
last year that is working essentially on the same platform as
our complaint-taking in mortgage and credit cards. The way that
system works now is we receive the complaint, we verify that
the consumer has a bona fide relationship with the entity about
whom the complaint is, and then forward it to that company. So
we do that now with credit reporting complaints.
As of the end of April, we've received over 10,000 credit
reporting complaints and we've obtained resolutions on most of
those. There's about a 60-day lag that we allow for
resolutions.
Senator Schatz. OK. Talk to me about these specialty CRAs
that compile and share consumer data without sufficient
oversight? I understand both FTC and CFPB have begun the
process of, would it be correct to say, inventorying who they
are and how they're operating? Maybe both of you could
articulate what the process is going to be to kind of inventory
who these institutions are, how they're operating, and how
they're going to fit into either the existing or future
regulatory framework?
Mr. Stone. Sure. Shall I start? There are a number of so-
called nationwide specialty consumer reporting agencies that
maintain national databases on things other than credit. An
example would be auto driving records. Another would be
checking accounts. Another would be tenant rental history.
Senator Schatz. Excuse me. Does the consumer have any right
to know what this information is or who it's being transmitted
to?
Mr. Stone. All of the same rights that are accorded
consumers with respect to the credit reporting agencies also
are accorded under the Fair Credit Reporting Act to these
others. So it includes the right to dispute, it includes the
same right to obtain a free copy each year of your consumer
report. In fact, last year the CFPB published a list of who
these national specialty consumer reporting agencies are, where
to go to get their free annual reports, and how to dispute.
Also, we sent letters to a few of those companies that did not
appear to be adhering to all of the requirements to make the
free reports available or to make it clear how to dispute. So
we certainly treat those as part of our FCRA oversight
responsibilities.
Senator Schatz. Thank you.
Ms. Mithal. I'll just add one thing. We actually do treat
the nationwide specialty CRAs very similarly to how we treat
the big three. So for example, last year we sued a CRA that was
engaged in employment background screening, and they were
providing employers with inaccurate information. So for
example, it might look like I have a criminal record, but that
record had actually been expunged and they hadn't reported the
expungement to the employer. So we sued that company and we
were able to get $2.6 million in civil penalties.
We also issued warning letters to data brokers that engage
in tenant screening. So they compile information about rental
histories and sell it to landlords. We sent them letters saying
that they were likely subject to the FCRA and if they weren't
maintaining accuracy of this information and allowing dispute
rights they were likely violating the FCRA.
Senator Schatz. Thank you.
Senator McCaskill. Senator Klobuchar.

STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA

Senator Klobuchar. Thank you very much, Chairman. Thank you
for holding this hearing. I've actually heard a trail of tears
in my state about this problem. I met with a number of the
victims. We've had anyone from a math teacher who's gotten
ripped off to a small town jewelry store owner who actually
started with a credit report that reflected that she'd missed
three mortgage payments. It was completely inaccurate. And then
what happened was that it affected her interest rates on her
credit cards, her auto insurance went up, and it ultimately
affected her business.
Our office has personally been handling a number of these
cases where people unbeknownst to them have an error on their
report and then it affects them in their rates. Many of them,
it takes a year or 2 years to actually get back to where they
were.
So it's a ridiculous situation for my mind, in this day of
technology and accountability, that shouldn't be happening. I
appreciate your work on this. I've actually a few months ago
sent a letter to the CEO's of the major credit reporting
agencies asking them to fix this. We're still working through
this with them. I appreciate the updates today, but clearly
this isn't still solved.
Mr. Stone, you mentioned in your testimony that CFPB has
adopted a rule just last July extending the supervision
authority to cover large credit reporting companies. Your
testimony noted that there are three key factors impacting
credit reporting accuracy: one, information provided to the
companies; two, how the credit reporting companies process it;
and then, three, how they handle customer disputes.
Have you started this supervision program in this market of
the credit reporting agencies, and which of these three factors
do you think needs the most improvement?
Mr. Stone. I would like to point out we actually started
examining non-CRA's prior to the creation of our larger
participant rule. So we actually have been looking at
furnishing practices, the first of those three legs, for some
time and have actually found some practices that we've obtained
corrections for.
The other two obviously are part of something that the
consumer reporting agencies cover and our supervision program
in this market is under way.
Senator Klobuchar. So is it going on right now and you're
identifying what the problems are? What's happening?
Mr. Stone. Yes.
Senator Klobuchar. OK. And then what happens next? Are you
going to put out some best practices or find out if people are
violating the rules?
Mr. Stone. Each of these processes--and I can talk maybe a
bit about the dispute process--has a number of components
associated with them. The dispute process involves both the
CRAs and furnishers, and consumers can file a dispute with both
the CRA and directly with the furnisher. We want to make sure
that both all of the relevant information that the consumer
provides, is being forwarded on to the furnisher when it's a
furnisher issue, and that the furnisher does conduct a thorough
investigation.
Senator Klobuchar. How about when an error is found? Is the
agency doing something to help them get back on their feet? I
know there are lawyers in my state that are starting to create
practices around this because of the errors, so that they can
get reimbursement for these people.
Mr. Stone. One of the key things to look for is when an
error is found, to make sure that the system of recordkeeping
inside the creditor, servicer, or whoever the furnisher is,
maintains the correction. Sometimes in the past a correction is
reported, but the underlying recordkeeping system didn't
include the correction, and so the next time, the next month
when the data's refreshed, it can go back. So we definitely
want to look for a thorough incorporation of the correction in
the records of the furnisher.
Senator Klobuchar. Thank you.
Is it ``MITH-al'' or ``Mith-ALL''?
Ms. Mithal. ``MITH-all.''
Senator Klobuchar. ``MITH-all,'' very good. I've got a
harder name than that, so don't worry about it.
In your view, are the credit reporting agencies doing
enough right now? That was what my letter was about? One of the
common complaints is that when consumers do dispute an error,
they will take it in, the credit reporting agencies just take
it in, but then we don't even know if they're doing any real
investigation. Do you think that's a real problem?
Ms. Mithal. I think, in answer to your first question, I
think we all could be doing more to improve accuracy of credit
reports. I think credit reporting agencies need to make sure
that they're living up to the standards under the law of
maintaining maximum possible accuracy of credit report
information. I think furnishers need to do a good job of
ensuring that they're only providing information when they have
a reasonable basis to believe it's accurate. I think we as
policymakers can do a better job of educating consumers.
I think, to your second question, if the consumer reporting
agency is not doing a reinvestigation, if they're not passing
on the information to the furnisher, if they're not promptly
reporting back to the consumer and correcting the error, then
they would be in violation of the law and we'd certainly want
to hear about a company that was doing that.
Senator Klobuchar. OK, very good.
Thank you to both of you. I'm sure you'll be hearing more
about this. I've assured--I just told the people in my State
we're not going to keep letting this go. So thank you.
Senator McCaskill. Senator Nelson.

STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA

Senator Nelson. Thank you, Madam Chairman.
Well, I can give you a personal example about the excellent
questioning of my colleagues here. Lo and behold, when I was
going to do some refinancing a couple of years ago on a home, I
suddenly found that I had purchased a refrigerator in Wisconsin
and hadn't paid on it for over a year. Well, of course, you
know, that held up the financial transaction. We got it all
straightened out, but it took some haranguing to get it----
Senator Klobuchar. Madam Chair, there are a lot of Nelsons
in the Upper Midwest.
Senator Nelson. That's true, probably a lot of Bills as
well. [Laughter.]
Senator Nelson. Then about a year later, I'm getting ready
to purchase and getting the financing on another home that
Grace and I had moved in, and we're ready to close and, lo and
behold, the same thing that was eliminated by --it was one of
the three. Do we know the name? One of the three credit
reporting agencies. They never had taken it off, and there it
is and we're ready to close.
Of course, not paying on a bill for over a year is going to
drastically affect your credit score, even though I'd cleared
it up a year ago that this wasn't me. It was a mistake in
identity.
So I want you--if this is happening to me, what is it doing
to the average citizen out there on the street that doesn't
know how to go about straightening out something like this?
I want to ask you about something else. Under the Fair
Credit Reporting Act, all credit files should be reported
accurately; isn't that correct?
Mr. Stone. That's correct.
Senator Nelson. OK. If a person goes into foreclosure,
someone--indeed, that will be noted and it will affect their
credit, will it not?
Mr. Stone. Absolutely.
Senator Nelson. Then I would ask both of you all as the
regulators, why are people who don't go into foreclosure, but
go into a short sale, which the government, this government,
under law that we have passed, actually encourages and even
encourages with some tax incentives, why is a short sale being
coded in the credit reporting agencies the same as a
foreclosure? And it's happening in my State right now. Why?
Mr. Stone. Short sales is a relatively new phenomenon and
it is important that it be reported accurately because Fannie,
Freddie, the GSEs, and the FHA treat those differently in their
underwriting system. So if they can't distinguish between a
short sale and a foreclosure, somebody who's had a short sale
will be treated as if they had a foreclosure.
The coding of this information is coming into the three
credit bureaus from furnishers in identical files, but it's our
understanding that the problem lies somewhere between how the
different bureaus code this information in their reports and
how the GSEs' underwriting systems interpret these reports.
This is something we've talked to the Consumer Data Industry
Association about and you can ask Mr. Pratt, the next witness,
a little bit more.
Senator Nelson. I don't know what you just said. My
question was, why is a short sale being coded the same and you
all as the regulators are allowing it to be coded the same as a
foreclosure, which is a completely different breed of horse?
Mr. Stone. Right now there is a special treatment for short
sales that does code them differently, but not in the same way
that other kinds of ends of loans are coded. This is a
technical aspect that I think Mr. Pratt will be able to shed
more light on. But right now some of the credit reporting
agencies do report this information accurately from the
information they receive, but in other cases----
Senator Nelson. They haven't been in Florida. And you're
the Consumer Finance Protection Bureau. You're supposed to be
protecting consumers. You're supposed to be seeing that fair
trade is going on. Here we have a new phenomenon. We have a lot
of mortgages under water. People still want to sell their
homes. You get into a State like mine where 40 percent of all
the mortgages in the State are under water, and you want
commerce to continue. You want to get the economy to recover.
So why then penalize the poor person--and we've seen this
over and over in Florida. Why penalize them because they've
done something we've encouraged and then they have their credit
completely blown, and they can't refinance?
Mr. Stone. We agree with you, Senator, that foreclosures
and short sales should be clearly distinguished in credit
reports. We've become aware of this problem and we're trying to
track down exactly how to fix it. And we'll have to be back to
you on how we progress.
Senator Nelson. Here's what I would encourage you to do,
since you're supposed to be protecting the consumer, and so are
you, too. I have just called this attention to your respective
chairmen, Mrs. Ramirez and Mr. Cordray, and I would appreciate
it if you all would stop this nonsense and get it coded
correctly so that our people are not being penalized. Thank you
very much.
Ms. Mithal. Thank you.
Senator McCaskill. What I want to get at is this free
credit report problem that we thought we'd solved. Sitting
here, I thought I would pull up freecreditreport on my handy-
dandy little Apple gadget here. Of the 15 responses to ``free
credit report'' on my Google search, 8 of them represented one
company, owned by one of the three credit reporting agencies.
What was really disconcerting about this is what they've
clearly done is they've gone from marketing primarily
freecredit
report.com--that's the company that's owned by Experian, I
believe--they've gone from marketing that to now marketing
``free credit score,'' to get around us telling them, you can't
do this any more, you can't rip people off and act like you're
giving them something free when you're not, when in reality
they can really get it for free.
So I don't know why this is legal, this page, because it
says ``Get your free credit report delivered in two days.'' So
when I was up in my office a few minutes ago, I tried to do
that. Well, they want my e-mail address. They won't process my
request to get my free credit report without my e-mail address.
I don't remember saying in the law that you had to give your e-
mail address to be able to get a free credit report.
Then you have to wait 2 days for it. But if you want to pay
them a dollar, you can get your credit report and score right
now.
So I started filling out to get my free credit report in 2
days with Experian's company and found out when I checked their
ad targeting policy that of course they want you to get your
free credit report through them because they're going to get
your Social Security number, and their ad targeting policy
means that they can sell your information to whoever they want,
including third parties.
So what was supposed to be an effort to allow consumers to
access their credit report free, they have now discombobulated
into a new marketing scheme to either grab your data, which is
very valuable, and sell it or sign you up for $19.99 a month or
$14.99 a month. And by the way, there was like seven different
entries on this Google page, all going back to the same
company.
Now, there were a couple that did the right thing. Equifax,
when you pull it up it actually says you're entitled to a free
report at annualcreditreport.com. One of them, Credit Karma,
said, well, the government is limited to how much they can give
you, so you need to give us your money every month because we
can track everything bad that's happening to you.
What are we going to do about this? What do we need to do
to shut this down? Because this is not what we wanted to have
happen. We wanted everyone to have clear, disclosable
information that they understood, that they didn't have to pay
anybody squat to get their credit report. And these people are
continuing to use this to mislead people, and I want to know
what you guys can do about it.
Ms. Mithal. If I could just make two points in response. I
think the first is the rule--I know that Congress was aware of
this problem and Congress passed a law to try to address it.
The rule implementing that law says that if you sell free
credit reports that are bundled with other products that the
consumer has to pay for, then you have to have a disclosure
saying that the consumer should be referred to
annualcreditreport.com. As you point out, there are a lot of
things that companies have done to try to get around this
requirement.
I think that brings in the second point, which is a broader
point that we've made at the FTC, which is about getting
people's personal data without informing them of what's
happening. So we issued a privacy report in March of 2012
basically saying that all companies, not just credit bureaus
but all companies, should be transparent about their data
collection practices and should provide consumers with choices,
and they should also limit the amount of data they collect to a
purpose that's appropriate for what they're trying to do for
the consumer.
So I think one of the things that we recommend in our
privacy report was general privacy legislation implementing
those principles. So I think that might help. But I understand
your concern, Senator, and we share it.
Senator McCaskill. Shouldn't this--shouldn't we have--you
need to let us know how we need to correct the legislation to
stop this, because this is what we were trying to stop in the
first place and they're still doing it. This hasn't had any
impact, and obviously they're the big dog. They've got eight of
the searches out of the 15 on the page is one company. They're
``Free Credit Report,'' they're ``Free Credit Score.'' They've
got five or six different names, but it all is the same company
and it's all one of the big three.
They know exactly what they're doing, and they got their
lawyers to figure out how to get around the rule to avoid the
exact purpose that we passed the law in the first place.
You're telling me you don't have the tools to stop this
right now; is that correct?
Ms. Mithal. That's correct.
Senator McCaskill. Do you believe the same thing is true,
Mr. Stone?
Mr. Stone. I don't at this point. I will say that the
fulfillment of the obligation to make a free credit report
available by a CRA is something that falls under our
supervision program. If there are practices that mislead a
consumer into thinking they're getting the report to which
they're entitled, those are something that we're going to look
at quite hard.
I think one of the hard things about this particular
practice is you can encode it in a word, like ``free credit
report,'' and you can migrate to ``free credit score'' and
you've avoided the rule. So there may be room for a broader
principle here.
Senator McCaskill. Mr. Stone, do you have jurisdiction over
FICO, the company that does FICO?
Mr. Stone. Our larger participant rule pertains to any
company, or larger participant, that either compiles or
analyzes consumer information for purposes of providing it to a
third party for making a decision.
Senator McCaskill. OK, so you do? That was a yes?
Mr. Stone. Our larger participant rule does those things.
Senator McCaskill. OK. I've got to give you courage. That
was a yes.
OK. So there are other smaller companies, just like the
specialty CRAs, that are also doing credit scores, right?
Mr. Stone. There are, but we're not aware of credit scores
or scorers in that realm like checking accounts or drivers
performance that have any kind of consumer market, where
consumers are actually paying money for them. There are scores
that are based on that kind of data, but they're primarily used
by businesses.
Senator McCaskill. I'm following up on Senator Schatz's
question. Do you see any reason why we shouldn't include a free
credit score with the free credit report? Is there any good
reason not to do that for consumers? Because, frankly, having
one without the other is a little bit like having a car without
wheels.
Mr. Stone. And consumers often conflate the two.
Senator McCaskill. Right.
Mr. Stone. They think of a score as a report and a report
as a score.
Senator McCaskill. Right.
Mr. Stone. I think the challenge--one challenge is that
there are multiple credit scores out there, so which score do
you mandate? These are all privately developed algorithms.
Senator McCaskill. Just like there are multiple credit
reports.
Mr. Stone. Exactly. Providing ``the score'' or ``a score,''
it raises an interesting question. There's no question that it
helps consumers to know where they stand with respect to a
spectrum of creditworthiness, and a score is a great
simplification tool.
Senator McCaskill. We're not going to solve this problem of
people getting ripped off by these companies, buying these
services, if we don't solve the score problem, too, because you
can see what they're doing. The minute we try to close off
their ability to sell a credit report that consumers should get
for free, they're going to start selling the score.
And by the way, most of the scores they're selling on here
are not the FICO scores. They're somebody else's they're using,
that they're selling. And they put a little-bitty disclaimer
down there: By the way, this may not be the score your lender
gets; we're just going to give you one. So it's not even fully
disclosed to them that they may be getting a score that their
banker says, well, we don't use that one, we use FICO.
Mr. Stone. That's right.
Senator McCaskill. OK, I've gone over my time. I apologize.
Anybody else would like another question for these witnesses?
[No response.]
Senator McCaskill. Thank you all very much for being here,
and I would like input from both your agencies on how to
address the clear gaps we've got in this consumer protection
area.
Senator McCaskill. I want to thank all of the witnesses for
being here. On this panel we have: Ms. Judy Thomas, who is a
consumer, I believe from Ohio; we have Mr. Stuart Pratt, who is
President and CEO of Consumer Data Industry Association; Mr.
Ira Rheingold, Executive Director of the National Association
of Consumer Advocates; and Dr. Howard Beales, a Professor at
Department of Strategic Management and Public Policy at George
Washington University School of Business.
Thank you all for being here, and we will begin by hearing
your testimony, Ms. Thomas.

STATEMENT OF JUDY ANN THOMAS, CONSUMER

Ms. Thomas. Thank you, Chairwoman McCaskill and Ranking
Member Heller and members of the Subcommittee, for inviting me
here today. This is very near and dear to my heart.
I would first like to introduce myself as Judy Thomas. I am
not Judith Kendall. I have fought to be Judy Thomas now for the
past 14 years. I started in 1999 with impeccable, exceptional,
excellent credit, except in July of 1999 I was suddenly
surprised to find out that I was not creditworthy.
This had gone on--I did exactly what the credit bureaus
told me to do as far as filing a dispute. I did a letter form
of dispute. I did phone call disputes. I got reassured that my
credit or my errors would be corrected. I was told to wait the
normal 60 to 90 days to ensure that this would be corrected,
only to find out after the 60 to 90 days that another error was
on my report.
So this went on for quite some time. Thinking that I was
going to get a simple error fixed by myself, turned into a
nightmare. I couldn't finance a home. I couldn't get a loan. I
couldn't even be a cosigner on my daughter's student loan. I
was basically held captive by these credit bureaus, and I
couldn't do a thing about it.
The problem that I had mostly was the credit report that I
would receive in the mail, when you talk about this annual
credit report, the free report, when I would get a report in
the mail I could look at it and go: Yes, this is Judy Thomas;
yes, this is my debt; yes, this is correct. However, I would go
to the bank or I would go to a loan company, what was on my
report was nowhere near on the report that the lending
institution had.
Why there is a discord between what I'm receiving versus
what the lenders are receiving, there is what I think the
problem is. You can't fight disputes if you don't have them on
your report. There's nothing to fight, there's nothing to
dispute.
So it wasn't until that I had actually seen a report from a
lending institution that I actually found out that the problem
wasn't one debt; the problem was I was mixed with another
individual in another--on the other side of the country, whose
name wasn't even close to Judy Thomas. And there was nothing I
could do.
I wrote letters. I wrote disputes. I made phone calls. I
contacted my Congressman. I couldn't even get an attorney.
There's no one to help you. There's no one. There's literally
no one to help you.
Thankfully, I was put in contact with a consumer attorney
and ended up having to file litigation, file a lawsuit, which--
it doesn't need to come to that. It does not need to come to
that. You need someone there who's going to look at the whole
credit report, not just each individual little debt, not each
little individual dispute, but look at the whole picture, look
at the whole person and what's going on in the credit report,
not just the error.
I hate to get emotional. It's very dear to my heart. I'm
not a statistic. You talk about these percentages. I'm not a
statistic. I am a consumer who had exceptional credit, who
prided myself in my credit, and I had that taken away from me.
Not only did you take that away from me; you have taken my
identity. You have turned me into someone that, I don't even
know who I am any more. And I have to carry papers around to
prove that I am Judy Thomas and I'm not Judith Kendall in Utah.
I was accused of falsifying a job application. They said I
falsified a job application because a credit bureau apparently
sold my false information to someone who does background
checks. So when I filed for a job position, they did a
background check, they got this other woman's information, and
accused me of falsifying documentation.
This has got to stop, please. I thank you for letting me be
here. I thank you for bringing this to attention. I'm just a
minor person in this whole fish pond of errors.
[The prepared statement of Ms. Thomas follows:]

Prepared Statement of Judy Ann Thomas, Consumer, Victim of Chronic
Credit Reporting Inaccuracy
I. Introduction
I would like to begin by thanking you for inviting me to testify
here today. Throughout the credit reporting nightmare I have been
living, a nightmare that has been going on since 1999 and which
continues on in various ways today, one of the most difficult things is
feeling like no one is really listening to me or cares what I am going
through. I am honored to be here, speaking on behalf of myself and
other consumers who have been forced into this ordeal through no fault
of their own. I am encouraged and hopeful that the problems plaguing
victims such as myself will get some of the attention that is
desperately needed to prevent others from suffering the same fate.
II. The Compromise of My Good Name
One afternoon, in 1999, I went into the local mall looking to buy
myself a new dress. I found the perfect one and decided to take
advantage of a store credit card offer to save myself 10 percent on the
purchase. Much to my complete surprise, I was denied. Besides being
completely embarrassed, I was also completely confused. I have always
taken pride in paying my bills on time and not living beyond my means.
My credit rating has always been excellent. I had no idea what was
going on.
Soon after, I received in the mail the official ``denial'' letter
saying that my store credit card application was denied because of some
negative information in my credit report. I requested a copy of that
credit report to see what could possibly be contained in there to
justify denying me for a relatively minor credit opportunity. My credit
report looked absolutely fine. I recognized the accounts that were
reported, and all of them were accurately showing that I am very
responsible with my use of credit.
What I did not know at the time, and what would take me years to
uncover, is that my personal information was beginning to mix together
with that of someone with similar identifying information. My name is
Judy Ann Thomas and I live (and always have lived) in Ohio. There is a
woman named Judith Kendall who lives in Utah. Apparently, because our
first names are sufficiently similar, and our Social Security numbers
are within a seven (7) of nine (9) match of each other (a fact I would
only discover through Federal litigation), one or more of the national
consumers reporting agencies (``CRAs'') started seeing us as the same
person for purposes of placing her data in my credit report. I never
could have imagined what that seemingly ``minor'' mistake would do to
me, to my good name, to my excellent credit rating.
It took quite some time for the mixture to show itself to me on
paper. I saw ``clean'' copies of my credit report for several months
before the name ``Judith Kendall'' ever appeared. Little by little,
however, that name, its corresponding address(es) in Utah, and the
numerous delinquencies, charge offs and collection accounts rightfully
belonging to somebody else, started showing up in my credit report. I
certainly was confused by what was going on, but at least now I had
something to work with; I could identify the problem and dispute the
false items I now could see.
But for every dispute I made, it seemed two more problems arose. I
would dispute one particular account, and maybe that account would be
deleted, but then a new account that was not mine would appear. It was
obvious to me that no one was looking at the bigger picture of why this
information was coming into my credit report in the first place. This
was never more evident to me than the day I received a credit report at
my home addressed to Judith Kendall! Was anyone paying any attention to
my disputes? Clearly the answer was no.
III. What It Really Means To Be A ``Victim'' of Chronic Inaccuracies
Even though my ``credit problems'' were caused by a failure of the
credit reporting system, not anything I did or could have done
differently, I am the one that has suffered the consequences. I have
been impacted on every level: economic, emotional, mental, physical.
A. Economic Loss and/or Financial Injury
Throughout the course of my fight to regain my good name and
impeccable credit rating, I was forced to suffer multiple credit
denials due to false and derogatory information in credit reports
circulated by one or more of the national CRAs. For instance, in 1999,
I applied for but was denied a credit card from Gantos. In 2000, I
applied for but was denied credit by Discover, Capital One, First Merit
and Verizon. In 2003, I was unable to refinance my existing mortgage
with Fifth Third Bank because of the appearance (or reappearance) of an
alias and corresponding derogatory collection references.
These numerous credit denials demonstrate the repeated and
seemingly never-ending cycle in which I have been thrust by the
national CRAs wherein I have suffered the humiliation and frustration
of being denied credit, disputed the false information with the CRAs,
dared to believe that the information has been corrected, and then
subjected myself to the application process again only to be humiliated
by rejection again. This cycle has imposed significant mental,
emotional and physical strain, distress and humiliation on me for which
I have suffered a significant loss of trust in the system as a whole.
The vicious cycle described above has repeatedly haunted me and my
ability to obtain credit at the best terms available. In 2004, I
attempted to co-sign a student loan for my daughter. After much
research, I discovered that Key Bank had the best rates available and
so, I submitted an application. This credit application was denied due
to the existence of ``Charge Off/Collection'' notations on my credit
report. Once again, I was subjected to the utter humiliation of a
credit denial, this time accompanied by the additional stress and
embarrassment of the fact that this particular credit denial called
into question my ability to assist my daughter in paying her college
tuition. My inability to secure the student loan for her created
tension between us of fear that she would otherwise be unable to attend
college. It also imposed feelings of inadequacy on me in not being able
to assist my daughter when my true credit rating should have been more
than sufficient to secure the loan. Additionally, I was forced to
approach my mother and father about possibly co-signing the loan for my
daughter which absolutely mortified me, but I felt I had no choice but
to do so to ensure my daughter could go to school.
The denial of the student loan application also triggered another
several-month-long dispute process wherein I was forced to defend my
good name and credit rating again, which involved the investment of
significant time, effort and resources to attempt to explain and verify
that I was not, in fact, the person whom my credit report continued to
say I was. This dispute process culminated with me being hounded at
work in October 2004 for verification of my employment in an effort to
attempt to secure the student loan for my daughter. In addition to
having to spend work-related time in an effort to do so, I suffered the
humiliation of having to justify and explain my actions to my superior,
as well as fear that I would be reprimanded or otherwise disciplined
for doing so. Ultimately, I secured a student loan for my daughter
through Bank One, but the interest rate on such loan was almost two (2)
percentage points higher than the rate offered by Key Bank (for which I
was denied).
By December 2004, I was advised by the national CRAs that my
disputes had been resolved and, once again, they represented to me that
my credit report had been cleared of any reference to any other
individual or credit information belonging to anyone other than me. I
hoped, trusted and believed that my ordeal had finally ended, and I
looked forward to enjoying the good name and credit rating I had worked
so hard to earn for myself.
However, regrettably, once I dared to believe my efforts had been
successful, I learned, once again, that I was a fool for doing so.
Specifically, in or around November 2005, I sought pre-approval on a
new home loan through Fifth Third Bank. I selected Fifth Third Bank to
apply for a potential loan because I was already a customer there, and
that fact had enabled me to secure credit previously (albeit after a
delay) despite the appearance of false information in my credit report.
In the face of the national CRAs' previous representations that all
reference to the previously-disputed, false information contained in my
credit report had been removed, I learned that my credit report once
again showed a false ``known'' alias and collection information
relating to another individual. I was sickened by the reappearance of
this information and did not further pursue a new home loan application
at that time.
Then, in or around July 2006, my fiance and I desired to purchase a
new home, so I needed to subject myself to the application process once
again. I desperately wanted my credit record to be accurate, not only
so I could ensure obtaining a home loan at the best terms available,
but also so that I not be forced to suffer through the pain and
humiliation of another credit denial, this time in front of my fiance.
In hopes of circumventing a credit denial based on false information
appearing in my credit record, I submitted to a pre-certification
process instead of submitting a full-blown loan application (so as to
pre-plan in case a problem arose), and I elected not to seek financing
on my own but did so jointly with my fiance so that his excellent
credit rating would be considered as well. In particular, my fiance and
I submitted a joint application for pre-certification for a new home
loan through Countrywide Mortgage. While my fiance was successful in
obtaining pre-certification, I was not. We decided not to proceed with
a formal loan application.
Of course, with each of these denials I have been forced to suffer
additional financial injury and/or loss to the extent I needed to
expend an absurd amount of time, effort and personal resources
(including credit report fees, telephone charges, postage, etc.) in
restoring my good name and credit rating to its rightful status because
of the national CRAs' failures or refusal to abide by the law.
Likewise, the never-ending cycle I have been thrust into has left me
paralyzed with respect to considering applying for credit, even when I
need it. Thus, I have and will continue to miss out on valuable cost-
saving credit opportunities because I simply cannot trust that my
credit report will accurately portray my credit history when and if I
do apply for credit.
The financial impact of this ordeal has not been limited just to my
inability to obtain credit on the best terms availability. In 2010, the
matter reared its ugly head yet again, threatening my ability to obtain
a new job. After applying for a new position, I was questioned by the
potential employer about whether I really had a nursing license as I
represented. Much to my horror, I learned that information about
``Judith Kendall'' had been returned in response to a background check
on me. To this day, I have never been able to confirm exactly how this
happened. The mixing of my personal information by one or more of the
national CRAs has left the confines of that arena and now is floating
out in the realm of public information as well. The loss of control of
my personal information in this regard is devastating. The proverbial
horse has left the barn and I am powerless to do anything about it.
Most recently, I was in need of refinancing my home within a
specified deadline due to a court-imposed deadline relating to the
ending of my relationship with my former fiance. As the deadline
approached, the now-familiar sense of dread returned but my credit
reports once again looked ``clean'' so I was hopeful that things would
go through with no problem. But then the loan officer placed before me
a form that I was required to sign in order close wherein I was
attesting that I sometimes go by the name ``Judith Kendall.'' I was
reduced to calling my attorney in tears.
B. Non-Economic Injuries: The Personal Toll
The financial impact of my ordeal has been significant, and I
certainly do not want to under-represent the toll that has taken on me.
But economic loss is something tangible, something relatively easy to
see and/or understand. The personal toll, on the other hand, is much
more difficult to see, and it is so much worse. Anguish, distress,
embarrassment, frustration, anger, fear. All of those words have
applied at one time or another for me, some all at the same time. There
has also been crying, pacing, sleeplessness, headaches. I feel like
there simply are not sufficient words for me to explain to you what it
feels like to go through something like this, and its maddening to be
faced with an attitude of ``no harm, no foul'' by the industry who has
done this to me.
I have suffered extreme embarrassment, humiliation and
disappointment in being denied credit on numerous occasions. I take
great pride in having built a good name and impeccable credit rating
for myself; thus, to be told that I do not qualify for the credit I
need or desire is greatly upsetting and demoralizing to me. In fact,
having to justify who I am on a repeated basis is extremely frustrating
and embarrassing.
I have also suffered embarrassment and humiliation from having to
explain myself and my actions to friends and family who have witnessed,
first hand, the ordeal I have been subjected to. Despite having the
love and support of these people, it is still greatly upsetting and
distressing that it outwardly appears I am someone or something I am
not. My mental, emotional and physical stress in this regard pales in
comparison to the embarrassment, distress and fear suffered when I was
been forced to explain myself to my superior at work because, once
again, the national CRAs reported false information about me to a
potential creditor. I was utterly humiliated after being discovered by
my boss crying at work, and then had to attempt to explain what was
going on. Again, it is greatly embarrassing to have to discuss such
personal matters with others, especially when I am faced with the fear
that I may not be believed or that I am being judged for being someone
or something I is not.
My mental, emotional and physical stress and distress is
exacerbated by the anxiety and fear I suffer because of not being able
to get credit when I need and/or want it, specifically including being
unable to co-sign a loan for my daughter's education and not being able
to secure sufficient financing for a new home loan on my own. The
position I have unwittingly been placed in has created anger, fear,
confusion, stress, worry, disappointment and frustration as to how this
happened and, equally, how I am going to make things better for myself
and my family. I take great pride in the good name and impeccable
credit rating I have struggled to build for myself, and it devastates
me that these things are being compromised and there is nothing I can
do about it.
Despite being a completely innocent victim in all of this, I feel
like I am fighting for my reputation against being slandered repeatedly
by entities that are supposedly charged with protecting my privacy, and
I resent being forced into such a position. Repeatedly having to deal
with the national CRAs to defend my good name and impeccable credit
rating has taken a great deal of emotional and physical energy from me.
I have been left exhausted and demoralized from the ongoing process
and, worse yet, I have no faith, trust or reasonable belief that I will
ever be successful in separating myself from Judith A. Kendall (and Ms.
Kendall's negative credit history). I desperately want to put this
never-ending saga behind me and never think about it again!
In November 2005, when I discovered that, once again, the false
alias and attached negative credit information were being reported by
the national CRAs, I was confused and angry, but more than that I felt
thrust into an unwanted and painful reality that this ugly monster of a
matter was rearing its head once again. I was forced to suffer the
uncertainty, doubts and fear of wondering why I was being subjected to
the return of the same problems I had worked so hard to correct over
the last several years. I wondered (and worried) why I was being forced
once again to deal with a matter that I believed was resolved, a matter
that had already taken such a huge mental, emotional, physical and
financial toll on me. This brutal reality--a reality that, once again,
was imposed upon me at no fault of my own--stripped from me any
remaining energy and resolve to keep fighting for my good name and
privacy. Thus, I began to accept that I had no choice but to look for
an attorney to institute litigation on my behalf. I resented having to
do so; there is no reason why a consumer should not be able to fix such
a matter by myself.
I hate remembering everything I have been forced to go through. I
am angry that the national CRAs get to disregard everything learned, or
at least told to them, from my disputes over a several-year battle, as
well as other litigation specifically including a lawsuit involving a
consumer of the same name suffering from the same problem as me. I am
very anxious and worried that this problem will continue to recur and
if ignored, will worsen, leaving my privacy compromised and my credit
tainted forever. This mental and emotional anguish, and its resultant
loss of trust, has left me reluctant to deal with everyday business
matters specifically including requesting credit even when I need it.
I firmly believe that our society creates laws to prevent
individuals from being damaged. Yet the national CRAs are somehow
allowed to thumb their noses at these laws to my repeated anguish,
disgust and dismay. Despite the enormous importance of credit
information, I never anticipated how difficult and devastating it would
be to try and clean up or correct my reports, resolve issues, or
communicate with entities about this situation. The sheer volume of
time, energy and resources necessarily devoted by me in my mostly-
unsuccessful efforts is staggering.
It frustrates and maddens me that none of the entities charged with
protecting and assisting me have any interest in me as a person and,
seemingly, are okay leaving me in the dark as to how this all actually
happened. It is apparent that they do not care just how much my life
has been ruined. I find it this particularly devastating considering
their only line of business is handling my information. Yet here I am,
more than a decade later, still living with a question mark over when
and where I will be hurt by this again.
All in all, my experience has led me to conclude that the system
that houses credit reports is very, very broken. Any intent by Congress
to offer citizens the tools they need to keep information safe has been
overshadowed by the fact that large corporations that buy and sell
information as a commodity ultimately own and control the process
through which the integrity of information is secured. I found fighting
this industry to be an impossible feat. There is nothing that requires
the ``system-machine'' to yield to common sense when any reasonable
person with value in the integrity or honesty of another human being
would have given pause, or at least attempt to define the problem.
Perhaps most troubling is the doubts and fears that I must live
with about the future. I am haunted by the fact that, even if my credit
reports are clean right now, I no longer have control as to when and if
I will be forced into this nightmare again. I did not cause the mixture
of my information in the first place, and I certainly cannot control if
it happens again in the future.
The bottom line is that my good name, in which I have vested a
lifetime of hopes, dreams, hard work and responsibility, will forever
be at risk. I must face this reality that the information that once was
so personal will never again be mine and mine alone. And this is a loss
for which no one can ever fully compensate me.

Senator McCaskill. That's what this is about. It's about
the Judy Thomas's out there. So thank you, Judy Thomas.
Ms. Thomas. Thank you very much. Thank you for having me
here. Thank you for letting me speak.
Senator McCaskill. Thank you.
Mr. Pratt.

STATEMENT OF STUART K. PRATT, PRESIDENT AND CEO, CONSUMER DATA
INDUSTRY ASSOCIATION

Mr. Pratt. I would agree with that. It is about the
individuals and not just about the statistics. The big picture
data is a good starting point. The FTC study has given us good
baseline information to work from in order to improve accuracy.
We're starting at a baseline of somewhere between 95 and 98
percent of credit reports being accurate. But the CDIA's
members are in fact committed to looking at that next
percentage.
I think you said it well in your opening statement, Madam
Chairman, and that is even if we have a good story to tell on
the front end in terms of the majority, we need to focus on the
minority.
So I'm glad to sit here today with Ms. Thomas, and we are
glad to learn from that situation. We're encouraged by the
research that has been done. We are now gathering data from the
FTC and from other sources to begin a working group process to
understand how we can, for example, keep a--which we should--a
Kendall and a Thomas from ever showing up on the same desk in
the future.
I think it was said in the first panel: The aspirational
goal is always 100 percent. I think the FCRA, the Fair Credit
Reporting Act, does acknowledge that there's a dispute process.
The dispute process should work well.
Again, the data that we have shows that for the majority of
consumers it is, and I think that's because in the majority of
consumers' cases it's not a complex dispute, and this situation
ended up being complex. That's not an excuse for not getting it
right. But we measured consumer satisfaction and we have about
a 95 percent satisfaction rate, not just with their experience,
but with the results of the reinvestigation.
But our job isn't simply to focus on the 95 percent, but
it's to focus on the 5 percent. So we have established this
year a working group to focus on the reinvestigation process,
to unpack--it's retroactive, but to unpack some of the
situations like those of Ms. Thomas and those of other
consumers, your constituent as well.
So the CDIA stands with consumers. Our members want to get
it right. I don't have a single CEO who sits at a desk saying
that this is the right result. In fact, I've had CEO's call me
to talk about this situation and say, how can we find a better
way forward? So we're not shying away from--we're not declaring
victory because there's good baseline data that says that we're
getting it right most of the time. It is a system for all
consumers. We want to get it right for all consumers.
So we're happy with the 98 percent accuracy rate. We're
happy with the 95 percent satisfaction rate. But we're not
happy with those smaller percentages and we're going to work
harder on those and focus on those today.
It is important, I think, what was said by Mr. Stone in his
opening statement: it is a three-legged stool. Another leg of
the stool, for example, is those who furnish information to us.
When we look at the FTC report, for example, one of the efforts
that we have to undertake is in fact to partner with all those
furnishers of data who are sending data, about 10,000 of them
in this country, updating about 3 billion data elements a
month. About 88 percent of the error types that were identified
in the FTC report came from the data furnisher side of the
aisle. So we have to look at the data furnishers as well to see
what kind of data they're reporting to us, even as we look at
our own data matching procedures to see how we then take the
data and match it into the credit reporting system.
We see the FTC report as a great opportunity to learn. It's
not just simply a report which validates. I think attitudinally
that's where we have always been.
Just to give you an idea of where this industry has been
historically, consumers were unhappy with how disputes were
processed. And this goes all the way back to the 1980s. We
stood up the first automated system, pre-FCRA amendments, pre-
requirements of law or regulators. We stood up the first Fair
Credit Reporting Act automated system for disputes, to process
disputes faster. So that cut the whole dispute process in about
half the time that it normally would.
When we saw that we had many data furnishers furnishing
data in different formats, we established the first Metro 2
data reporting standard to standardize, improve the quality of
data in credit reporting systems. That Metro 2 system exists
today.
When Y2K came around, we retooled the system proactively 24
months in advance and worked with the data furnishers to make
sure that this new millennium didn't have an effect on the way
credit reports work.
We always want to get out in front of a problem. We always
want to get out in front of a challenge. We always want to take
the next right step for consumers to ensure that the success of
the system that we're building on today is just that much more
successful tomorrow.
So we're happy to be at this hearing. We're happy to tell
you that, and pleased to tell you, that we have new working
groups to focus on some of these harder questions, and we
expect to have more information and more insights into some of
these complexities down the road.
So, Madam Chairman, thank you for allowing me to appear
before you today.
[The prepared statement of Mr. Pratt follows:]

Prepared Statement of Stuart K. Pratt, President and CEO,
Consumer Data Industry Association
Chairman McCaskill, Ranking Member Heller 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 160
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.
Credit Reports Benefit Consumers and the 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 fifty or a hundred
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 in the Fair Credit Reporting Act 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. They help 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.
What's In a Credit Report?
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. Sec. 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.
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.
The Consumer Financial Protection Bureau & Credit Bureaus
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. Sec. 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.''

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.
The Dispute Resolution Process for Consumers
A Consumers right to dispute information in his or her credit
report is 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 in the next section of this testimony measured consumer
satisfaction with the reinvestigation process and fully 95 percent of
consumers were satisfied with the results. This fact offers a
compelling rebuttal to the unfounded accusations offered 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.
Though the data discussed above confirms an error-correction system
that is working very well for consumers, some consumer advocacy
organizations have mischaracterized a key technology platform, called
eOscar, that contributes materially to this success. This platform
connects the more than 10,000 data furnishers who supply data to the
nationwide consumer credit reporting agencies so that disputes can be
submitted quickly and consistently.
The FCRA requires nationwide credit bureaus to maintain an
``automated reinvestigation system.'' \2\ The FCRA also requires
nationwide credit bureaus to transmit a consumer's dispute to the
lender/data source within five business days.\3\ This requirement of
law makes sense when you consider that the FTC's credit report accuracy
study found that 88 percent of the possible errors consumers identified
in their credit reports were about how collection agencies and lenders
reported data to credit bureaus (and not how credit bureaus loaded
these data).
---------------------------------------------------------------------------
\2\ 15 U.S.C. Sec. 1681i(a)(5)(D).
\3\ 15 U.S.C. Sec. 1681i(a)(2)(A).
---------------------------------------------------------------------------
In the interest of serving consumers industry built an automated
system prior to law requiring it and it is a great success. While law
requires disputes to be processed in no more than 30 days, this
platform shortens the time frame to an average of 14 days and recent
studies show that 95 percent of consumers are satisfied with the
results.
Codes are used to transmit the consumer's dispute to a lender. Some
have misunderstood these codes to mean that they are a shortcut and
result in an abridged version of the consumer's dispute being sent to
the lender. This is not the case. Each code comes with a full and
complete meaning that is also part of the system. Consider the
following example:

E1--``Claims paid original creditor before collection started
or paid before charge-off. Verify account status, payment
rating, current balance, amount past due, pay history''.

This is a typical example of a code that is unambiguous and which
encourages a thorough and complete investigation of all data regarding
a consumer's account. Lenders and collection agencies take these
directions seriously and conduct robust reinvestigations.
Finally, though the current coding system is working well a new
technology will go live later this year to enable nationwide credit
bureaus to provide lenders with images of any validating documents
submitted by consumers. According to the CFPB 44 percent of consumers
submit a dispute in writing.
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. As an extension of
this commitment, CDIA has formed a new Reinvestigation Working Group to
focus on the 5 percent of consumers who were not satisfied with their
results. This working group will also consider the adverse effects of
fraudulent credit repair schemes on consumers and our members'
resources which are dedicated to serving consumers and quickly
addressing consumer concerns.
Credit Repair Scams
It is good news that consumers' knowledge of credit reports and how
scores analyze credit report data is improving. It is also good news
that the systems for submitting a dispute are working well for
consumers. 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,
for credit bureaus and for all data furnishers (credit unions,
community banks, etc.). Our members estimate that as much as 43 percent
of incoming mail is tied to credit repair schemes that take money from
unsuspecting consumers, distract from processing valid disputes and
which tie up data furnisher resources leading some to give up and
delete accurate, predictive data.
Repeated Studies Confirm that Credit Reports are Accurate
The accuracy of credit reports is at the center of our members'
values and there is ample empirical evidence that their efforts are a
success. Consider the findings of the following studies/reports:

In 2004 the Federal Reserve Board published a study of 300,000
credit reports and stated that `` ``. . . the proportion of
individuals affected by any single type of data problem appears
to be small . . .''

In February of 2013 the Federal Trade Commission released its
comprehensive study of the accuracy of credit reports (see
CDIA's full news release in Appendix I of this testimony). It
focused on errors in reports that could adversely impact the
price a consumer would pay. These errors were defined as
``material errors.'' The study found that 98 percent of credit
reports do not contain a material error.

Further, in December 2012, the Consumer Financial Protection
Bureau (CFPB) published a white paper on credit reporting
stated the following: ``. . .the number of credit-active
consumers who disputed one or more items with an NCRA
[nationwide credit bureau] in 2011 ranges from 1.3 percent to
3.9 percent.''

The Federal Government reports continue a consistent narrative
about the integrity of the data contained in credit reports. In
2011, the Political and Economic Research Council study found
that only 1 percent of credit reports contained a material
error.

While these studies confirm that our members and data furnishers
are extraordinarily successful in maintaining accurate data, CDIA's
members are committed to learning from the FTC's latest report on
accuracy with a particular focus on the nature of the concerns of the 2
percent of consumers who may have a material error on one of their
credit reports. A CDIA working group on data quality has been
established to focus on improvements to data management practices and
outreach to data furnishers. Fully 88 percent of potential errors
identified by consumers in the FTC study were about the data reported
to the credit bureau and not about how the credit bureau loaded these
data.
The Role of Data Furnishers and Accuracy
More than 10,000 data sources report more than 3 billion updates of
data to nationwide consumer credit reporting agencies. As CFPB Director
Cordray stated during a July 26, 2012 field hearing:

``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''.

Our members have procedures in place for both on-boarding new data
furnishers and monitoring the data reported by the current community of
data furnishers. This ongoing partnership has resulted in FTC finding
that 98 percent of credit reports do not contain a material error that
would affect the price a consumer will pay in the marketplace. We
discuss below some of these practices:

New data furnishers--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 \4\:
---------------------------------------------------------------------------
\4\ 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.
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. Though 95 percent of consumers are satisfied with the results
of their reinvestigations and 98 percent of credit reports don't
contain a material error, our new CDIA working groups will focus on the
minority of issues that persist. Our members' goal is always to improve
and learn from both anecdotes and from new research.
I am happy to answer any questions.
______

Appendix I--CDIA News Release--FTC Accuracy Study

February 11, 2013 FOR IMMEDIATE RELEASE

Norm Magnuson

FTC Report Confirms Credit Reports Are Accurate

CDIA Says Consumers Should Take Advantage of Free Credit Reports

The Federal Trade Commission (FTC) released its latest study on
credit reports today and reconfirmed the findings of several recent
studies that conclude that credit reports are highly accurate and play
a critical role in facilitating access to fair and affordable consumer
credit. The FTC's research determined that 2.2 percent of all credit
reports have an error that would increase the price a consumer would
pay in the marketplace and that fully 88 percent of errors were the
result of inaccurate information reported by lenders and other data
sources to nationwide credit bureaus. The study also showed that 95
percent of consumers are unaffected by errors in their credit report.
Stuart Pratt, President and CEO of the Consumer Data Industry
Association (CDIA), said, ``Most consumers are well aware that their
credit report is a fundamental reflection of their discipline and
responsibility when accessing and using consumer credit. This
additional study from the U.S. government's chief consumer protection
agency should reassure consumers that they can depend upon the accuracy
of their credit history.''
``While the overall number of errors and their impact on consumers'
creditworthiness is small, maintaining accurate credit reporting data
is essential to both lenders and credit bureaus. We will continue to
work with lenders and others who provide data to the credit bureaus to
make sure the percentage of material errors impacting consumers is even
lower'', Pratt said.
This is the third study in just over a year that addresses factors
associated with the accuracy of credit reports. In December 2013, the
Consumer Financial Protection Bureau (CFPB) published a white paper on
credit reporting and found only 1.3 percent to 3.9 percent of all
consumers file a dispute about information in their credit report. In
2011, the Policy and Economic Research Council (PERC) also undertook a
peer-reviewed study of credit report accuracy and found that consumer
credit scores were negatively affected less than one percent of the
time by an error in a credit report.
The CDIA encourages consumers to take advantage of their right to
free credit reports from nationwide credit reporting agencies by going
to www.annual
creditreport.com. To convince more consumers to look at their credit
reports, CDIA's nationwide credit reporting companies have given the
Association a grant to fund new public service announcements focused on
connecting them with their credit reports.
``Confirmation that credit reports are accurate is a good thing,''
said Pratt, ``but all consumers should be aware that checking credit
reports every year is fundamental to accuracy.''
About CDIA
Founded in 1906, CDIA is the international trade association that
represents 170 consumer data companies. CDIA members represent the
Nation's leading institutions in the credit reporting, mortgage
reporting, check verification, fraud prevention, risk management,
employment reporting, tenant screening, and collection services
businesses.

Senator McCaskill. Thank you.
Mr. Rheingold, your testimony as well.

STATEMENT OF IRA RHEINGOLD, EXECUTIVE DIRECTOR, NATIONAL
ASSOCIATION OF CONSUMER ADVOCATES

Mr. Rheingold. Sure, my pleasure, as soon as I can figure
out how to get this mike on.
Is it on? OK, thank you. Technology.
Chairwoman McCaskill, Ranking Member Heller, members of the
Subcommittee: Thank you for inviting me to testify today about
the consumer credit reporting industry, its failure to ensure
accurate and reliable reports, and the impact that inaccurate
information has on consumers' ability to obtain much-needed
credit, gain employment, or even to find a job.
This afternoon I'd like to share two key observations about
our nation's credit reporting system. First I'd like to talk
about the two main reasons why I believe there are so many
inaccuracies in consumer credit reports and offer ideas about
what can be done to correct the problem. Second, I'll discuss
what I see as the completely unreasonable credit report dispute
process and explain why it's almost impossible for an average
consumer like Judy Thomas or Brenda Campbell to navigate that
system and make certain that the information in their own
credit report is correct.
Our nation's economic recovery has been slowed by
consumers' inability to access fair and reasonable credit.
While there are many reasons for this tightening of credit,
consumers and our general economy are significantly harmed when
credit is denied to consumers based on credit reports filled
with inaccurate information.
Despite the fundamental importance of accurate credit
reports, systematic errors remain common in our nation's credit
reporting system. Two of the main causes of this problem are
mixed or mismerged files and bad information placed in credit
reports by furnishers, particularly debt collectors and debt
buyers.
The problem of mixed files, which the nationwide CRAs have
known about for over two decades, occurs when credit
information relating to one consumer is placed in the file of
another, as Judy Thomas described. This largely occurs because
the nationwide CRAs do not use sufficiently rigorous criteria
to match consumer data precisely, even when such unique
identifiers are Social System numbers are present. Most
importantly, they do not match information based on all nine
digits of the consumer's Social System number. Instead, they'll
only match information based on seven of nine digits if the
consumers' names are also similar.
Simply requiring the nationwide CRAs to match all the
digits of the consumer's Social System number, which they do
when they provide a consumer with her own credit report, would
go a long way in solving the problem of mixed files.
Debt collectors and debt buyers as furnishers of
information present their own special type of credit reporting
errors. A recent CFPB report indicated that a disproportionate
number of credit reporting errors involve debt collectors. The
FTC issued a similar report that showed over 32 percent of the
errors were related to debt collection accounts.
Typically, these credit reporting problems occur because
debt buyers and debt collectors do not get any of the critical
supporting documentation to establish that the consumer
actually owes the debt or the amount is correct, whether there
are any disputes, or even if the collector is dunning the
correct consumer. Debt collectors and buyers should not be able
to furnish information and the credit reporting agencies should
not be accepting this information unless the debt buyers can
show they have actual documentation that the debt is owed by
the specific consumer.
Of course, the damage done by the inaccurate information
would be significantly mitigated if the CRAs had a fair and
reasonable dispute process that would allow consumers to
correct inaccurate or incomplete information. Instead, despite
the FCRA requiring both CRAs and furnishers to conduct
reasonable investigations when a consumer disputes an item in
his or her credit report, the CRAs provide a perfunctory,
automated process that consists of nothing more than
translating consumer disputes into a two or three-digit code,
forwarding that code in a one-page electronic form to the
furnisher, and parroting whatever the furnisher states in
response.
Further, despite the fact that almost half of consumer
disputes are written and often consist of a detailed letter
with significant supporting documentation, the automated code
assigned to the consumer dispute by dispute handlers is sent to
the furnisher and is often communicated alone, without the
supporting documentation provided by the consumer.
The failure to pass along documentation submitted by a
consumer is a deliberate violation of the FCRA's requirement
that a CRA include all relevant information about the dispute.
This must be corrected, either through enforcement actions or
through rulemaking.
While the automated, impersonal dispute process created by
the CRAs is problem enough, the failures of the system are
further exacerbated by the nationwide CRA's bias in favor of
furnishers. Time and again, CRA's unquestioningly accept the
furnisher's automated response to a consumer dispute, despite
being presented with evidence and documentation that
contradicts the furnisher's unexamined conclusion. This
systemic bias is in direct violation of the FCRA, which places
the burden of proof in a dispute investigation on the
furnisher, not the consumer. Simply, the Act provides that if
the disputed information is inaccurate or cannot be verified it
should be deleted.
I thank you for the opportunity to testify today and I look
forward to your questions.
[The prepared statement of Mr. Rheingold follows:]

Prepared Statement of Ira Rheingold, Executive Director, National
Association of Consumer Advocates also on behalf of National Consumer
Law Center (On behalf of its low income clients)
Chairwoman McCaskill, Subcommittee Ranking Member Heller and
members of the Subcommittee on Consumer Protection, Product Safety, and
Insurance, thank you for inviting me to testify today about the
consumer credit reporting industry, it's failure to ensure accurate and
reliable reports and the impact that inaccurate information has on a
consumer's ability to obtain much needed credit, gain employment or
even find a place to live.
In my testimony, on behalf of the National Association of Consumer
Advocates (NACA) \1\ and the National Consumer Law Center's low-income
clients,\2\ I will share with you what I have learned in more than a
decade of working with consumer advocates from across the country. I
will describe a credit reporting system that is riddled with
preventable inaccuracies including consumer files that all too
frequently mix the identities of consumers and include innumerable
errors and unverifiable information provided by debt collectors and
other furnishers of information. I will explain how our nationwide
consumer reporting agencies (CRAs), Equifax, Experian, and TransUnion,
are in gross violation of the FCRA's requirements to conduct
``reasonable'' investigations when consumers dispute errors in their
credit reports. These agencies, instead of hiring trained personnel to
conduct actual investigations, have developed a perfunctory automated
system that consists of nothing more than translating a consumer's
dispute into a two-or three-digit code, forwarding that code and a one-
page electronic form to the furnisher, and parroting whatever the
furnisher states in response. I will look at the growth of specialty
consumer reporting agencies, including background check and tenant
screening CRAs, which are plagued with errors that often create even
greater problems for consumers. Finally, I will offer some ideas for
Congressional legislative action that can provide better accountability
for the credit reporting industry and ensure that consumer information
is accurate and dependable.
---------------------------------------------------------------------------
\1\ The National Association of Consumer Advocates (NACA) is a non-
profit corporation whose members are private and public sector
attorneys, legal services attorneys, law professors, and law students,
whose primary focus involves the protection and representation of
consumers. NACA's mission is to promote justice for all consumers.
\2\ The National Consumer Law Center is a nonprofit organization
specializing in consumer issues on behalf of low-income people. We work
with thousands of legal services, government and private attorneys, as
well as community groups and organizations, from all states who
represent low-income and elderly individuals on consumer issues. As a
result of our daily contact with these advocates, we have seen many
examples of the damage wrought by inaccurate credit reporting from
every part of the Nation. It is from this vantage point--many years of
observing the problems created by incorrect credit reporting in our
communities--that we supply these comments. Fair Credit Reporting (7th
ed. 2010) is one of the eighteen practice treatises that NCLC publishes
and annually supplements. This testimony was written with Chi Chi Wu of
NCLC.
---------------------------------------------------------------------------
I. Easily Preventable Inaccuracies Plague The Credit Reporting System
Our nation's recovery from the economic meltdown created by the
reckless and fraudulent behavior of many actors in the financial
services industry has been slowed by many consumers' inability to
access fair and reasonable credit. While there are many reasons for
this tightening of credit, consumers, families, businesses and our
general marketplace are harmed when credit is denied to consumers based
on credit reports filled with inaccurate information. A good credit
history (and its corollary, a good credit score) enables consumers to
obtain credit, and to have that credit be fairly priced. Credit reports
are also used by other important decision makers, including insurers,
landlords, utility providers, and employers. Consequently, a bad credit
report or score can prevent a consumer from buying a car, securing a
mortgage, or even getting a job.
Despite the importance of accurate credit reports and the purpose
of the FCRA to promote accuracy, systematic errors remain common in our
Nation's credit reporting system. Below, I will focus on a few of the
most repeated and egregious errors, which are easily preventable with
common-sense regulation and oversight.
A. Avoidable Inaccuracies
1. Mixed Files
One of the most intractable and damaging types of credit reporting
errors are mixed or mismerged files. Mixed files occur when credit
information relating to one consumer is placed in the file of another.
Mismerging occurs most often when two or more consumers have similar
names, Social Security numbers (SSNs), or other identifiers.
Mixed and mismerged files occur largely because the nationwide CRAs
do not use sufficiently rigorous criteria to match consumer data
precisely, even when such unique identifiers as Social Security Numbers
(SSNs) are present. Mostly importantly, they do not match information
based on all nine (9) digits of the consumer's SSN. Instead, they will
only match information based on seven of nine (7 of 9) digits of an SSN
if the consumers' names are also similar.\3\
---------------------------------------------------------------------------
\3\ See, e.g., Reeves v. Equifax Info. Serv., 2010 WL 2036661 (S.D.
Miss. May 20, 2010) (mixed file case involving similar names, different
addresses but same state, and match of seven of nine SSN digits);
Apodaca v. Discover Fin. Servs., 417 F. Supp. 2d 1220 (D.N.M.
2006)(describing how Equifax uses partial matching logic, including
only seven of nine SNN digits, to build files).
---------------------------------------------------------------------------
The nationwide CRAs have chosen to be excessively and unreasonably
over-inclusive because, as the FTC once noted: ``lenders may prefer to
see all potentially derogatory information about a potential borrower,
even if it cannot all be matched to the borrower with certainty. This
preference could give the credit bureaus an incentive to design
algorithms that are tolerant of mixed files.'' \4\
---------------------------------------------------------------------------
\4\ Federal Trade Commission, Report to Congress Under Sections 318
and 319 of the Fair and Accurate Credit Transactions Act of 2003, at 47
(Dec. 2004).
---------------------------------------------------------------------------
The nationwide CRAs have been aware of mixed file errors for
decades.\5\ In the early to mid-1990s, the FTC reached consent orders
with the nationwide CRAs requiring them to improve their procedures to
prevent mixed files.\6\ However, nearly two decades later, mixed files
remain a significant problem.
---------------------------------------------------------------------------
\5\ For an example of a mixed file case dating from the late 1970s,
see Thompson v. San Antonio Retail Merchants Ass'n, 682 F.2d 509 (5th
Cir. 1982).
\6\ FTC v. TRW, Inc., 784 F. Supp. 361 (N.D. Tex. 1991), amended by
(N.D. Tex. Jan. 14, 1993); In the Matter of Equifax Credit Information
Services, Inc., 61 Fed. Reg. 15484 (Apr. 8, 1996) (consent order).
---------------------------------------------------------------------------
2. Identity Theft
Identity theft is often called the ``fastest growing crime'' in
this country, with an estimated eleven million consumers victimized by
some form of the crime every year.\7\ In 2011, the FTC reported 279,156
complaints alleging identity theft, which was the largest single
complaint category of consumers to the FTC.\8\
---------------------------------------------------------------------------
\7\ Javelin Strategy & Research, 2010 Identity Fraud Survey Report:
Consumer Version 5 (2010).
\8\ Consumer Sentinel Network Data Book for January-December 2011,
at 6 (February 2012). See http://ftc.gov/sentinel/reports/sentinel-
annual-reports/sentinel-cy2011.pdf.
---------------------------------------------------------------------------
Identity thieves can harm a consumer's credit history by setting up
new credit or health care accounts in the consumer's name and then
letting them go unpaid. As these accounts go delinquent, the consumer
victim's credit rating can plummet.
The nationwide CRAs and furnishers bear a share of the blame for
this ever-growing problem. The nationwide CRAs' loose matching
procedures, discussed above, contribute to identity theft problems.
Once the fraudulent debt is reported, often after default and non-
payment, and especially when collectors begin attempting skip trace
searches, the account ends up merged into the victim's file even though
many of the identifiers do not match. Accordingly, the ``identity
theft'' can be characterized as a special type of mixed file problem.
3. Furnisher errors
Furnishers can often be the source of errors in credit reports. A
furnisher might report the consumer's account with an incorrect payment
history, current payment status, or balance. A particularly difficult
type of error involves furnishers who have attributed a credit account
to a consumer who does not owe the debt, often called an ``ownership
dispute.'' This type of dispute often involves a spouse or other
authorized user who is not contractually liable for a debt. Another
type of common error occurs when a CRA fails to mark accounts as
disputed when the consumer has a legitimate bona fide dispute with the
furnisher.
Debt collectors and debt buyers as furnishers of information
present their own special types of credit reporting errors. Typically,
the debt buyer or debt collector does not get any of the critical
supporting documentation to establish that the consumer actually owes
the debt, whether the amount is correct, whether there are any
disputes, or even if the collector is dunning the correct consumer.
Another problem all too often created by debt buyers and collectors is
the ``re-aging'' of old accounts so that they stay on the credit report
past the FCRA's seven year limit.\9\
---------------------------------------------------------------------------
\9\ Chi Chi Wu, National Consumer Law Center, Automated Injustice:
How a Mechanized Dispute System Frustrates Consumers Seeking to Fix
Errors in Their Credit Reports (Jan. 2009), at 11-12, available at
www.nclc.org/issues/credit_reporting/content/automated_injustice.pdf.
---------------------------------------------------------------------------
Not surprisingly, a recent CFPB report indicated that a
disproportionate number of credit reporting errors involve debt
collectors. The CFPB report found that debt collectors generate 40
percent of disputes to the nationwide CRAs, despite providing only 13
percent of the account tradeline information in credit reports.\10\ A
recent study by the Federal Trade Commission on errors in credit
reports similarly found that 32.2 percent of disputed items were
collection accounts.\11\
---------------------------------------------------------------------------
\10\ Consumer Financial Protection Bureau, Key Dimensions and
Processes in the U.S. Credit Reporting System: A review of how the
Nation's largest credit bureaus manage consumer data, December 2012, at
14, 29, available at http://www.consumerfinance.gov/reports/key-
dimensions-and-processes-in-the-u-s-credit-reporting-system.
\11\ Federal Trade Commission, Report to Congress Under Section 319
of the Fair and Accurate Credit Transactions Act of 2003, December
2012, at 51, available at.
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4. Definitive FTC indicates unacceptable error levels in credit reports
Just a few months ago, the FTC released the definitive study on the
level of inaccuracies in credit reports.\12\ The study, found that
about 21 percent of consumers had verified errors in their credit
reports, 13 percent had errors that affected their credit scores, and 5
percent had errors serious enough to be denied or pay more for
credit.\13\ The FTC's study involved two pilot studies, 1,000 study
participants, and was nearly a decade in the making.
---------------------------------------------------------------------------
\12\ Id.
\13\ Id. at i.
---------------------------------------------------------------------------
The rate of inaccuracy found by the FTC study is unacceptable,
especially given that many of these errors are preventable. It
translates into 40 million American who have errors in their credit
reports, 26 million of whom have lower scores as a result, and 10
million of whom have errors seriously damaging enough to cause them to
be denied or charged more for credit or insurance or even be denied a
job.
We also note that the FTC study found that the percentage of
serious errors was many greater than the percentage reported by a May
2011 industry-funded study, which had claimed that only 0.51 percent of
credit reports had errors serious enough to cause the consumer to be
denied or pay more for credit. \14\
---------------------------------------------------------------------------
\14\ Michael Turner et al., Policy and Economic Research Council,
U.S. Consumer Credit Reports: Measuring Accuracy and Dispute Impacts,
May 2011.
---------------------------------------------------------------------------
B. Fixing the System: The Roles and Responsibilities of the Nationwide
CRAs,
Empowered Consumers, the FTC and the CFPB
1. The culpability of the nationwide CRAs
Obviously, the nationwide CRAs have the critical role in fixing
errors caused by their own procedures, such as mixed files. However,
they also bear a very real responsibility for furnisher errors, which
are aided and abetted by the failures of the nationwide CRAs to
exercise adequate oversight. The nationwide CRAs unquestioningly rely
on furnishers and provide little oversight of the quality of the
information being reported. Any error sent by the furnisher in its
computer file automatically appears in the consumer's credit report,
sometimes even when the information patently contradicts information
appearing in other parts of the credit report. The classic example is
reporting a consumer as ``deceased'' when active trade-lines are being
reported by other furnishers, clearly indicating that the consumer is
still alive.\15\
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\15\ See, e.g., Perez v. Trans Union, L.L.C., 526 F. Supp. 2d 504,
509, 510 (E.D. Pa. 2007) (question of fact for jury as to whether CRA
should have detected inaccuracy in reporting consumer as deceased even
though payments were reported as being made to his current accounts).
---------------------------------------------------------------------------
The FCRA imposes ``grave responsibilities'' on consumer reporting
agencies to promote accuracy, and to act with ``fairness, impartiality,
and a respect for the consumer's right to privacy.'' \16\ The FCRA
requires them to have and follow ``reasonable procedures to ensure
maximum possible accuracy.'' \17\
---------------------------------------------------------------------------
\16\ See 15 U.S.C. Sec. 1681.
\17\ See 15 U.S.C. Sec. 1681e(b).
---------------------------------------------------------------------------
Unfortunately, there are very logical reasons, and tremendous
incentives for the nationwide CRAs NOT to exclude bad actors or require
stricter measures to reduce furnisher errors. The credit reporting
industry is unlike most other American industries in a fundamental
respect: the paying clients of the credit reporting industry are not
consumers, but the very creditors and debt collectors that the CRAs
should be--but are not--screening the data of, auditing, and
overseeing.
Moreover, consumers have no say in whether their information is
included in the nationwide CRAs' databases. Most Americans cannot avoid
having a credit history. Unless they are very wealthy, consumers will
need to borrow money if they want to buy a house or attend college.
Thus, unlike almost all other business relationships, consumers who are
unhappy with the actions of a CRA cannot vote with their feet--they
cannot remove the information or take their business elsewhere.
On the other hand, debt collectors and creditors do have the
ability to switch between CRAs if they wish. Therefore vigorous
oversight by the nationwide CRAs, or tougher requirements for accuracy
are likely to drive furnishers away. The biggest impact of excluding a
furnisher is to cost the nationwide CRAs a paying customer; the
nationwide CRAs don't profit and indeed lose money from making sure
consumers are treated fairly. Furthermore, furnishers want all negative
information that might possibly relate to the consumer, even if the
information is of uncertain accuracy, It costs creditors more if
negative information is unreported than if it is falsely reported.
Thus, the nationwide CRAs have incentives to develop systems that are
overly inclusive of negative information.
In short, traditional competitive market forces provide little
incentive for CRAs to incur the costs to institute new procedures that
ensure information is accurate or to undertake investigations to
correct errors, since these activities primarily benefit consumers. Up
until the creation of the CFPB, the major force of change to correct
errors was consumers themselves who were willing to go to court to
enforce their rights under the FCRA.
2. The vital importance of private rights and empowered consumers; the
need for consumer remedies
In 1970, Congress recognized that no one has a bigger stake in the
accuracy of a credit report than the consumer whose name is on it. And
for over 40 years, private litigants have provided the most significant
enforcement of the FCRA. A Westlaw search for reported Fair Credit
Reporting Act case citings yields over 1,500 cases. In contrast, there
has been much less enforcement by Federal regulators. The FTC has only
been able to bring several dozen FCRA cases, and most of them did not
involve the accuracy of the nationwide CRAs.
New rights were added to the FCRA in 1996 and 2003 to protect
consumers, but in compromises with the credit industry, consumers were
prohibited from seeking relief in court to enforce some of these
rights. Most notably, many of the responsibilities placed on furnishers
are only enforceable by government agencies. This includes a
prohibition on reporting information that the furnisher knows or has
reason to believe is inaccurate, and the requirement that furnishers
handle credit reporting disputes sent directly to them.\18\
---------------------------------------------------------------------------
\18\ See 15 U.S.C. Sec. 1681s-2(d).
---------------------------------------------------------------------------
I would urge Congress to provide consumers with the right,
currently lacking under the FCRA, to ask a judge to tell a furnisher or
a CRA: ``fix that report.'' With one minor exception, the FCRA does not
provide for declaratory or injunctive relief in actions by private
parties. The vast majority of courts have held that courts do not have
the power to issue an injunction under the FCRA. The FCRA is an anomaly
in this respect, as the Supreme Court decision in Califano v. Yamasaki
\19\ provides the basis for injunctive relief for most other laws.
---------------------------------------------------------------------------
\19\ 442 U.S. 682, 99 S. Ct. 2545, 61 L. Ed. 2d 176 (1979).
---------------------------------------------------------------------------
Providing courts with explicit authority to issue injunctive relief
would further the purpose of the FCRA to ``assure maximum possible
accuracy.''
3. The role of the FTC
During the past four years, the FTC has significantly increased its
examination, investigation and enforcement actions against credit
report agencies, and in particular, the debt collection and debt buying
industry that have littered consumer reports with inaccurate and
unverifiable information.
For example, in an important case last January, the FTC took
enforcement action against Asset Acceptance in part over its failure to
properly investigate consumer disputes and reporting of information it
had reason to suspect was inaccurate.\20\ I would hope that the FTC
continues to aggressively pursue these types of actions and seek
remedies that prevent the flow of inaccurate and/or unverifiable
information to consumer reports. Further, despite FTC enforcement
actions, the CRAs continue to willingly accept information from
companies, like Asset Acceptance, that have a proven history of
providing inaccurate data.
---------------------------------------------------------------------------
\20\ Complaint, United States v. Asset Acceptance, LLC, Case No.
8:12-cv-182-T-27 (M.D. Fla. Jan 30, 2012).
---------------------------------------------------------------------------
The FTC must also continue to enforce the FCRA's provisions
requiring culpable CRAs to follow reasonable procedures to ensure
maximum possible accuracy of information included in reports. For
example, last year the FTC took action against HireRight Solutions,
alleging that the CRA, HireRight Solutions, failed to follow reasonable
procedures to prevent patently inaccurate consumer report information
from being provided to employers and these failures led to consumers
being denied employment or other employment-related benefits. The FTC's
consent order imposed a $2.6 million civil penalty against HireRight
Solutions and prohibited future violations of the FCRA. Vigorous
enforcement of the FCRA, in conjunction with the CFPB, in order to
maintain accuracy and fairness in the consumer reporting system must
remain a top priority for the FTC.
4. The role of the CFPB
When the Dodd-Frank Act created the CFPB, Congress recognized that
credit bureaus required greater oversight and there needed to be reform
of the industry as a whole. Dodd-Frank gave the CFPB rule-writing,
supervisory and enforcement authority over credit bureaus that were
never provided to the FTC. The CFPB can write regulations to implement
almost all of the provisions of the FCRA, including the provisions
regarding accuracy and the dispute process. In addition, the CFPB has
new supervisory authority over the ``larger participants'' of the
credit reporting industry that have more than $7 million in annual
receipts, which includes the nationwide CRAs. The CFPB must use its
supervisory authority to fully investigate whether consumer reporting
agencies are complying with the FCRA and other consumer financial laws
and work with the FTC to better enforce these violations.
II. The FCRA-Mandated Credit Reporting Dispute System, As Designed and
Implemented by the Nationwide CRAS Provides Little Relief for
Consumers
A. A Long-Documented History of Blatant Violation
The FCRA requires both CRAs and furnishers to conduct
``reasonable'' investigations when a consumer disputes an item in his
or her credit report as inaccurate or incomplete. Instead, it is a
perfunctory, automated process that consists of nothing more than
translating consumer disputes into a two-or three-digit code,
forwarding that code and a one-page electronic form to the furnisher,
and parroting whatever the furnisher states in response.\21\ In this
highly automated, computer-driven process, a consumer's dispute is
communicated using a Consumer Dispute Verification form (CDV). An
automated version of the form, communicated entirely electronically, is
known as Automated Consumer Dispute Verification (ACDV). Furthermore,
all three nationwide CRAs collaborated through the Consumer Data
Industry Association to create an automated on-line reinvestigation
processing system called ``e-OSCAR.''
---------------------------------------------------------------------------
\21\ Chi Chi Wu, National Consumer Law Center, Automated Injustice:
How a Mechanized Dispute System Frustrates Consumers Seeking to Fix
Errors in Their Credit Reports (Jan. 2009), available at www.nclc.org/
issues/credit_reporting/content/automated_injustice.pdf.
---------------------------------------------------------------------------
Approximately 44 percent of consumer disputes are written.\22\
These written disputes often consist of a detailed letter with
supporting documentation, painstakingly written by concerned and even
desperate consumers. The code, assigned to the consumer dispute and
generated by dispute handlers, is sent to the furnisher and is often
communicated alone, without supporting documentation provided by the
consumer.
---------------------------------------------------------------------------
\22\ Consumer Financial Protection Bureau, Key Dimensions and
Processes in the U.S. Credit Reporting System: A review of how the
Nation's largest credit bureaus manage consumer data, December 2012, at
27, available at http://www.consumerfinance.gov/reports/key-dimensions-
and-processes-in-the-u-s-credit-reporting-system.
---------------------------------------------------------------------------
In 2009, the National Consumer Law Center issued an in-depth report
about the details, nature, and abuses of the credit reporting dispute
system in a report called Automated Injustice: How a Mechanized Dispute
System Frustrates Consumers Seeking to Fix Errors in Their Credit
Report. The CFPB's report confirmed the automated nature and hands-off
approach of the nationwide CRAs, and documented that in 85 percent of
cases, the CRA does no more than pass along the dispute to the
furnisher. Most notably, CFPB Director Cordray noted that, as consumer
advocates have long alleged, ``the documentation 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.'' \23\
---------------------------------------------------------------------------
\23\ Prepared Remarks by Richard Cordray, Director of the Consumer
Financial Protection Bureau, Credit Reporting White Paper Press Call,
December 13, 2012.
---------------------------------------------------------------------------
I believe this failure to pass along documentation submitted by the
consumer deliberately violates the FCRA's requirement that a CRA
include ``all relevant information'' about the dispute that the CRA
received from the consumer.\24\ And if all relevant communication is
not forwarded, the furnisher cannot comply with the FCRA's requirement
to ``review all relevant information'' provided by the CRA.\25\
---------------------------------------------------------------------------
\24\ See U.S.C. Sec. 1681i(2).
\25\ See 15 U.S.C. Sec. 1681s-2(b)(1)(B).
---------------------------------------------------------------------------
B. The Nationwide CRAs' Bias against Consumers Violates the FCRA
The nationwide CRAs' bias in favor of furnishers--their
unquestioning acceptance of the furnisher's response despite being
presented with evidence and documentation by the consumer--violates the
FCRA's protection for consumers. The FCRA places the burden of proof in
a dispute investigation on the furnisher, not the consumer. The Act
provides that if disputed information is inaccurate or cannot be
verified, it should be deleted. See 15 U.S.C. Sec. 1681i(a)(5)(A).
Thus, if a consumer provides evidence and documentation that she is
correct, and the furnisher responds without such evidence, the disputed
information is ``unverifiable'' by nature, and should be deleted. Yet
the nationwide CRAs not only illegally place the burden of proof on the
consumer, they go further by always siding with the furnisher and
automatically accepting the furnisher's position--even when, in 40
percent of the cases, the furnisher is a debt collector or debt buyer.
This is not only wrong; it is illegal under the FCRA.
C. Furnishers Also Engage in Perfunctory ``Investigations,'' with
Encouragement from the Nationwide CRAs
For their part, furnishers often also conduct non-substantive and
perfunctory ``investigations.'' These procedures consist of nothing
more than verifying the challenged data by comparing the notice of
dispute with the recorded information that is itself the very subject
of the dispute. The nationwide CRAs promote ``Automated Batch
Interface'' which ``allows Data Furnishers to receive Consumer Dispute
Verification (ACDV) requests in XML batch file format'' so that they
can handle disputes using a mass production method.\26\
---------------------------------------------------------------------------
\26\ e-OSCAR, Automated Batch Interface, at http://www.e-oscar.org/
automated-batch-interface.aspx.
---------------------------------------------------------------------------
D. What Needs to be Done
It is well past time for the credit reporting dispute system to be
reformed. First, the nationwide CRAs must be required to have
sufficiently trained personnel to actually review, and conduct real
investigations of, consumer disputes. Nationwide CRAs must also be
required to forward to furnishers actual copies of the documents
submitted by consumers. Furthermore, in those circumstances where the
CRA personnel truly cannot determine whether the consumer or the
furnisher is correct, the information should be deleted. After all, the
FCRA requires information to be deleted if it ``cannot be verified.''
\27\ Thus, the burden should be on the furnisher, not the consumer,
when there is a credit reporting dispute.
---------------------------------------------------------------------------
\27\ See 15 U.S.C. Sec. 1681i(a)(5)(A).
---------------------------------------------------------------------------
Debt collectors must be subject to even stricter screening and
oversight. There should be a flat-out prohibition against the
nationwide CRAs to engage in parroting when a debt collector is
involved. Finally, as discussed above, consumers should have the right
to ask a court to order the nationwide CRAs and furnisher to fix their
credit reports when there is an error.
III. Specialty Consumer Reporting Agencies
``Specialty consumer reporting agencies'' compile and maintain
files relating to criminal records, residential or tenant histories,
check-writing histories, employment histories, and insurance claims.
These agencies are not required to be licensed or even registered, nor
is there any one source identifying all of these companies. Therefore,
as of today, there is no centralized location to obtain the kind of
information required to determine the accuracy of the information these
agencies are collecting or being used to determine the ``worthiness''
of consumers for employment, housing and/or insurance.
Despite the general lack of transparent information about these
specialty bureaus, consumer advocates have discovered a number of
troubling problems with this growing industry.\28\ For instance, few
users of the reports generated by these bureaus comply with the FCRA's
requirement to provide ``adverse action'' notices to the consumers (or
potential employees or tenants) that a report has been used against
them. Therefore, many people are denied employment or housing and never
know that the reason for the denial was a background check that might
have been filled with inaccurate information.
---------------------------------------------------------------------------
\28\ See Persis S. Yu & Sharon M. Dietrich, Nat'l Consumer Law
Cent., Broken Records: How Errors by Criminal Background Checking
Companies Harm Workers and Businesses, April 2012.
---------------------------------------------------------------------------
Additionally, although the FCRA does provide consumers with the
right to preemptively review the information in their consumer file,
this right is virtually meaningless for specialty consumer reports.
There are hundreds, if not thousands, of specialty consumer reporting
agencies operating in the United States. Unlike the big three credit
bureaus, there is no centralized location where a consumer can go to
order his or her background, or specialty consumer/credit report.
Fortunately, the CFPB has recently released a list of contacts for
some of the largest specialty credit reporting agencies. However, it
only scratches the surface of the number of background checking
agencies. With thousands of specialty consumer reporting agencies
operating, a consumer cannot predict which company his or her future
employer, insurance company, or landlord will use.
Further, dispute rights are similarly meaningless with specialty
consumer reports. Even if a consumer is successful in disputing
information on his or her report (in the rare instance she actually
discovers a report was used), the employment or housing opportunity may
be gone, and the chances of that report being used again are small. The
only way to provide meaningful protections to consumers is to take
greater steps to ensure the accuracy of the reports from the outset.
To address some of the problems with the specialty bureaus,
consumers need, at the least, the following protections:

1. Require all consumer reporting agencies to be licensed and
registered.

2. Require all consumer reporting agencies to undergo independent
auditing of their data and records for accuracy.

3. The CFPB must continue to monitor and collect data regarding the
larger participant consumer reporting agencies and draft
regulations detailing matching criteria and ensuring that
information on consumer reports is up to date.

4. The FTC and the CFPB must actively investigate and bring
enforcement actions against specialty consumer reporting
agencies who fail to comply with the FCRA.
IV. Other Credit Reporting Issues That Congress Must Address
Beyond the issues addressed above, there are other areas where
Congressional action is necessary to ensure our Nation's credit
reporting system works fairly for consumers and the general
marketplace. They include:

Consumers lack critical information regarding credit scores.
They do not have the right to obtain a copy of the credit score
most commonly used by lenders (FICO), or other types of scores
based on their credit or consumer reports, such as insurance
credit scores, tenant screening scores, or healthcare scores.
They do not have the right to a free annual credit score. We
strongly support S. 471, which would provide consumers with
access to the real credit score used by businesses passing
judgement about their credit ``worthiness.''

Millions of Americans have their credit reports damaged by
medical debt, even when the debt is the result of insurance
disputes or billing errors by providers, or is ultimately
settled or paid off. We strongly support S. 160, the Medical
Debt Responsibility Act, which would remove paid or settled
medical debts from credit reports. This approach will provide
tremendous benefits to consumers, and indeed is probably the
simplest and easiest ``quick fix'' available to improve the
credit records of a substantial number of consumers.

The use of traditional credit reports by employers is a
growing practice that is harmful and unfair to American
workers. Despite many good reasons to avoid engaging in this
practice, sixty percent of employers do so today. We urge
Congress to restrict the use of credit reports in employment to
only those positions for which it is truly warranted, such as
those requiring a national security clearance.

The Fair and Accurate Credit Transactions Act of 2003
(FACTA) inadvertently deprived consumers of a 30 year-old pre-
existing right they had to enforce the FCRA requirement that
users of credit reports disclose to consumers when an ``adverse
action'' is taken, i.e., credit or insurance is denied or
provided on less favorable terms, on the basis of an
unfavorable credit report. Congress can easily fix this
scrivener's error and should do so, as it was never part of the
legislative bargain struck by FACTA.

Thank you for the opportunity to testify, and I look forward to
your questions.

Senator McCaskill. Thank you, Mr. Rheingold.
Dr. Beales.

STATEMENT OF J. HOWARD BEALES III, PROFESSOR,

STRATEGIC MANAGEMENT AND PUBLIC POLICY,

GEORGE WASHINGTON UNIVERSITY SCHOOL OF BUSINESS

Dr. Beales. Thank you very much, Madam Chairman. I appeared
before this committee many times between 2001 and 2004 when I
was the head of consumer protection at the FTC, but it's nice
to have the opportunity to be back in an academic capacity.
Let me make five essential points about credit reporting
that I think we have to keep in mind. One is that credit
reporting is vital. Consumer spending drives the economy. It's
two-thirds of gross domestic product. And that depends on the
availability of affordable credit. In turn, widespread credit
availability depends on an efficient system for credit
reporting.
Efficient credit reporting makes possible the miracle of
instant credit, which enables a consumer to visit a car dealer
and arrange financing for the transaction probably in less time
than it takes to negotiate the price. It enables retailers to
arrange on-the-spot discounts for consumers who agree to open a
new credit account with the retailer. Such arrangements offer
significant benefits to both consumers and retailers and they
facilitate economic activity.
Our credit reporting system also facilitates competition
among lenders, to the benefit of consumers. Using credit
reports, lenders can readily identify consumers who deserve a
better deal. The ability to offer credit on terms that lenders
find profitable and consumers find more attractive obviously
benefits everyone.
Finally, efficient credit reporting is important to small
businesses. Decisions to lend to a small business depend on the
lender's assessment of the viability of the business, but they
also depend in many instances on the personal creditworthiness
of the owner of the business.
Second, risk-based pricing of credit benefits consumers.
Economic efficiency requires that people who create costs must
pay them. If not, they'll create excessive costs that impair
economic performance. That's why it's both equitable and
efficient that teenage males pay higher auto premiums than
teenage females or older men. Teenage males are higher risk
drivers. They should and they do pay higher insurance premiums.
The same principles apply in credit markets. Some consumers
manage their financial obligations responsibly and pay their
bills on time. Others borrow more than they can afford and in
the end default. There's no reason that good credit risks
should be expected to subsidize the choices made by those who
are less likely to repay their debts.
Importantly, making loans based on objective risk
assessment reduces the risk of default by 20 to 30 percent
compared to lenders who simply use judgment about who deserves
credit and who doesn't.
Risk-based pricing based on credit scores offers two
important benefits. First, responsible borrowers, undoubtedly
the vast majority, pay less for credit, as much as 8 percentage
points less in one study.
Second, risk-based pricing substantially expands credit
availability. In the ``one size fits all'' world of
standardized, plain vanilla credit products, the lender's only
choice was yes or no. For marginal borrowers the answer was
generally no. Risk-based pricing introduced a new alternative,
yes, but at a higher price, commensurate with the additional
risk.
The result was a substantial expansion in credit
availability. In 1970, only 2 percent of the lowest income
quintile had credit cards. After the introduction of risk-based
pricing, by 1998 that had risen to 28 percent of that lowest
quintile with credit cards.
Third, more information in the system leads to better
performance. There's an estimated 30 to 50 million consumers
who do not have sufficient credit information in their files to
qualify for mainstream credit. Instead, they're left to rely on
high-cost sources such as overdraft protections or pawn shops.
Studies have shown that adding positive payment information
from utilities and telecommunications providers, instead of
only the negative information that most now report, could
improve the credit scores of those with thin files that
otherwise would not have sufficient information to support a
reliable credit score.
Fourth, accuracy and completeness are both important.
Credit reporting agencies face a difficult task of matching
incoming information to the right file when identifying
information is incomplete, as it often is in a voluntary
system. It's obviously a mistake to include information in my
file that is not in fact about me. That's the kind of error
that's the mixed file report, error, and that the FTC report
examines.
More subtly, it's also an error to leave out information
that should be in my file simply because there's some ambiguity
about the match. Such errors of omission reduce the value of
the credit report as a predictive tool. In some cases, the
failure to include relevant information may leave a consumer
with a thin file and limited access to conventional credit.
Either mistake reduces the accuracy of risk assessments, and
that's the ultimate goal of the reporting system.
Moreover, the risk of a mistake depends on the quality of
the information voluntarily provided by furnishers, because
even the best matching algorithm can't overcome bad data.
Finally, different risks are different. The best prediction
of risk depends on the particular risk involved. Different
information may be useful and different risk analytic
approaches may be more useful for particular risks. That's why
there are some CRAs that specialize in particular risks to get
that kind of information to enable better predictions. Almost
inevitably, these CRAs are significantly smaller than the big
three, however, and the regulatory compliance costs may be more
significant.
Thank you again for the opportunity to testify today and I
look forward to your questions.
[The prepared statement of Dr. Beales follows:]

Prepared Statement of J. Howard Beales III, Professor, Strategic
Management and Public Policy, George Washington University School of
Business
Thank you very much for the opportunity to be here today. In my
limited time, I want to make five key points.
1. Credit reporting is vital
Consumer spending accounts for over two-thirds of U.S. gross
domestic product. The wide availability of affordable credit lubricates
this spending: roughly 2.8 billion in outstanding consumer credit
enables numerous transactions that would not otherwise occur.
In turn, widespread credit availability depends on an efficient
system for credit reporting. Lenders cannot economically make loans
without understanding the potential risks they face, and credit
reporting is an essential tool for objective risk assessments.
Efficient credit reporting makes possible the miracle of instant
credit, which enables a consumer to visit a car dealer and arrange
financing for the transaction, probably in less time than it takes to
negotiate the price. It enables retailers to offer on the spot
discounts for consumers who agree to open a new credit account with the
retailer. Such arrangements offer significant benefits to both
consumers and retailers, and they facilitate economic activity.
Our credit reporting system also facilitates competition among
lenders, to the benefit of consumers. Using credit reports, lenders can
readily identify consumers who deserve a better deal. The ability to
offer credit on terms that lenders find profitable, and consumers find
more attractive, obviously benefits everyone.
Efficient credit reporting is also important to small businesses.
Decisions to lend to a small business depend on the lender's assessment
of the viability of the business, but the also depend on the personal
creditworthiness of the owner of the business. Thus, credit reporting
is often critical to decisions about whether to lend to the small
businesses that are important elements of job creation.
2. Risk Based Pricing Benefits Consumers
A fundamental principle of economic efficiency requires that those
who create costs must pay them. If not, they will create excessive
costs that impair economic performance. This is why it is both
equitable, and efficient, that teenage males pay higher auto insurance
premiums than teenage females or older men--teenage males are higher
risk drivers. They should, and do, pay higher insurance premiums.
The same principles apply in credit markets. Some consumers manage
their financial obligations responsibly, and pay their bills on time.
Others borrow more than they can afford, and, in the end, default.
There is no reason that good credit risks should be expected to
subsidize the choices made by those who are less likely to repay their
debts.
Importantly, making loans based on objective risk assessment
reduces the risk of default. Some studies indicate that the delinquency
risk when decisions are based on scoring algorithms from credit report
data are 20 to 30 percent lower than the risk of delinquency when the
lender uses ``judgment'' to decide which consumers deserve a loan.\1\
Moreover, such judgmental decisions often rely on stereotypes about
which borrowers are most likely to repay--they are, in short,
discriminatory.
---------------------------------------------------------------------------
\1\ Peter McCorkell, ``The Impact of Credit Scoring and Automated
Underwriting on Credit Availability,'' in Thomas A. Durkin and Michael
E. Staten, eds., The Impact of Public Policy on Consumer Credit (2002).
---------------------------------------------------------------------------
Risk based pricing based on credit scores offers two important
benefits. First, responsible borrowers--undoubtedly the vast majority--
pay less for credit. The introduction of risk based pricing reduced
interest rates for these borrowers by as much as 8 percentage
points.\2\
---------------------------------------------------------------------------
\2\ Mark Furletti, Credit Card Pricing Developments and Their
Disclosure, Discussion Paper, Payment Cards Center, Federal Reserve
Bank of Philadelphia (January 2003) at 8.
---------------------------------------------------------------------------
Second, risk based pricing substantially expanded credit
availability. In the ``one size fits all'' world of standardized, plain
vanilla credit products, the lender's only choice was yes or no. For
marginal borrowers, the answer was generally no. Risk based pricing
introduces a new alternative: yes, but at a higher price, commensurate
with the additional risk. The result was a substantial expansion in
credit availability. In 1970, only 2 percent of the lowest income
quintile had any credit card; by 1998, after the introduction of risk
based pricing, the percentage had increased to 28 percent.\3\
---------------------------------------------------------------------------
\3\ Thomas A. Durkin, ``Credit Cards: Use and Consumer Attitudes,
1970-2000,'' Federal Reserve Bulletin, September, 2000, at 626.
---------------------------------------------------------------------------
Thus, well-functioning credit markets are an essential component of
economic prosperity. Consumer reporting has played a key role in
providing U.S. consumers with rapid access to credit. The development
of the consumer reporting system, with its sophisticated risk models
and automated underwriting, has contributed greatly to making credit
more widely, inexpensively, and rapidly available. The system also has
narrowed the gap in credit availability between high and low income
consumers.
3. More information in the system leads to better performance
An estimated 30 to 50 million consumers do not have sufficient
credit information in their files to qualify for affordable mainstream
credit.\4\ Instead, they are left to rely on such high cost credit
sources as overdraft protection, short term loans, or pawn shops.
Studies have shown that adding positive payment information from
utilities and telecommunications providers, instead of only the
negative information that most now report, can improve the credit
scores of those with thin files that otherwise do not have sufficient
information to support a reliable credit score.\5\ Such additional
information can help to further reduce the differences in the
accessibility of credit on reasonable terms.
---------------------------------------------------------------------------
\4\ PERC, Alternative Data Initiative, available at http://
perc.net/content/alternative-data-initiative-adi (May 3, 2013).
\5\ Michael A. Turner and Amita Agarwal, ``Using non-traditional
data for underwriting loans to thin-file borrowers: Evidence, tips and
precautions,'' 1 Journal of Risk Management in Financial Institutions
165 (2008).
---------------------------------------------------------------------------
4. Accuracy and completeness are both important
Credit reporting agencies face a difficult task of matching
incoming information to the right file when identifying information is
incomplete, as it often is in a voluntary system. It is obviously a
mistake to include information in my file that is not in fact about me.
This is the kind of error that the recent FTC report examines. More
subtly, it is also an error to leave out information that should be in
my file simply because there is some ambiguity about the match. Such
errors of omission obviously reduce the value of credit reports to
lenders, because a report that does not include all of the relevant
information about a particular consumer is less likely to be predictive
of future behavior. In some cases, the failure to include relevant
information may leave a consumer with a thin file and limited access to
conventional credit. Either mistake reduces the accuracy of risk
assessments, which is the ultimate goal of the system. Moreover, the
risk of a mistake depends on the quality of the information voluntarily
provided by data furnishers. Even the best matching algorithms cannot
overcome bad data.
5. Different risks are different
The best prediction of risk depends on the particular risk
involved. Different information may be especially valuable for certain
kinds of risks. Moreover, the population of consumers attracted to
particular financial products is likely to differ, leading to
differences in the best risk prediction model. It is for this reason
that many, if not most, users of credit reports develop their own
scoring models. It is also for this reason that some CRAs specialize in
particular types of risks, such as the risks involved in extending
short term or liquidity credit. By specializing, they can build
databases that contain the right information, and the right risk
assessment analytics, to serve particular markets. Almost inevitably,
however, these CRAs are significantly smaller than the big three, and
regulatory compliance costs may be more significant.
Thank you again for the opportunity to testify today. I look
forward to your questions.

Senator McCaskill. Thank you very much.
Senator Heller.
Senator Heller. Thank you, Madam Chairman.
Mr. Beales, you just hit on a topic right there at the end
of your statement, the fact that we have smaller reporting
agencies out there, but none of them can compete really with
the big three, or that their costs, of course, are
substantially higher because they don't have as many reports
coming through their system.
Why don't we have four or five or maybe ten large CRAs? Is
there a lack of competition in this process? Or why are we
limiting ourselves? I know this is a private sector effort, but
for me to think that there are only three--why aren't there
four or five, ten, half a dozen, twelve?
Dr. Beales. Well, as an economist, this is sort of the
market outcome. There were at one point thousands of credit
reporting agencies and over time they consolidated, and what we
ended up with as sort of the market-determined right number of
credit reporting agencies with nationwide databases and general
purpose credit was three.
Senator Heller. So the market decides?
Dr. Beales. The market decided that. This was very much the
outcome of a market process.
There are a lot of other, smaller credit reporting agencies
that really have a niche sort of competitive strategy, if you
will. They are competitors, but they don't try to do general
credit in the whole market. They try to do payday loans or
particular--or rental decisions, particular kinds of credit or
credit-like decisions where they can build a better database to
answer that set of questions.
Senator Heller. I've obviously gotten my list of complaints
coming through my office on CRAs. Most of them have to do with
they went down to buy a car and two were fine, one was off, and
they had to deal with that. But obviously Ms. Thomas's
situation is far different than that. How widespread is that?
Is this a unique situation for her, or are there a lot of
people that find themselves in the same situation as Ms.
Thomas? Anybody who wants to answer that, please.
Dr. Beales. I don't know.
Mr. Rheingold. I would say there are a lot of people in
that situation. We hear stories like this all the time. It is
because of the way data is matched, because of the mismerging
problem, the mixed file problem, which exists in a lot of
instances. That's exactly what happened. Judy Thomas, I assume
because her first name is Judy and the other person's name is
Judy and because their Social System number was close or
something--do you know why those two things were matched? I
were merged with this person because their data collection
system simply doesn't do a good enough job when they provide
reports. And intentionally, I might add; they intentionally
merge those files because the businesses who are their
customers would rather have over--would rather have more
information than less. So they're not as finite as they could
be in terms of creating people's consumer files.
Senator Heller. Mr. Pratt?
Mr. Pratt. So, disagreeing just a little bit here. I know
that's a shock to you. Lenders do not want any data on their
desk other than the data about the right consumer. So they want
the right Judy Thomas. They don't want any extra data in there
any more than anybody else. There's no market incentive to do
that.
We see it as, these are smaller--this is a very small
percentage of all the issues that are out there, and this is
why we have this new working group that we've established to
focus on that, to try to unpack these and decide where these
come from, or how can we resolve them quickly and get it right
the first time.
So that's really the key to us. So it doesn't matter
whether it's a big number or a small number because it is
affecting a consumer in a very serious way.
But I will tell you that I'm looking at data from the FTC
report and they're saying roughly 10 percent of consumers are
saying the account's not mine. That's not necessarily a mixed
file, but it's indicative of a consumer who says, I have some
question about an account on my report. But that's 10 percent
out of more than a couple of thousand different disputes that
were going through this FTC report.
Senator Heller. But you said in your testimony that 95
percent of consumers were satisfied with the report.
Mr. Pratt. Exactly. We're measuring----
Senator Heller. But if that's 95 percent, you've got 200
million people that have reports.
Mr. Pratt. Those are still big numbers.
Senator Heller. Five percent of that, that's 10 million.
Are there 10 million Judy Thomas's out there?
Mr. Pratt. No, sir. I think there are 10 million consumers
who are still not satisfied with the results. Now, that may
come for a couple of different reasons. Something that we've
dealt with in our testimony, Senator, that I think is important
is that the consumer relations process is also affected by
fraudulent credit repair. These are companies that will tell a
consumer: I promise to delete information from the credit
report that is either unverifiable or inaccurate.
``Unverifiable'' means they will repetitively dispute the same
information until a credit union says: I give up; I'm just
going to stop reporting this data, even though it's accurate,
even though it's correct. So there's a credit repair industry
out there. The Credit Repair Organizations Act is enforced by
the Federal Trade Commission. They do a good job. States
attorneys general do a good job. More needs to be done in that
space. And that clogs our system. About, I'd say, 17 to 20
percent of all disputes come from credit repair, and in fact 40
percent of the written disputes come from credit repair. So
that's one of the challenges we have as we're pushing disputes
through the system, is to unpack those that are repetitive
fraudulent versus those that are coming from honest consumers
who need to have their problem resolved.
Senator Heller. Thank you.
Senator McCaskill. Senator Klobuchar.
Senator Klobuchar. Thank you very much.
Thank you, all of you. I'm trying to be rational here, as I
think if only Ms. Thomas had a harder name she'd be fine. That
just can't be our answer here.
So I was thinking about this, your numbers, Mr. Pratt,
where you said: Oh, it's OK because only 2 percent of them are
problems and only 5 percent are dissatisfied. Is that right?
Mr. Pratt. I didn't say anything was OK.
Senator Klobuchar. No. OK, forget about that.
Mr. Pratt. I just want to be clear on that.
Senator Klobuchar. But just showing these good numbers.
Mr. Pratt. You're right, big picture. Absolutely, big
picture.
Senator Klobuchar. And I'm trying to compare that to the
FTC report, because FTC looked at 3,000 credit reports. They
found that 21 percent had a confirmed material error. They
found that 5 percent of the 3,000 had error significant enough
to change their credit risk profiles.
Mr. Pratt. There you go, and that's the real key.
Senator Klobuchar. OK. Well then, let's get into that
number.
Mr. Pratt. Right.
Senator Klobuchar. So 200 million Americans use credit
reports, is that right?
Mr. Pratt. There are more than 200 million consumers with a
credit report.
Senator Klobuchar. Great. That means 40 million of them
have errors that could significantly affect their reports, if
you take the FTC 3,000 credit reports and extrapolate it out.
Mr. Pratt. Well, you're right, although less--it's about 98
percent of credit reports that don't contain those errors. But
here's the key, and this is why we put a new group together to
look at data quality, Senator. That is, when you look at the
data quality the disputes that went through the system--it's
boring, it may not be exciting, but this is what you have to do
to get a data system to work better. I'm telling you right now,
for example, about 24 percent of consumers disputed a balance.
Balances oftentimes are a result of consumers----
Senator Klobuchar. I want to get those numbers. If we just
extrapolate them out, if its instead of 21, its 20 percent had
some confirmed error, so that's how I got to the 40 million.
Mr. Pratt. Right.
Senator Klobuchar. But if you go to the 5 percent, then
you're still at--you're still at 10 million people.
Mr. Pratt. Right.
Senator Klobuchar. Ten million people is a lot of people.
And the reason--I figure we're like the canaries in the coal
mine up here. So when we start having people come into our
offices all over the country, you have a real problem. If it's
just one person I see in a parade, fine. But when we start
having dozens and hundreds of people contacting our office,
then there's a problem.
So just, this number that you're throwing around on the 98
percent and the 95 percent bothers me, because we're still
dealing--if banks said: Oh, guess what, 2 percent of our
customers have less money than they thought they had, that
would be a big scandal if their accounts were reduced by even
500 bucks and it was suddenly missing. That would be a big
scandal.
Mr. Pratt. Senator, if I've said it wrong--I've said it
wrong if that's the feeling you have about our industry, that's
the thought, the response you have. The reason that we have new
groups brought together, the best data quality experts in our
industry, the best consumer relations service folks in our
industry, is to look at these percentages. So it's not a
victory when we say, even if we've got 95 percent of it right,
we want to look at the 5 percent. That's attitudinally where we
are and I just want you to know that. That's important.
Senator Klobuchar. OK, great. Just to use one example here,
so this is a different example than the jewelry owner. This guy
pays his mortgage every time, every time on time. He saves his
canceled checks. I don't think many people do that any more,
but this guy did. Nevertheless, the mortgage company counted
him late by mistake. This is the mortgage company.
Then he made them recognize the error and he even went so
far to notify all the credit bureaus of this error, OK.
However, they still showed up as late. So then he writes a
letter of explanation to the credit bureau, encloses copies of
his checks. Most people wouldn't have this. He encloses copies
of his canceled check, other supporting documentation. The
credit bureau refuses to acknowledge his case. His name's Mr.
Bell. Now he cannot refinance his house at current rates.
So my point is this is just one example of one guy in
Minnesota, whose name was probably Nelson. But that's what
we're dealing with right now. So I guess I'd like to just hear
from you, Mr. Rheingold, what you think would be the best way
to go here, if we need legislation, if Mr. Pratt's right and
it's these other third parties that are coming in that are
trying to fix it and then they're not really fixing it, but
there's probably a market there because there are so many
problems?
Mr. Rheingold. I think there are a lot of answers. I think
the Fair Credit Reporting Act, if enforced properly, if the
CRAs were kept to the standards of actually maximum possible
accuracy and there was enforcement there, I think in many ways
the FCRA works.
There are a couple of fixes that could be done, like a
consumer like Ms. Thomas would have the right, if the law was
changed, that they could seek injunctive relief, so the court
can order them to fix it. That would be a really good remedy
for people.
One of the--I'll leave it there, but I wanted to answer one
of your other questions, which I think is really essential
here. I think what we see here--and I thought the 60 Minutes
report did a really good job of it in terms of how the dispute
process works. They went down to Chile and met these folks who
worked in the dispute process. They had to do what, 90 a day.
The dispute process is--that person, Mr. Bell who provided
all that information, I think it's a pretty safe bet that all
of that information went to the credit reporting agency, went
to the dispute handler, looked at all that information, turned
into an automated code of three numbers. That number got sent
to the mortgage company, who looked at it and said, no, that
looks right to us, and sent their code number back, and that's
what happened.
So how--so in terms of assuring accuracy, how do we ensure
that the credit reporting agencies actually provide all of the
information a consumer provides to the furnisher of that
information and simply does not rely on a furnisher who says,
yes, that's right, we'll accept it? The law requires basically
a tie goes to the consumer under the Fair Credit Reporting Act.
The way the law works right now, the way the CRAs operate, the
tie does not go to the consumer, and that needs to be fixed.
Mr. Pratt. Could I just add one footnote to that? The
automated system does use codes, but each code comes with a
full description, which is also available to the lender. So in
other words, the code is merely a way to convey a standard
system of disputes, which actually improves the results of
disputes, because you otherwise had folks keystroking in their
own view of what they thought a dispute was and that wasn't
very effective back in the nineties. It was a long time ago,
but it was how it worked back then.
But we have decided to go ahead and build a new technology
platform that is being beta tested right now, where we will
simply load the paperwork the consumer submits and transmit it
and make it available, and in fact compel the lender to open up
the material to be able to view that information going forward,
to sort of short-circuit this potential problem that we have
where a lender might respond to the standard code but not do a
deeper look.
About 15 percent of the time, we are able to resolve a
dispute ourselves about data coming to us, not data that we
have but data coming to us from a lender, about 15 percent of
the time. So we are being proactive where we can. But some
folks are I think conflating the responsibility of the lender--
lenders were obligated in 1986 for the first time to process a
dispute and to be accurate in the data they reported. They did
that because they realized that that was the other leg of the
stool. You have to have a lender doing a responsible
reinvestigation, just as the bureau must transfer the data, the
fullness and completeness of the dispute, to the lender. So we
both participate in that process at the same time.
We want to make that better. I think one of the ways we're
doing that right now is this new technology platform that's
coming on line this year.
Senator McCaskill. So, following up on that, Mr. Pratt,
you're saying that by the end of the year all three of the big
three will be receiving the supporting documentation that Judy
Thomas and my constituent in Nixa, Missouri, tried to provide
to the credit reporting agencies?
Mr. Pratt. Before the end of the year, before the end of
the year.
Senator McCaskill. So you're going to scan the documents
and that way the lender, who has absolutely no motivation other
than to say no, we're leaving it the way it is----
Mr. Pratt. I think lenders are really motivated, because
these are their customers. They don't want wrong information.
They want good relationships. So there are market motivations
for them.
But they will see the data, that's absolutely correct.
Senator McCaskill. We're not talking about a local bank who
you have a relationship with here. We're talking about
nameless, faceless people that are dealing with numbers, that
are not really--clearly what happened in many, many instances
is the consumer comes forward and says, you've got an error,
and you all put in a two-digit code. I can't believe you're
clogged up from the consumer repair, credit repair agencies,
because all you do is convert it to a two or three-digit code,
send it to the lender, and the lender says no and you say okay.
Mr. Pratt. No, in fact a dispute might require several
different communications about the dispute. So what you have to
do is, if it's paper, just as you and I would, you have to have
a team of people sitting and they will unpack the paper, read
through the paper, identify the various disputes that are
submitted. That's the labor-intensive side of it, particularly
on the paper side.
But again, our goal is to try to bring the paperwork of the
consumer forward and make it available to the lender. And these
are small lenders and small credit unions.
Senator McCaskill. That's news and that's good.
Mr. Pratt. Yes.
Senator McCaskill. That's good.
Why can't you match all the numbers, like Mr. Rheingold
suggested?
Mr. Pratt. If we did so, we would not have a credit
reporting system the way he thinks of it. So let me just give
you an example.
By the way, the FTC was tasked with studying this in 2004-
2005. They published a report after having brought in each of
the national credit bureaus and interviewed the data quality
experts on data matching and the algorithms that were used. So
the FTC studied this question coming out of the FACT Act in
2003. The conclusion was a good conclusion. In other words, if
I have ``Stuart K. Pratt'' and I have his Social with one digit
transposed at the end of it, but I also have his full address,
and in fact I know that there are ten other data furnishers
furnishing that same address and it's been there for 10 years
on the credit report, that single transposition is more likely
a problem with how the application was processed than it is
with the fact that this account should belong in Stuart Pratt's
credit report.
If I match 100 percent, I don't get to put that proper
account into the Stuart Pratt credit report.
Senator McCaskill. So why are you matching it 100 percent
with the one you send to the consumer?
Mr. Pratt. We're using the same matching algorithm for the
consumers today that we use for any lender in the country.
There's no difference, so I don't know----
Senator McCaskill. So you're not matching all nine numbers
for the consumer?
Mr. Pratt. You're matching--we are matching to deliver a
report--an algorithm is always going to look at the full
picture of all the data elements that are provided to us in
order to deliver the report.
Senator McCaskill. Well, I will tell you that we've talked
about percentages and numbers. We had, what, five Senators here
today questioning. Senator Nelson as a U.S. Senator bought a
washing machine in Wisconsin. Senator Schatz owed money to a
wedding service in Hawaii. I just refi'ed, found out that
Comcast had done a credit check on me last December. And I
went, Why? So I looked into it. It turned out it was somebody
in Houston, Texas.
Now, that's three Senators out of five that questioned
today. I think you are not well served by saying you don't have
a problem. You have a big problem.
Mr. Pratt. Madam Chairman, we have not said that we don't
want to deal with the problem of inaccuracies. All I've said is
that we have a team that's going to look into where we can
improve the system. It is a system that has to be improved with
those who furnish the data as well as how the data is matched.
But we're not sitting here saying, because we have a 98 percent
accuracy rate, which is what the report says, that somehow
that's the victory and that's the final word on all of this.
If I were a marketing person selling a product, I might be
happy with 98 percent satisfaction. But that's not where we
are. As you said, this is a system consumers can't walk away
from. We have to strive to push that number down further.
Senator McCaskill. So how do we make this--how do we
monetize this in terms of incentivizing you to do the right
thing? I know for a fact that people's credit records are
threatened in disputes. A good example I can give you is a
nephew of mine who believed he had his deposit due back to him
from his landlord and the landlord said very simply: You want
to fight me on the deposit; I'm going to turn you in to the
credit reporting agency, I'm going to give you bad credit,
you're going to pay more rent the next place you go.
Now, this is a kid in college. What's he supposed to do?
Right? I mean, he has no leverage in that situation whatsoever.
The furnishers do not have enough leverage against them in
this system. Frankly, I'm not sure you have enough leverage
against your clients in terms of bad things that happen when
you don't fix things for Ms. Thomas, who's been at this for 14
frickin' years. I mean, somebody should be handing her piles of
money for how badly you guys screwed this up.
Ms. Thomas. No, just fix my report.
Senator McCaskill. But seriously, you won't fix it if
you're not going to be monetarily punished.
Mr. Rheingold. I think that's exactly right. I think what
we've seen--it's interesting that at this point we're finally
looking to fix it again. These are problems that have gone on
for 20 years. I'm glad the industry is now doing a study and
fixing these problems. But they have known about it for a long
time.
Fundamentally, the system they built, the automated system
that turns people's stories into numbers, is a cost --Ms.
Thomas's dispute is simply a cost of doing business. The money
that she will ultimately receive in litigation is a drop in the
bucket in terms of the money that the credit reporting agencies
made.
Consumers are not their customers. The market isn't working
for customers. Their customers are the furnishers of
information, the credit card companies. Those are the people
they're trying to satisfy, not consumers. The question is how
do you build incentives so that in fact consumers are the
customers.
And it's the consumers' information, for God's sake. It's
our information that's being bought and sold and spindled and
twisted for all sorts of purposes. Yet the system is not
designed to serve their needs. The system is designed to meet
the needs of companies who are offering credit.
Senator McCaskill. Dr. Beales, we talked about making the
market work. If we wanted to make this market work, shouldn't
we put something in the market that the furnishers of bad data
have some kind of economic incentive to make sure that that
data is correct? Clearly that is missing in this free market
economic model.
Dr. Beales. Well, it's missing, but it's missing because
the provision of data is entirely voluntary. And as you pile
obligations on the furnishers, what you risk is that furnishers
say: Fine, I won't tell you anything. It's the equivalent of
the response to the credit repair guys of the credit union
says: This report's accurate, but I'm just not going to report
it any more.
Senator McCaskill. So why are they giving the information
now?
Dr. Beales. I'm sorry?
Senator McCaskill. Why are the furnishers giving
information now?
Mr. Pratt. There's a shared benefit to it.
Senator McCaskill. Of course, there's an economic incentive
for them, because if their----
Mr. Pratt. Madam Chairman, there are new data sources.
Professor Beales' testimony talked about the fact that there
are some consumers who don't engage aggressively in the
traditional credit marketplace. They don't like credit cards,
they tend to go cash-based. Many more consumers are more debit-
based post-recession. So there are consumers who don't have a
thick credit report or even a credit report that can be scored.
So in this case, we need new data sets. So for example,
there are new data sources--the device you held up, that's a
credit-like transaction. Every month you make a payment for the
services you receive from that smartphone. Those types of
service providers don't want to report into the credit
reporting system today because they already see the penalties
for and the severity of what has been built into the FCRA as
being too severe for them to choose to participate.
Senator McCaskill. You've got to be kidding.
Mr. Pratt. No, absolutely not. And in fact----
Senator McCaskill. You're telling me that my account with
Verizon, that they are so worried----
Mr. Pratt. They are.
Senator McCaskill.--of the FCRA----
Mr. Pratt. Yes.
Senator McCaskill.--that they don't want to report my
information?
Mr. Pratt. That is correct.
Senator McCaskill. You know, that just strains credulity,
honestly.
Mr. Pratt. Oh, no. In fact----
Senator McCaskill. Exactly how much money has been
collected against these companies through the FCRA? What is the
burdens that they have had to bear?
Mr. Pratt. Let me walk through, let me walk through the
liabilities. I'm always surprised when--by the way, Mr.
Rheingold and I are up here. Later we're going to have to have
a drink. Our sons went to school together and they texted each
other this morning saying our dads are going to testify here.
Mr. Rheingold. Small world.
Mr. Pratt. So I'm trying to figure out which one of us is
going to pay.
But I will say that the FCRA has the following: private
rights of action for the accuracy of information, so any
consumer can enforce the law as a private consumer, even when
they don't want to. There are AG's. Attorneys general may
enforce the law. The Consumer Financial Protection Bureau may
enforce the law. The Federal Trade Commission may enforce the
law. There are class action penalties, as well as individual--
as well as an imposed, in the case of willful violations,
minimum damages.
So this is not a statute that is uncoupled from what we
consider to be the self-enforcement mechanism that you would
traditionally see. So I do think the incentives are there. If
the theory of incentives is just a sword of Damocles hanging
over the heads of the bureaus--but it isn't. Bureaus don't want
to get it wrong. Our members want to get it right. The consumer
relations folks don't want Judy Thomas to ever get the result
that she got. Now, that's little comfort to her at this point,
but we're going to work on that going forward.
Senator McCaskill. Senator Heller, do you have any more
questions?
Senator Heller. No.
Senator McCaskill. Senator Klobuchar?
Senator Klobuchar. I'd like to follow up and maybe Senator
McCaskill will as well on this. I worked hard on the Dodd-Frank
bill on the free credit report and to make sure that that was
part of this, and Senator McCaskill raised some excellent
questions about those free credit reports and what was
happening and why it's so hard to get them. She can follow up
on some of it, but I wanted to make sure that the question was
asked.
What do you know about it, Mr. Rheingold, and then Mr.
Pratt?
Mr. Rheingold. Well, in terms of the annual credit report,
there are two issues. One, obviously the industry found a
pretty good way of monetizing the notion that people get credit
reports. Experian created freecreditreport.com. They've now
changed their name there.
It's a good thing that people can get an annual credit
report. There's actually a bill in the Senate that--I have the
number in my testimony; I don't have it in front of me right
now--that was introduced this year, so that people could get
the free credit report along--a free credit score to go along
with their credit report, and it would be the credit score
that's actually used to pass judgment on them. That's a very
good bill and that would be an improvement.
What's happening in terms of that advertising, I think it's
a great case for the Federal Trade Commission. I think it's
misleading and I think it's a case that's something that the
FTC can certainly bring an enforcement action against. And I
think there's any reason why the CFPB can't pass rulemaking
saying: You companies that are under my jurisdiction should not
be misleading people with that type of advertising. I don't see
there's any reason why both those agencies can't move forward
on that issue.
Senator Klobuchar. Mr. Pratt?
Mr. Pratt. I'd like to just speak more generally to the
idea of a product that was built more recently and it does
connect me as a consumer. To me it's similar to--I may have a
home security system on my house, I may not; I may buy certain
types of insurance, I may not. Some consumers have chosen to
buy a service that's different than using free credit reports
three times a year from annualcreditreport.com. Those types of
services are sold and there are many consumers who are happy
with them. I am notified when a change to my address occurs or
I'm notified when some balance occurs. I've used products
from--I've at different times used products like these just to
see what they're like, and they sometimes clog up my in box
with too many notices and some of them do a better job of less
so.
The products themselves are good overall. Now, as to the
advertising practices, I'd just say in fairness to
freecreditreport.com it was a product that was developed before
annualcreditreport.com ever existed. It was one of a number of
direct-to-consumer products in the marketplace today. They're
not all run and operated by nationwide credit bureaus. It is a
broadly competitive marketplace. And consumers do buy the
product and nobody's compelled to buy the product. And
certainly everybody can exercise their right to the free credit
report through annualcreditreport.com.
Senator Klobuchar. I just think we have to somehow make it
easier for consumers to understand that they get this credit
report, and then hopefully we can add on a score to make it
easier, because when there are all these errors they shouldn't
have to pay to protect themselves.
When we have three out of five Senators up here who had
issues--and I used that number from the FTC, which was 20
percent. Now, presumably the Senators got around this and were
able to do it, so maybe this is what's called an immaterial
error. Well, they are Senators and so, you know, maybe they
were able to call and get this done. But it still was a hassle
and it still for regular people delays them getting financing.
So my guess is the wedding dress, the refrigerator, those
wouldn't have even been in the worst 5 percent. They're in the
20 percent. And that is affecting--like I've said, if you
extrapolate it out, it's affecting 20 million people.
Mr. Pratt. And I think our job is to--this is why the FTC
report is such a helpful new piece of research. I intend to go
to the University of Missouri and actually visit with some of
the researchers who conducted the work down in St. Louis as
well. And we intend to root around in this data to see if we
can't find better answers to some of the challenges we see,
again patterns, how many times do consumers dispute balances,
how many times is it a debt collection-related dispute, what
other types of disputes?
The detail here is important. It's too much for this
hearing, but I just want you to know we're committed to looking
at it.
Senator Klobuchar. I understand that. But it just---- to
me, I'm sure there are people with bad credit. I know that. But
these are errors that appear to us to be on the rise. I'll just
ask Mr. Rheingold to react, and Ms. Thomas last, if you could
have the last word for my question, your reaction to all this.
Mr. Rheingold. I'm sure the industry wants to get it right,
just like the mortgage service industry wants to get their
servicing right. The question is investing resources in doing
it right and building a system that is sufficient to actually
solve these errors. It's a cost of doing business. They don't
want to invest the resources to make the system work properly.
They haven't done it for the past 20 years. I'm glad they're
undertaking some effort right now, but the fact is they may
want to do it, but they're certainly not showing it with how
they're investing their resources.
Senator Klobuchar. All right. Ms. Thomas, what do you think
of all this?
Ms. Thomas. I'm glad that something's going to be done. I'm
glad that you're looking for ways to improve the system. I sit
here and I listened to you say that we're going to put things
in place that we can actually look at paperwork that's
submitted by the consumers. I think that's probably one of the
most beneficial things that could be done, because I actually
did the legwork and submitted testimony from these collection
people that this was not my debt and submitted it to the credit
bureaus, only to have it sent back as verified.
So if somebody actually looks at it, I think that's a
bonus. The other bonus is I truly advocate the matched Social
System number. I mean, why even take that chance? Why take that
chance that my information is being mixed up with someone else?
I don't understand why that can't be done.
Senator Klobuchar. OK. Thank you.
Ms. Thomas. Thank you.
Senator Klobuchar. Thank you, Chairman.
Senator McCaskill. I'm a little confused, because you just
said, Mr. Pratt, that free credit report, that model happened
before the change in the law to require the annual report, and
that--but when you do the Google search, if you understand how
Google works, the first report that comes in the top in the
shaded area is paid.
Mr. Pratt. Those are advertisements, right.
Senator McCaskill. That's paid advertisement.
Mr. Pratt. Right.
Senator McCaskill. And the top report, the top one, that's
huge money. You pay huge money to be number one on the Google
search page. Guess what's number one? Freecreditreport.com,
with the trademark.
Mr. Pratt. Yes.
Senator McCaskill. And you go there and you can't get a
free credit report without giving them your data that they're
going to sell to a third party. Do you think that's
appropriate?
Mr. Pratt. CDIA isn't going to endorse a particular
product, but I will tell you this. I know that the FTC is
overseeing their consent order with this company. I know that
this company's website is compliant with what the FTC has
required. I guess it's a different question. I don't think they
want to violate the law. They want to do business with
consumers who want to do business with them, just like every
other direct-to-consumer provider.
Some consumers will never choose to do business with them,
just like some consumers will never buy a home security system.
Senator McCaskill. Do you think it's appropriate--let me
ask you this question. Do you think it's appropriate you have
two choices on the website? One is to get a free credit report
in 2 days, and you give your mailing address, but you have to
give them your e-mail. They won't send it to your mailing
address unless you give them your e-mail. Or you have a choice
that you can get it immediately if you pay them a dollar, and
then they get your credit card information.
Mr. Pratt. I think that has to do with how the regulations
operate. I can't speak to all those details. But I believe that
is--that's part of the structure of their compliance that they
have to go through in order to comply with the oversight of
that website.
Senator McCaskill. Do you believe that that accurately
reflects the intent of Congress as to trying to make sure that
everyone understands they can go to annualcreditreport.com and
get a free credit report?
Mr. Pratt. I think on that same website, just like others,
you'll find there's also a link saying you can go to
annualcreditreport.com.
Senator McCaskill. No. Nope, not there. Not there.
Mr. Pratt. I've got to pull out my device here.
Senator McCaskill. It's not there. Believe me, it's not
there.
Mr. Pratt. I think that's part of the follow-up. But I will
tell you that all of our members' websites are channels of
distribution pushing consumers to annualcreditreport.com. All
of our members want to have an honest, good relationship with
the consumer in the marketplace that wants to buy their
product. None of our members want--nobody wins with a product
that a consumer is unhappy with.
I can tell you that there are consumers who find direct-to-
consumer products an excellent way for them to manage finances
and they choose to invest in it. Other consumers choose to use
annualcreditreport.com exclusively and exercise their right to
a free report.
Senator McCaskill. I think it's fine for consumers to have
choices and buy products that they want. I think it is
inappropriate for a company to continue to be less than
forthcoming that what they are gathering your data for and
selling it and making you wait 2 days and making you give your
e-mail is something that is immediately available if they just
put the information on the website for annualcreditreport.com.
And the fact that it's not there I think violates the intent of
the law, and if it's not enforceable then we need to fix it and
make it enforceable, because there's a problem. If this is
compliant, it's not what we intended when we changed the law.
So that's why I keep harping on it.
Do you know right now if you could--and you may not want to
say this and it's your right not to say it, and you probably
won't want to say it. But I'm going to try to dig and find out.
Where is the real money made in this business? Is the money
made selling data to first party lenders, or is the money made
selling reports and scores to consumers, or is the money made
selling data gathered in the number two process to third
parties? Where are they making the most money in this endeavor?
Mr. Pratt. A number of our members are publicly traded, so
any of us can go to see where their U.S. division makes its
money and how profitable it is.
Senator McCaskill. Are all three of them publicly traded?
Mr. Pratt. Two out of three are publicly traded.
Senator McCaskill. And which one is not?
Mr. Pratt. TransUnion Corporation.
Senator McCaskill. OK. Well then, I'll get that information
and I'll be able to find out. Well, you probably know, then, if
they're publicly traded.
Mr. Pratt. But let me just answer the question. The
question is, assuming it's OK to make money--and I think it's
OK to make money----
Senator McCaskill. It is. It's great to make money. I'm
just curious.
Mr. Pratt.--we generally like commerce. So my answer is
they make money in an honest business relationship with
consumers. They make money in an honest business relationship
with lenders, providing--they make money selling credit
reports, they make money selling credit scores. They're not shy
about that, because that's the business model that they've
built.
I know it's like a dark cloud hanging over the industry
because of kind of the optics of this hearing, but you know, we
have everybody else in the world coming to the U.S. and saying
this is by far the best system around the globe, let's export
it to Tanzania, let's export it to Kenya, let's export it to
other parts of the world. And in fact we do that as CDIA
through an international conference.
That doesn't mean we don't want to focus on these issues.
But I just want you to know that this system is working well,
and they are making money, but they are doing it----
Senator McCaskill. I love that anybody makes money in
America. I endorse heartily the free market system. But this is
a system that consumers are captured by. They have no choices
here. And once they're captured with bad information, it costs
them money, their hard-earned money. They have to pay more when
it's unfair. They have to pay more.
So this isn't just like going out and buying a widget. This
is a little different because of this unique relationship you
have with the consumers. And the consumers aren't in the
position individually to fight you.
So we are here talking about these issues, trying to fix
these for the consumers that are captured by this system. I'm
glad they're all making money.
Once again, let me ask: Do you know, is the majority of
their money made selling information to people who lend money,
or selling scores and credit reports to consumers, or selling
consumers' data to third parties?
Mr. Pratt. Well, that would be the same as the first one,
because when they're selling a credit report that is a
compilation of all my different lenders to a new lender then
they're selling--it's a third party transaction. That's what
the FCRA regulates.
Senator McCaskill. But when I read their targeting
advertising policy, it was clear to me that they were telling
me that they were----
Mr. Pratt. So that was marketing data as opposed to the
data regulated under the Fair Credit Reporting Act.
Senator McCaskill.--right. That's what I'm asking about.
Mr. Pratt. That's two different worlds.
Senator McCaskill. The marketing data.
Mr. Pratt. Our members' product mixes are very different
and so we really would have to go to the publicly disclosed
information----
Senator McCaskill. OK.
Mr. Pratt.--and see how much of their revenues are derived
from marketing activities versus credit reporting activities
versus fraud prevention tools and so on.
I did want to respond just for the record to this question
of free credit scores. Credit scores are software. They're not
credit reports. They're not in credit reports. They're not just
numbers that somebody pulled out of thin air. There are many
different score developers in the marketplace. Many of them are
U.S.-based in terms of their headquarters, one of which is
headquartered in Minnesota, at least for the time being.
Senator Klobuchar. Do you know something that I don't know?
Or is it my questions are going to lead them to leave?
Mr. Pratt. My point is this. Credit scores are a product.
It's intellectual property. A credit bureau doesn't own, for
example, a FICO product. So when somebody drops a bill in that
says somehow we're going to have to give away somebody else's
product or we're going to have to pay somebody else to give
that product away, that's just a bad idea.
This is not part of the credit report that is my
information about me, that is stored in that file. This is a
third party's software technology that has been developed and
invested in and that is used and sold in the marketplace for
insurance companies and lenders and others who make risk-based
decisions.
Senator McCaskill. So you can buy it and sell it to the
consumers?
Mr. Pratt. Well, we build it to sell. We build it.
Senator McCaskill. So you own FICO?
Mr. Pratt. No. Our members own other score developing
companies, and so some score developers will--but FICO partners
with national credit bureaus to sell scores. But at the same
time, our members also compete in that same space with scores
of their own. In fact, they compete globally selling those
scores. It's an export.
Senator McCaskill. I see. So you guys have developed your
own scores and you sell them?
Mr. Pratt. As well as selling third party scores like the
product produced by FICO.
Senator McCaskill. OK.
Mr. Pratt. So there are many scores out there.
FICO, by the way, has 49 different versions of its score. I
don't know how you pick the score you're going to disclose to a
consumer. I just have no clue, other than scores--disclosure of
scores is an educational opportunity. It is not about trying to
connect a consumer with the score used in a given transaction.
Senator McCaskill. Most of the lenders--I think FICO is the
most commonly used score.
Mr. Pratt. It's common, but it's the same competitive issue
you deal with in the Commerce Committee all the time. Emergent
companies and competitors want to be the next company that
beats out that larger player in the marketplace. We have to
preserve the openness of that marketplace to allow those
smaller players to build and encroach on that competitive
position of a large player that exists currently.
Dr. Beales. Senator, there are numerous lenders that build
their own scoring models because they think they're better at
it, frankly, than the conventional marketed scores. And they
try to compete based on better risk assessment and better risk
partitioning because they've got their own scoring.
Senator McCaskill. And it would be your position, Dr.
Beales, that as long as the information on the underlying
credit reports were appropriate, then we should keep our big
nose out of the credit scores?
Dr. Beales. I think that's right. I would agree with that.
The score is--consumers need to understand that you do not have
a credit score; you have hundreds of credit scores, because
every lender that you deal with may have a different credit
score.
Senator McCaskill. Well, they don't really understand that,
because they are getting bombarded with advertising that tells
them they can get their credit score if they will only pay
$14.99 a month for the rest of their life. They can have a 7-
day free trial, but by the way, of the 7 days only three of
them will be relevant because it takes them that long to get
the information in. And if they don't withdraw with 7 days,
they're going to go ahead and get charged with $29.99 for the
next month.
I can read you score and verse how they do it. And the
consumer believes there's one credit score. There is nothing
that's in that big banner that says, you know, by the way,
there are a million different credit scores and we're going to
sell you one, but it's not necessarily relevant to what you
need to know.
So I guess that's my problem, is that so much of this is so
daunting and confusing to the consumer. It seems to me that the
transparency that is needed for the marketplace to work more
effectively and efficiently for the people that are putting
their money in the marketplace--those are the people that are
making the loans and buying the products--that we have an
obligation to do that.
Nowhere does it say on any of these clearly that there are
a million different credit scores and the one you're buying may
not be worth squat. So it's a problem.
Dr. Beales. In terms of what influences a credit score,
what information is likely to matter in pushing it up or down,
there's a lot of commonality across scores. But it's not going
to be identical from score to score.
Senator McCaskill. Right.
Mr. Pratt. That's really important, and even the FTC did
what's called a correlation analysis to look at VantageScore
versus FICO, and the correlation is very high between the two.
In fact, it's never going to be perfect. The only time you have
a one to one correlation is when you're comparing the product
to the product and you get that perfect correlation.
But I think Professor Beales is right, these scores are
competing to say, we have a better way of giving you the delta
between the average risk and the better risk, and you're going
to get access to--you'll have a safer and sounder portfolio and
reach deeper into the marketplace.
But that's the whole point. These scores are in fact
educational, and I think that Dr. Beales says it right. This
gives consumers a chance to understand generally what goes into
a score, generally how am I affected by a lending decision in
the marketplace and what can I do as a consumer to position
myself effectively in the marketplace with regard to my credit
report data.
Mr. Rheingold. But they're more than educational, because
they're being used you companies to make decisions about you.
So it's not mere education that's happening here.
Senator McCaskill. Right. I know that Senator Klobuchar has
one more question. I have a question I need to ask for Senator
Nelson, but you can go ahead.
Senator Klobuchar. Well, I just want to followup. Senator
McCaskill talked about basically following the money. We're
both former prosecutors, so we get that, because I'm just
trying to get at what is creating a disincentive for accuracy,
basically. There's got to be something that's creating a
disincentive for accuracy, because you just don't see this as
much in other companies that are having to send bills out, for
instance, or in banks that are having your account.
You don't see this percentage of people. The banks may be
causing this, Mr. Pratt. But there's some kind of disincentive
in the system that is causing this high percentage of
inaccuracy. So that is what I'm trying to get at here. There is
clearly a problem. That's why you now have predators, who are
super-bad, who are playing on this to try to rip people off,
too. But that is a secondary problem to the actual inaccuracy
and why people are contacting other people to try to fix it
because it's not getting fixed.
So that is what we have to figure out here to figure out
how to fix it, because there has got to be a better way to do
this than these stories that we've been hearing today and
throughout the last year.
And also, why has it gotten worse, Mr. Rheingold? Because
of course we all know back in the old days--when I first got a
house, for $115,000, I dealt with one bank that I knew, a
banker that I knew. They could look at my credit report. They
understood. If something was wrong--I don't remember if there
was anything; I don't think there was--I could show them that I
did the bill. It was a very intimate thing.
Now, years later, even just 25 years later, we're dealing
with all of this problems with a faceless system, dealing with
people down in Chile that are doing the credit reporting. So we
have to figure out what's creating this incentive and how we
fix it.
Mr. Rheingold. I think there are two parts here. I think
that one is easy, that's intuitive, is that the credit
reporting system has become a mechanism for debt collectors,
for creditors, to force people to pay. I think Senator
McCaskill's point is exactly on point. Parking debt on your
credit report, parking information on your credit report--how
many times is a consumer going to go to closing, they'll see a
debt on their closing of $500 that they've been disputing all
along--I didn't pay it; Comcast stuck that debt on my account;
I'm not going to pay it--and they're sitting at closing saying:
You've got to take care of it. So you pay the $500.
So there's an incentive for companies to put that
information on there because they know it's a way of collecting
debt. Simple. I think that's easy, and that's intuitive.
The piece that I've never really--that doesn't make
complete sense to me. I know I've been told this and I know
this is true--but I think that industry would much rather have
overinclusive information than completely accurate information.
What I mean by that is the problem of the Social Security. One
would think that if we're making judgments about people we
would want it to be point-blank. We would want to make sure we
have absolutely accurate information.
And it's really hard for me to say, after living through
the sub-prime crisis and seeing all the credit that was offered
to people who should never have received it, in ways that were
completely inefficiently and wrongly priced, but I think there
really, there's an effort by industry to have--they'd rather
have more bad information than have completely accurate
information, because they'd rather make a mistake denying
people than making a mistake giving credit to people who
otherwise couldn't qualify. I think that really is one of the
factors here.
Mr. Pratt. That just could not be more wrong. The reason
that could not be more wrong is because lenders are incented to
provide their data accurately on behalf of their customers,
because they want to have those customers. That same small bank
is likely still there, doing business with local consumers, and
they care about how they report that data.
But the bottom line is the incentives are strong today for
accuracy, but they're market-based and their also based in law.
But it is a system of, depending on how you do the head count,
10 to 15,000 data sources and probably more than 100,000
different fingers on various keyboards data-entering
information. There's going to be a--if you had any professor
come in here and talk about this, you'd find there is a likely
low-grade error rate that flows into that. And then we have to
do a data quality process to make sure that we exclude data we
can't report.
I will say this, though. This is just so wrong--to say that
we would rather be inclusive rather than exclusive. We want the
right data in the right file and we don't want any information
in that file other than the information that should be in
there.
Senator Klobuchar. But then more resources of your profits
have to be put into making sure it's accurate.
Mr. Pratt. To the contrary, what we have to do is we have
to work with the data furnishing community through the FTC
report to better understand where we think some of the patterns
lie. So it isn't CDIA members not investing. They are
investing. It is about the partner process and also making sure
that we can encourage other furnishers in the future so that
underbanked and unbanked individuals can participate in the
traditional credit process as well. But that's the key.
Dr. Beales. Senator, if I could just briefly, I think
they're both right. There is----
Senator Klobuchar. It's getting late in the day. Anything
is possible.
Dr. Beales. As I said in my statement, there is a tension
between accuracy and completeness. It is a mistake to put
something into my file that doesn't belong there because it
doesn't match me, but it's also a mistake to leave something
out of my file because somebody typed the Social Security
number wrong. Both of those are mistakes.
The system and the lenders care about having the most
comprehensive and accurate information possible, but that is
information that almost inevitably is going to have some of
each kind of mistake. It's going to leave some stuff out that
really belongs to my file and it's going to put some stuff in
that probably doesn't.
Senator Klobuchar. Just one last point that I made. I wrote
a note to Senator McCaskill, because when you said, Mr. Pratt,
that people have choices like for security systems, the
difference here is Congress didn't mandate that people have a
free security system. So in this case we have mandated that
they get a free security report, and I hope 1 day a score, and
so the difference is once we've mandated that it has to be very
clear and understandable that they get that.
So we may have to make some other legal changes. If they
don't understand that, it's not their fault. I would Google it,
too, and I can't figure it out. So I think that is something
that we're going to have to look into more.
Senator McCaskill. I have a question from Senator Nelson
for Mr. Pratt: Why is a short sale being coded as a
foreclosure?
Mr. Pratt. Well, they're not. But I think that Mr. Stone
said it right. The short sale is a new--we've had deed in lieu
of, we have foreclosures, we now have short sales. The Metro 2
task force which the CDIA administers is now looking at a new
short sale code, because in fact it isn't a scoring issue in
this case; it's a Fannie and Freddie issue. Fannie and Freddie
are administering some programs and they need to be able to
identify short sales uniquely, different from any other loan
which is simply settled for less than the full amount.
So we have a code that says ``Settled for less than full
amount.'' Generally, we try to keep codes broad rather than
narrow, because very narrow codes generally don't populate into
the database, they don't become scoreable, they don't become
useful.
So in this case we probably will have to create a short
sale code, because Fannie and Freddie are looking for something
like a short sale code and they want to see it uniquely and
differently from any other ``Settled for less than full
amount'' loan that's out there in the marketplace. So that's
why.
Senator McCaskill. So you're saying prospectively you will
code it differently, but now it's being coded the same?
Mr. Pratt. Lenders are coding it as a ``Paid for less than
the full amount.''
Senator McCaskill. Which is the same as a foreclosure?
Mr. Pratt. No. Actually, a foreclosure is yet a different
coding. If a lender is coding foreclosure on its own, then they
are miscoding a short sale, which would be a data furnisher
issue, which would be an issue that the CFPB can look into,
just as they can look into our practices with our members.
Mr. Rheingold. But that coding still has an incredibly
negative impact on a consumer's ability to get credit.
I would also add that short sales have been around for a
long time. I've represented homeowners for 25 years and we were
doing short sales 20 years ago. So it's not a new phenomenon.
Maybe the prevalence of it, but it has been around a long time.
Mr. Pratt. I think that's well said. The prevalence of it,
and the relevance of it to certain new processes that Fannie
and Freddie are trying to roll out in the marketplace.
Senator McCaskill. OK. Well, consumers are needing a cop on
the beat here still. I think we're going to stay with this and
continue to look. I'll follow up with CFPB and FTC about some
of the practices of these free credit scores and
freecreditreport.com, because I think they are kind of spitting
in the face of the intent of the legislation that was passed
and I think that needs to be corrected.
I do want to recognize and put into the record a letter
from a member of the Banking Committee, recognize the work they
have done on this subject. It is one of my frustrations that in
some ways the FTC has jurisdiction and so does Consumer Finance
Protection Bureau, so there are two committees that actually
have jurisdiction over this issue. That's why we are having
this hearing today. But the Banking Committee has done great
work on this, and I'll look forward to working with my
colleague Senator Brown, who wrote a letter for the record to
kind of document all the work they have also done in this area.
And we will try to join forces and see if we can.
[The information referred to follows:]

United States Senate
Washington, DC, May 7, 2013

Hon. Claire McCaskill,
Chairman
Senate Committee on Commerce, Science, and Transportation,
Subcommittee on Consumer Protection, Product Safety, and Insurance,
Washington, DC.

Hon. Dean Heller,
Ranking Member,
Senate Committee on Commerce, Science, and Transportation,
Subcommittee on Consumer Protection, Product Safety, and Insurance,
Washington, DC.

Dear Chairman McCaskill and Ranking Member Heller:

Thank you for holding today's hearing on the consumer credit
reporting industry. As the Chairman of the Senate Banking Subcommittee
on Financial Institutions and Consumer Protection, I share your concern
about the outsized and growing role of the consumer credit reporting
industry.
The Senate Committee on Banking, Housing, and Urban Affairs has
long maintained jurisdiction over consumer credit reporting.\1\ In
1970, under the chairmanship of Senator William Proxmire, the Senate
Banking and Currency's Subcommittee on Financial Institutions held
hearings on and ultimately approved the Fair Credit Reporting Act
(FCRA), the first legislation to regulate consumer credit reporting.\2\
In the succeeding 40 years, the Senate Banking Committee continued its
oversight of the industry in partnership with enforcement from the
Federal Trade Commission (FTC) and ushered in additional essential
consumer protections through the Fair and Accurate Credit Transactions
Act (FACTA) in 2003.\3\
---------------------------------------------------------------------------
\1\ See S. R. Rule XXV (2000) (The Committee on Banking, Housing,
and Urban Affairs shall be referred ``all proposed legislation,
messages, petitions, memorials, and other matters relating to . . .
Banks, banking, and financial institutions . . . [and] money and
credit[.]''); see also id. (The Committee on Commerce, Science, and
Transportation shall be referred ``all proposed legislation, messages,
petitions, memorials, and other matters relating to . . . Regulation of
consumer products and services . . . except for credit, financial
services, and housing.''). The definition of ``financial institution''
includes any entity that engages in an activity that is closely related
to banking, see 12 U.S.C. Sec. 1843(k), including credit bureau
services, see 12 C.F.R. Sec. 225.28(b)(2)(v).
\2\ See Pub. L. No. 91-508 (1970).
\3\ See Pub. L. No. 108-159 (2003).
---------------------------------------------------------------------------
When Congress enacted the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) in 2010, it reaffirmed the
consumer credit reporting industry's unique and important role as part
of the system of ``banks, banking, and financial institutions'' by
transferring the vast majority of oversight functions as well as new
rulemaking authority to the newly created Consumer Financial Protection
Bureau (CFPB).\4\ The CFPB is charged with regulating ``the offering
and provision of consumer financial products or services under the
Federal consumer financial laws.'' \5\ As required by statute, the CFPB
appears before and issues reports to the Senate Banking, Housing, and
Urban Affairs Committee on a semiannual basis to allow the Committee to
conduct Congressional oversight of consumer financial products and
services as provided by the Rules of the Senate.
---------------------------------------------------------------------------
\4\ See Pub. L. No. 111-203 (2010), Sec. Sec. 1002(12), 1061-67,
1081-1100g.
\5\ Pub. L. No. 111-203 at Sec. 1011(a).
---------------------------------------------------------------------------
Nearly a year ago, the Columbus Dispatch, in my home state of Ohio,
published an impressive investigative series on the damage that flawed
credit reporting has caused in the financial lives of far too many
Americans. This series prominently featured one of your witnesses, Ms.
Judy Thomas, who was the victim of what is known as a ``mixed file''
that commingled elements of her credit history with those of another
consumer.\6\
---------------------------------------------------------------------------
\6\ See Mike Wagner & Jill Riepenhoff, Credit Scars: Mixed and
Marred, Columbus Dispatch, May 7, 2012.
---------------------------------------------------------------------------
In keeping with its role exercising oversight responsibilities for
consumer financial products,\7\ the Subcommittee on Financial
Institutions and Consumer Protection held a hearing on December 19,
2012, examining the challenges that consumers face navigating the
credit reporting industry.\8\ Testifying in one of the CFPB's now-33
appearances before various congressional committees,\9\ the witness on
the first panel was Mr. Corey Stone, Assistant Director for the Office
of Cash, Collections, and Reporting Markets. Mr. Stone provided his
perspective on the industry based upon the CFPB's work to date
supervising larger nonbank financial market participants,\10\ including
findings from two reports on the accuracy of consumer reports published
by the CFPB earlier that year.'' \11\
---------------------------------------------------------------------------
\7\ The Dodd-Frank Act includes in the definition of ``financial
product or service,'' ``collecting, analyzing, maintaining, or
providing consumer report information or other account information,
including information relating to the credit history of consumers, used
or expected to be used in connection with any decision regarding the
offering or provision of a consumer financial product or service[.]''
Pub. L. No. 111-203 at Sec. 1002.
\8\ To our knowledge, this was the first Senate hearing on credit
reporting since FACTA was passed nearly 10 years ago.
\9\ See Testimony of Richard Cordray, Director, Consumer Financial
Protection Bureau, before the Senate Committee on Banking, Housing, and
Urban Affairs, April 23, 2013 at 1 (``My colleagues and I are always
happy to testify before the Congress, something we have done 32 times
now.'').
\10\ See Defining Larger Participants of the Consumer Reporting
Market, 77 Fed. Reg. 42874 (July 20, 2012).
\11\ See Consumer Financial Protection Bureau, Key Dimensions and
Processes in the U.S. Credit Reporting System: A Review of How the
Nation's Largest Credit Bureaus Manage Consumer Data, Dec. 2012,
available at: http://files.consumerfinance.gov/f/201212_cfpb_credit-
reporting-white-oanermdf; see also Consumer Financial Protection
Bureau, Analysis of Differences between Consumer- and Creditor-
Purchased Credit Scores, Sept. 2012 available at: http://
files.consumerfinance.gov/f/
201209._Analysis_Differences_Consumer_Credit.pdf.
---------------------------------------------------------------------------
The second panel was comprised of the Consumer Data Industry
Association (CDIA) and the National Consumer Law Center (NCLC), who
provided additional insights into structure of the credit reporting
industry. While it is clear that banks, employers, landlords, and even
utility companies rely heavily on credit reporting agencies--especially
the three largest credit reporting agencies--consumers face significant
challenges fully understanding or correcting their own consumer credit
information when errors arise.
The hearing raised a number of issues about the credit reporting
industry, including:

The financial incentives of credit reporting agencies
(CRAs). Mr. Stone agreed with the subcommittee's assessment
that ``the revenues for the three bureaus overwhelmingly come
from the financial institutions, not from the consumer,''
potentially creating a situation in which the CRAs have a
greater incentive to respond to financial institutions than the
consumers that depend on them.

Lack of information available to consumers. The CFPB's first
report noted that sample credit scores available for purchase
by consumers could vary substantially from the scores that
creditors received, leading consumers to be unexpectedly
rejected for credit opportunities or to underestimate their
creditworthiness, as was the case for my constituent, Ms.
Thomas.

Overly burdensome and unresponsive dispute processes that
favor financial institutions over consumers. Mr. Stone also
agreed that consumers ``must provide evidence'' when disputing
an aspect of their credit report ``but that creditors are taken
at their word.'' This creates a system in which financial
institutions could be unjustly favored over consumers, causing
financial harm to consumers.

Insufficient systems for transmitting consumer-provided
documentation regarding a dispute to a data furnisher for
evaluation. As noted by NCLC Attorney Chi Chi Wu and Mr. Stone,
documents that consumers submit when disputing information are
infrequently shared with data furnishers. Instead, they are
distilled into two-digit codes with a limited associated text
field. This system fails to account for consumers' substantive
complaints and undermines the integrity of the consumer
reporting process. It is my understanding that CDIA is already
working with its members to remedy this situation by enabling
the E-OSCAR reporting system to transmit consumer-provided
documentation to furnishers.

These are just a few of the many issues that arose during the
subcommittee's hearing.
My colleagues on the Senate Banking, Housing, and Urban Affairs
Committee have continued to draw attention to the credit reporting
industry, encouraged ongoing CFPB oversight of the market, and worked
to correct the consumer dispute process. We are considering fundamental
issues raised under the FCRA, including what constitutes ``reasonable
procedures'' needed to ensure compliance with the law's information
reporting requirements,\12\ and whether reinvestigation requirements
adequately protect consumers, both in law and in practice.\13\
---------------------------------------------------------------------------
\12\ 15 U.S.C. Sec. 1681e.
\13\ See 15 U.S.C. Sec. 1681i.
---------------------------------------------------------------------------
I assure you that the Senate Banking Committee, and the Financial
Institutions and Consumer Protection Subcommittee, with primary
jurisdiction over credit reporting agencies, will continue to provide
meaningful oversight of the consumer credit reporting industry and the
CFPB's efforts to protect consumers' credit histories.
Sincerely,
Sherrod Brown,
Chairman,
Subcommittee on Financial Institutions
and Consumer Protection,
Senate Committee on Banking,
Housing and Urban Affairs.

Senator McCaskill. And any suggestions from you, Ms.
Thomas, and we thank you very much for being here. And you, Mr.
Pratt, on behalf of the people you represent. Mr. Rheingold and
Dr. Beales. We don't want to screw up the free market here. On
the other hand, we want to make sure that consumers are not
getting unfairly handcuffed to credit scores and credit reports
they don't deserve.
Thank you very much, and this hearing is adjourned.
[Whereupon, at 4:42 p.m., the hearing was adjourned.]
A P P E N D I X

Response to Written Questions Submitted by Hon. Claire McCaskill and
Hon. Bill Nelson to Maneesha Mithal
Question 1. The stories we heard from Ms. Thomas and that of Ms.
Campbell were both beyond belief Both of these women have what to me
seem like obvious errors: someone else's information was in their
credit files. Yet these women filed dispute after dispute, sending
every type of paperwork imaginable, and nothing happened. They both
ultimately had to hire lawyers and have spent years dealing with these
issues, all the while living with the effects of these errors. Under
the Fair Credit Reporting Act (FCRA), consumer reporting agencies are
supposed to have ``reasonable procedures to assure maximum possible
accuracy'' and are supposed to ``conduct a reasonable reinvestigation''
to determine whether disputed information is accurate. Yet from Ms.
Thomas and Ms. Campbell's examples, it does not appear the measures
used by Equifax, Experian, and TransUnion meet such a reasonableness
standard. Do the experiences of Ms. Thomas, Ms. Campbell, and what we
saw in the 60 Minutes report meet the FCRA's legal requirements for
accuracy and dispute procedures?
Answer. I am deeply disturbed to hear stories like that of Ms.
Thomas and Ms. Campbell, which demonstrate that inaccurate credit
report information can take an extreme toll on people trying to go
about their daily lives. I recognize that it is impossible for credit
reporting agencies (``CRAs'') to guarantee 100 percent accuracy of all
credit reports, and given the amount of information being handled
certain amounts of errors are inevitable. That being said, the law
requires CRAs have reasonable procedures to assure maximum possible
accuracy. A critical aspect of this standard is that the system for
responding to consumer disputes must be easily accessible and
effective. The CRAs should be sure that the dispute system is easy to
use and that consumers who file disputes are getting a reasonable
investigation of their claims. If the CRAs' dispute systems
consistently fail to meet that standard, then they are not meeting the
FCRA's requirements.

Question 2. How are your agencies ensuring that these credit
reporting agencies are living up to the accuracy and dispute
obligations under the FCRA?
Answer. The FTC has always considered the accuracy of credit
reports a vitally important issue and has done many things to improve
the quality of information in the credit reporting system. For example,
the Commission recently brought an action against Asset Acceptance, a
large debt buyer, alleging that it failed to ensure that information it
provided to the CRAs was accurate. The Commission obtained a $2.5
million civil penalty against the company. The Commission also recently
settled an action against a CRA, HireRight, for failing to maintain
reasonable procedures to ensure accuracy of consumer reports. The
Commission obtained a $2.6 million civil penalty in this case.
The Commission has also put a large emphasis on educating consumers
about the importance of reviewing their credit reports to ensure that
they are accurate. Improving the accuracy of the credit reporting
system is complicated by the sheer bulk of information involved and by
the number of participants in the system. The FTC study discussed in my
May 7 testimony was an important step in quantifying the number of
errors in the system and will serve as an important tool for our future
efforts. In addition, Commission staff have and will continue to work
with the CFPB, who has supervisory powers over larger CRAs, to continue
to improve credit report accuracy. Commission staff will also continue
to coordinate with the CFPB to avoid duplication of our efforts.

Question 3. It was shocking to learn that the consumer reporting
agencies have not used consumers' supporting documentation in any
meaningful way when it comes to disputes. When the consumer reporting
agencies send a consumer's dispute on to a furnisher for investigation,
those companies typically do not forward that supporting documentation
along to the furnisher as well. During the hearing, Mr. Pratt confirmed
that later this year, technology will enable the nationwide consumer
reporting agencies to give furnishers the supporting documents
submitted by consumers.
Under the FCRA, consumer reporting agencies are supposed to send
the furnisher ``all relevant information regarding the dispute that the
agency has received from the consumer.'' However, for some time now,
consumers like Judy Thomas have carefully compiled documents
demonstrating the inaccuracy of information in their files, and this
information has been ignored and replaced by a two-or three-digit code.
Do the consumer reporting agencies' practices--specifically, the
failure to forward consumers' supporting documentation to furnishers
along with their disputes--meet the obligations set forth in the FCRA?
Shouldn't ``all relevant information regarding the dispute''
necessarily include the supporting documentation that consumers submit
to the consumer reporting agencies?
Answer. As you note, the FCRA requires CRAs to provide ``all
relevant information regarding the dispute that is received by'' the
CRAs from the consumer. In some simple disputes, the preexisting codes
you describe may be sufficient to provide ``all relevant information
regarding the dispute.'' In disputes involving unusual or complicated
facts, however, this system may fail to provide the relevant
information. In these cases, it may be necessary for the CRA to use
some other method to provide the information to the furnisher. It is
our understanding that the three nationwide CRAs will soon be
implementing a system that will enable documents supplied by consumers
to be provided to furnishers for disputes. This will hopefully provide
a more complete picture of consumers' disputes and will better serve
consumers with difficult or complex cases. Commission staff will
continue to monitor CRAs' actions in this area.
Several years ago, advertisers flooded the market with offers of
``free credit reports'' that were anything but free. These companies
signed people up for ``credit monitoring services'' and other costly
products for which they had no interest. The FTC and Congress both
acted and, in 2010, the FTC issued a rule requiring any company
offering such ``free credit reports'' to clearly disclose the existence
of the federal, truly free website, www.annualcreditreport.com.
However, it appears that these companies are still engaging in
questionable advertising and marketing practices while skirting the
intent of Congress. Now, advertisements for ``free credit scores'' and
``$1 credit reports'' are on the rise. These products appear to have
the same flaws as ``free credit reports''--consumers who order them
also unwittingly sign up for ``monitoring services'' and other products
that they do not want.

Question 4. Do the advertising and marketing practices for these
``free credit scores'' and ``$1 credit reports'' violate the Rule and/
or Section 5 of the FTC Act?
Answer. Section 612(g) of the Fair Credit Reporting Act and the
Free Credit Report Rule apply only to advertisements that offer ``free
credit reports.'' In my view, if an advertisement offers only ``free
credit scores'' or ``$1 credit reports'' without offering ``free credit
reports'' then the Rule is not violated by a failure to include the
disclosure. If, however, the advertisement is otherwise deceptive, such
as by failing to properly inform consumers that they are subscribing to
a monthly service, then it may violate Section 5. Such advertisements
need to be evaluated on a case-by-case basis to determine whether they
are deceptive to consumers.
In any event, regardless of whether there is a violation of the
law, I share your concern about potential consumer confusion in this
marketplace. For this reason, Commission staff are exploring the
creation of new consumer education materials on the topic of credit
scores.

Question 5. Is Congressional action needed to stop these deceptive
advertisements?
Answer. Any blanket prohibition on such advertisements or specific
requirements regarding disclosures would likely require Congressional
action. In the absence of such action, the Commission will continue to
scrutinize offers for credit reports or scores on a case-by-case basis
to determine whether such offers are unfair or deceptive under section
5 of the FTC Act.

Question 6. While access to their credit report is important
information for consumers to have, we know the consumer's credit score
is an important tool used by creditors in determining a consumer's
creditworthiness. Should consumers be entitled to receive a free credit
score along with their free credit report? Why or why not?
Answer. Because credit scores play an important role in many credit
transactions, providing consumers with more information about their
scores could be beneficial, giving them an idea of how they are viewed
by lenders and an opportunity to address any issues with their scores.
However, the industry uses many different credit scores and it is not
clear which score a CRA or other entity would be required to provide.
When a consumer purchases a score from a CRA, it will most likely not
be the score that a lender would obtain on the consumer, because there
are many scores available from various sources, with different scoring
models designed for specific types of lenders. Instead, consumers get
scores known as ``educational scores,'' which give them a general sense
of their creditworthiness.
There are concerns that, while these scores certainly provide some
information to consumers about how they are viewed by potential
creditors, a score that gives a consumer a substantially different
impression of her credit risk than a score that a lender would use
could confuse and possibly disadvantage consumers. Therefore, any
requirement that consumers receive free credit scores will need to take
these issues into account so that consumers get information that will
be of use to them.
Under current law. consumers are sometimes entitled to obtain free
credit scores when a particular score is used in a decision about their
credit. Under the FCRA, a consumer that is denied credit based on
information contained in a consumer report must be provided an adverse
action notice. If a credit score was used in order to make the adverse
decision, the adverse action notice must include that credit score.
Additionally, consumers that apply for credit at a specific rate, but,
based in whole or in part on information contained in their consumer
reports, are offered credit at a higher (worse) rate, are entitled to a
risk-based pricing notice and a free copy of their credit report. If a
credit score was used to make the decision, the risk-based pricing
notice must include that credit score. Finally, consumers applying for
a mortgage are also generally required to receive copies of any credit
scores obtained by the mortgage lender or broker for purposes of their
application. In these cases, consumers receive the same score that was
used by the lender, ensuring that they are receiving relevant and
useful information.

Question 7. Should Congress consider legislation that would require
companies that generate credit scores to provide a free annual credit
score to consumers similar to the requirement in place for free credit
reports? Why or why not?
Answer. As discussed above, credit scores play an important role in
today's credit system and allowing consumers' free access to their
credit scores could be beneficial, giving them important information
about their creditworthiness. There are many credit scores available,
however, and any legislation that requires the generation of a free
credit score will need to address the issue of exactly what score
should be provided to consumers. A general score similar to the
``educational scores'' sold by the CRAs today might give consumers
useful information, but if it does not match the scores provided to
lenders then it may mislead consumers. Commission staff would be happy
to discuss any proposed legislation with you or your staff.

Question 8. If there is no single credit score, should consumer
reporting agencies be allowed to market and sell consumers ``their''
credit score? Do those practices violate Section 5?
Answer. The ``educational scores'' provided by CRAs may be useful
to provide consumers with a general sense of their creditworthiness,
even if they are not the same scores provided to lenders.
If, however, educational scores are substantially different from
ones provided to lenders, then consumers may be misled about the
likelihood that they will be approved for credit. If their educational
scores are significantly higher than those provided to lenders, then
consumers may believe that they will obtain rates that they are not
likely to receive. Consumers that receive scores lower than those that
would be provided to potential creditors may fail to even apply for
credit because of a misbelief that they do not qualify. Therefore, a
company that markets a score that is consistently and significantly
different from those provided to lenders and that fails to inform
consumers of this fact, could be violating Section 5, and Commission
staff would examine this issue on a case-by-case basis.

Question 9. As we discussed during the hearing, short sales, which
are encouraged by the government and are an increasingly common choice
for underwater borrowers are different transactions than foreclosures.
Yet, they are being coded as foreclosures on people's credit reports.
Why are short sales being coded the same as a foreclosure in consumer
credit reports?
Answer. Based on conversations Commission staff has had with
industry, we understand that there is currently a code used to report
completed foreclosures and another code stating that a mortgage has
been ``settled for less than the full amount,'' which is used to report
short sales. While these codes are all technically accurate, it seems
that some underwriting systems have difficulty interpreting the codes.
This inability to interpret the codes and differentiate between short
sales and foreclosures on credit reports can have a detrimental effect
on consumers who have undergone short sales in the past and are seeking
to reenter the housing market.

Question 9a. Why is the FTC allowing short sales to be coded the
same as foreclosures on consumer credit reports?
Answer. Staff has discussed the issue with industry and the
Consumer Financial Protection Bureau (``CFPB''), and believes that
finding and implementing the solution to this problem will require the
cooperation of consumer reporting agencies and underwriters. Staff is
encouraging all parties to work on ways to solve the interpretation
issues, and will support these efforts in any way we can.
In the interim, Commission staff is working to prepare consumer
education materials for consumers who have undergone a short sale. The
education materials will highlight the potential issues consumers might
face, and provide some concrete steps they can take to ensure that
their previous short sales do not unduly hinder their future attempts
to purchase a home.
Commission staff would be happy to discuss these issues in detail
with you or your staff.
Thank you again for the opportunity to testify and for your
questions. I would be happy to answer any additional questions you or
your staff may have.
______

Response to Written Questions Submitted by Hon. Claire McCaskill to
Corey Stone
Question 1. The stories we heard from Ms. Thomas and that of Ms.
Campbell were both beyond belief. Both of these women have what to me
seem like obvious errors: someone else's information was in their
credit files. Yet these women filed dispute after dispute, sending
every type of paperwork imaginable, and nothing happened. They both
ultimately had to hire lawyers and have spent years dealing with these
issues, all the while living with the effects of these errors. Under
the Fair Credit Reporting Act (FCRA), consumer reporting agencies are
supposed to have ``reasonable procedures to assure maximum possible
accuracy'' and are supposed to ``conduct a reasonable reinvestigation''
to determine whether disputed information is accurate. Yet from Ms.
Thomas and Ms. Campbell's examples, it does not appear that the
measures used by Equifax, Experian, and TransUnion meet such a
reasonableness standard. Do the experiences of Ms. Thomas, Ms.
Campbell, and what we saw in the 60 Minutes report meet the FCRA's
legal requirements for accuracy and dispute procedures?
Answer. The errors described by Ms. Thomas, Ms. Campbell, and in
the 60 Minutes report raise important concerns about the file matching
and dispute procedures at consumer reporting agencies (CRAs). The
Consumer Financial Protection Bureau (Bureau) understands the
significant harm to consumers that matching errors can cause,
especially if dispute procedures do not work as intended. The Bureau
recognizes that, as a general matter, matching the right pieces of
information to the right consumer can be complex and challenging when
information characterizing individuals varies widely and furnisher
records may contain errors or incomplete identifying information about
an individual. But this challenge only heightens the importance of
adequate investigation by the CRA when a consumer disputes a particular
trade line as ``not mine.'' The Bureau is intent on using all tools
available to it, including its enforcement, research, and supervision
programs, to identify the sources of these problems and protect
consumers. Further, the Bureau's Office of Consumer Response accepts
complaints from individual consumers about consumer reporting agencies
and the Bureau encourages consumers to file a complaint if the credit
reporting agency dispute process does not result in correcting the
inaccuracy.

Question 1a. How are your agencies ensuring that these credit
reporting agencies are living up to the accuracy and dispute
obligations under the FCRA?
Answer. The Bureau has the authority to investigate and take law
enforcement actions against CRAs that violate the Fair Credit Reporting
Act (FCRA), and the Bureau will use that authority, where appropriate,
to protect consumers.
In addition, the Bureau's consumer reporting supervisory program
went into effect on October 1, 2012, after promulgation of a rule
defining larger participants in the consumer reporting industry. As
Director Cordray has noted, three early areas of focus for the
supervisory program are the reliability and accuracy of information
provided to CRAs by furnishers; the accuracy of information contained
in consumer reports; and the difficulties consumers encounter during
the dispute process.\1\
---------------------------------------------------------------------------
\1\ Richard Cordray, Director, Consumer Financial Protection
Bureau, Credit Report Field Hearing (July 16, 2012), available at
http://www.consumerfinance.gov/speeches/prepared-remarks-by-richard-
cordray-on-credit-reporting/.
---------------------------------------------------------------------------
Finally, the Bureau is currently pursuing research to better
understand the root causes of credit reporting inaccuracies. Improving
the accuracy and responsiveness of the credit reporting system for
consumers is among the Bureau's top priorities.

Question 2. It was shocking to learn that the consumer reporting
agencies have not used consumers' supporting documentation in any
meaningful way when it comes to disputes. When the consumer reporting
agencies send a consumer's dispute on to a furnisher for investigation,
those companies typically do not forward that supporting documentation
along to the furnisher as well. During the hearing, Mr. Pratt confirmed
that later this year, technology will enable the nationwide consumer
reporting agencies to give furnishers the supporting documents
submitted by consumers.
Under the FCRA, consumer reporting agencies are supposed to send
the furnisher ``all relevant information regarding the dispute that the
agency has received from the consumer.'' However, for some time now,
consumers like Judy Thomas have carefully compiled documents
demonstrating the inaccuracy of information in their files, and this
information has been ignored and replaced by a two-or three-digit code.
Do the consumer reporting agencies' practices--specifically, the
failure to forward consumers' supporting documentation to furnishers
along with their disputes--meet the obligations set forth in the FCRA?
Shouldn't ``all relevant information regarding the dispute''
necessarily include the supporting documentation that consumers submit
to the consumer reporting agencies?
Answer. As you note, the FCRA requires consumer reporting agencies
to forward all relevant information regarding a consumer dispute to the
furnisher of the information, and I believe that does mean information
in documents that is relevant to the dispute should be forwarded to
meet this legal obligation. For the first time, a Federal agency
responsible for enforcing the FCRA has supervisory authority over
larger CRAs and the ability to assess how frequently supporting
documentation is submitted by consumers with their disputes, what types
of supporting documentation are submitted, and whether supporting
documentation not forwarded to furnishers ought to be forwarded or is
otherwise being used by the CRAs in resolving disputes. A key goal of
the Bureau's supervisory program--already underway--is to examine how
larger CRAs are meeting their obligations under the FCRA, which include
this important obligation to forward ``all relevant information'' to
furnishers when investigating disputes. The three national credit
reporting companies have announced plans to upgrade their shared
dispute messaging system to enable dispute documentation supplied by
consumers to be forward to furnishers. The Bureau will use its
authority to ensure that these changes are implemented in a way that
meets these CRAs' legal obligations under the FCRA.

Question 3. Several years ago, advertisers flooded the market with
offers of ``free credit reports'' that were anything but free. These
companies signed people up for ``credit monitoring services'' and other
costly products for which they had no interest. The FTC and Congress
both acted and, in 2010, the FTC issued a rule requiring any company
offering such ``free credit reports'' to clearly disclose the existence
of the federal, truly free website, www.annualcreditreport.com.
However, it appears that these companies are still engaging in
questionable advertising and marketing practices while skirting the
intent of Congress. Now, advertisements for ``free credit scores'' and
``$1 credit reports'' are on the rise. These products appear to have
the same flaws as ``free credit reports''--consumers who order them
also unwittingly sign up for ``monitoring services'' and other products
that they do not want.
Do the advertising and marketing practices for these ``free credit
scores'' and ``$1 credit reports'' violate the Rule and/or Section 5 of
the FTC Act?
Answer. As you note, in 2010 the Federal Trade Commission amended
its Free Annual File Disclosure Rule to prevent the deceptive marketing
of ``free'' credit reports.\2\ The amended rule requires that certain
advertisements for ``free credit reports'' include prominent
disclosures designed to prevent consumers from confusing such ``free''
offers with the free annual file disclosures available through the
single centralized source, wwww.annualcreditreport.com. The amended
rule also requires nationwide CRAs to delay advertisements for products
and services available through the centralized source until after
consumers receive their free annual file disclosures, and prohibits
other practices that may interfere with the free annual file disclosure
process.\3\
---------------------------------------------------------------------------
\2\ 16 C.F.R. Sec. 610.4, now superseded by 12 C.F.R.
Sec. 1022.138.
\3\ 16 C.F.R. Sec. 610.2, now superseded by 12 C.F.R.
Sec. 1022.136.
---------------------------------------------------------------------------
The Bureau is evaluating market developments in this area and is
aware that the advertising and marketing of credit reporting products
has evolved since 2010. In general, each advertisement or marketing
practice must be evaluated on a case-by-case basis to determine if it
violates the Free Annual File Disclosure Rule or the prohibition
against unfair, deceptive, or abusive acts or practices (UDAAPs) under
the Dodd-Frank Act. Although I cannot comment on whether specific
advertisements or marketing practices violate the rule or the
prohibition against UDAAPs, the Bureau will take appropriate action,
including enforcement action, in cases where it concludes there is a
statutory or regulatory violation.

Question 4. Is Congressional action needed to stop these deceptive
advertisements?
Answer. As an independent Federal regulatory agency, the Bureau's
focus is on carrying out, implementing, and complying with the laws
enacted by Congress. The Bureau would defer to Congress on questions of
when and whether Congressional action is needed. We continue to monitor
the marketplace and oversee compliance with the Free Annual File
Disclosure Rule and UDAAP standards.

Question 5. While access to their credit report is important
information for consumers to have, we know the consumer's credit score
is an important tool used by creditors in determining a consumer's
creditworthiness. Should consumers be entitled to receive a free credit
score along with their free credit report? Why or why not?
Answer. Currently, the FCRA requires the disclosure of free credit
scores used by certain mortgage lenders and by other lenders in
connection with the provision of adverse action and risk-based pricing
notices. In other circumstances, the consumer can purchase a credit
score. Requiring consumer reporting agencies to provide a consumer with
a free credit score along with a free credit report could raise several
issues. In addition to those discussed in response to the question
below, for example, some CRAs do not generate consumer credit scores
themselves.
I note that, while a consumer can get a rough indication of her
creditworthiness from a credit score, her access to and review of her
free credit report remains of paramount importance. Regardless of the
credit scoring model used, inaccurate information in a consumer's
credit file can harm the consumer's ability to get credit.

Question 6. Should Congress consider legislation that would require
companies that generate credit scores to provide a free annual credit
score to consumers similar to the requirement in place for free credit
reports? Why or why not?
Answer. As an independent Federal regulatory agency, the Bureau's
focus is on carrying out, implementing, and complying with the laws
enacted by Congress. The Bureau would defer to Congress on questions of
when and-whether Congressional action is needed.
We note that a requirement that credit scoring companies issue free
scores could raise new issues. For example, it is important to note
that consumers do not have a single credit score. Multiple companies
sell credit scores in the commercial market and the ranks of scoring
providers continues to increase. In addition, most scoring providers
offer multiple versions of consumer credit scores, including generic
scores, industry- and company-specific scores, and educational scores
only available to consumers. Media reports indicate that one developer,
FICO, offers over 49 different credit scoring models.
Further, not all score providers base the scores they sell on their
own data. Many providers would need to gain access to underlying
consumer report data from some other entity in order to generate free
scores. The Bureau's September 2012 report provides further information
on the credit scoring market.\4\
---------------------------------------------------------------------------
\4\ Consumer Financial Protection Bureau, Analysis of Differences
between Consumer- and Creditor-Purchased Credit Scores (Sept. 2012),
available at http://files.consumerfinance.gov/f/
201209_Analysis_Differences_Consumer_Credit.pdf.

Question 7. If there is no single credit score, should consumer
reporting agencies be allowed to market and sell consumers ``their''
credit score? Do those practices violate Section 5?
Answer. Consumer reporting agencies sell multiple versions of
commercial scores as well as educational scores. The Bureau agrees
that, as a result, there is a potential for consumer confusion in the
marketplace for consumer credit scores.
As we noted in the conclusion of our September 2012 report:

This study finds that 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 of 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.\5\
---------------------------------------------------------------------------
\5\ Id. at 21.

The Bureau evaluates the marketing of consumer financial products
and services by CRAs on a case-by-case basis, and will take appropriate
action, which may include enforcement action, in cases where it
concludes that such marketing involves an unfair, deceptive or abusive
act or practice under the Dodd-Frank Act.
______

Response to Written Questions Submitted by Hon. Claire McCaskill to
Stuart K. Pratt
Question 1. When consumers search for ``free credit score'' on the
Internet, the results are staggering. Consumers are flooded with
advertisements and directed to websites operated by consumer reporting
agencies that market ``free credit score'' and ``$1 credit report''
products that have serious deficiencies--namely, consumers who order
them may also unwittingly order expensive products like ``monitoring
services'' that they do not want. Yet, unlike ``free credit reports,''
these websites lack the federally-mandated disclosure directing
consumers to the true website for free credit reports,
www.annualcreditreport.com. In developing these products, the consumer
reporting agencies appear to be doing nothing more than taking
advantage of a legal loophole in spite of Congress' clear intent to
stop these deceptive marketing practices for ``free'' products that are
not truly free, whether they involve credit reports or credit scores.
Why don't the consumer reporting agencies you represent include the
Federal disclosure directing consumers to www.annualcreditreport.com on
their websites that offer ``free credit scores'' or ``$1 credit
reports''?
Answer. Our members care greatly about ensuring that consumers have
a transparent experience when it comes to the products they offer. They
want consumers to become long-term customers who value the full suite
of services offered.
As an example of our members' approach in the marketplace in this
regard, technology allows us to identify which websites are most often
pointing consumers (e.g., referrals via a link) to
www.annualcreditreport.com. Along with the Federal Trade Commission's
website, our members' primary corporate websites, which do include
product offerings for consumers to purchase, also have links to
www.annual
creditreport.com. All are top-five referral channels for consumers
wishing to obtain a free annual credit report disclosure. Our members
will continue to review their transparency efforts. A recent example of
this ongoing effort is the fact that one of our members has now added a
link to www.annualcreditreport.com to an additional product site under
their control as a means of ensuring full transparency for consumers.
These data and actions speak well of our members' commitment to
ensuring consumers are not confused.
Our members built www.annualcreditreport.com with the goal of
ensuring consumers had an easy-to-find and easy-to-use means of
ordering their free credit report disclosures. The website is
extraordinarily successful. Consider the common commercial metric for
measuring the success of a website's market position: search engine
result/position. CDIA staff queried ``free credit report'', ``credit
report'' and ``annual credit report'' on a variety of search engines
and found that the website is the #1 or #2 search result on all major
search engines (where it is #2 this is only because the FTC is #1)
which is good news for consumers wishing to exercise their right to a
free annual credit report disclosure. Following are details of the CDIA
research:

----------------------------------------------------------------------------------------------------------------
Search Engine Results for Query: ``Free Credit Query: ``Credit Query: ``Annual Credit
www.annualcreditreport.com Report'' Report'' Report''
----------------------------------------------------------------------------------------------------------------
Bing #1 is official site #1 is official site #1 is official site
----------------------------------------------------------------------------------------------------------------
Yahoo #1 is official site #1 is official site #1 is official site
----------------------------------------------------------------------------------------------------------------
Google #1 is official site #2 is official site \1\ #1 is official site
----------------------------------------------------------------------------------------------------------------
AOL #1 is official site #2 is official site \2\ #1 is official site
----------------------------------------------------------------------------------------------------------------

Question 1a. Search results will also always include advertisements
for products, some of which may result from our members, but also
because of the offerings of other companies in the marketplace. There's
no indication that consumers who are choosing to take advantage of free
credit score offers are doing so because they are commonly confusing
these offers with their right to obtain their free credit report
disclosures through www.annualcreditreport.com. Will you and your
members commit to offering such disclosures?
---------------------------------------------------------------------------
\1\ #1 was the FTC's site which is also the top site for referrals
to www.annualcreditreport.com.
\2\ #1 was the FTC's site which is also the top site for referrals
to www.annualcreditreport.com.
---------------------------------------------------------------------------
Answer. Our members would not want consumers to confuse free credit
score offers with their right to obtain a free credit report disclosure
through www.annualcreditreport.com and as discussed above, our members
do include links on their corporate websites. This said, it doesn't
appear to us that consumers are confused when encountering a free
credit score offer which brings into question the need for a new
notice. As always, however, we welcome additional dialogue on this
point. Our members believe in establishing an honest and transparent
relationship with consumers and these are the values which guide them
as they design both their advertising and their products.

Question 2. During the hearing, concerns were raised that your
members have so far failed to utilize sufficient resources to properly
address consumer disputes. How many individuals do the nationwide
consumer reporting agencies employ to answer the toll-free number? Are
those staff members based overseas or here in the United States? What
is the average on-hold time for consumers?
Answer. We are working with our members to determine whether the
data requested is proprietary or has competitive implications. It is
important to note that the CFPB, via its supervisory powers, can review
the information you request in the context of their examination of our
members, while still keeping competitive data secure from general
public disclosure.
Regarding use of employees overseas, each of CDIA's nationwide
consumer credit reporting agency members maintains a U.S.-based
consumer relations service center. However, our members, which are
global companies, also maintain operations centers around the world to
meet the needs of their businesses in various markets including
assigning some aspects of their U.S. consumer relations processing to
service centers outside of the country. This decision brings with it
many benefits including redundancy of services and also ensuring our
members' service levels are maintained for all U.S. consumers even
during peak service hours across all time zones.\3\ Regardless of where
our members' service centers are located, these operations are in full
compliance with the requirements of the Fair Credit Reporting Act and
the extensive data security requirements imposed by rule as a result of
the Gramm-Leach-Bliley Act.
---------------------------------------------------------------------------
\3\ In addition to the four time zones which divide the
continental United States, the U.S. has the following five additional
time zones:

Alaska Standard Time Zone

Hawaii-Aleutian Time Zone

Atlantic Standard Time Zone--Puerto Rico and U.S. Virgin
Islands

Samoa Standard Time Zone

Chamorro Standard Time Zone--Guam and Northern Mariana
Islands

Question 3. The stories we heard from Ms. Thomas and Ms. Campbell
described ``mixed files'' that should have been fixed, yet both women
used your members' dispute processes for years to no avail. In fact,
those consumers, and others like them, still struggle today to get fair
results from the nationwide consumer reporting agencies, and are still
being stonewalled by the companies you represent. Does the existing
processes to ensure accuracy and dispute errors comply with the FCRA?
Are the nationwide consumer reporting agencies really acting
reasonably?
Answer. Our members' have a shared commitment to ensuring that the
highest quality data is reported to their databases and that consumers
are well served when consumers wish to dispute the accuracy of data in
their credit reports. We do believe the processes to ensure accuracy
and handling disputes comply fully with the FCRA.
With regard to handling consumer disputes please consider the
following excerpt from our written testimony which goes into greater
detail regarding our members' efforts to ensure consumers receive a
consistent and high quality experience when they have disputes
regarding data in their credit reports:

``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 [2011] PERC
data quality study discussed in the next section of this
testimony measured consumer satisfaction with the
reinvestigation process and fully 95 percent of consumers were
satisfied with the results. This fact offers a compelling
rebuttal to the unfounded accusations offered 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. \4\
---------------------------------------------------------------------------
\4\ See page 5 of the FTC Report to Congress Submitted on December
29, 2003: http://www.ftc.gov/os/2008/12/P044807fcracmpt.pdf.

With regard to accuracy of data see below the excerpt from our
written testimony that summarizes the various reports and studies
regarding the baseline accuracy of our members' databases. Consistent
with both CDIA's written and oral statements, our members are pleased
that 98 percent of credit reports are free of a material error, but
they remain committed to focusing on the 2 percent of cases where a
material error may affect a consumer.

``The accuracy of credit reports is at the center of our
members' values and there is ample empirical evidence that
their efforts are a success. Consider the findings of the
following studies/reports:

Further, in December 2012, the Consumer Financial Protection
Bureau (CFPB) published a white paper on credit reporting
stated the following: ``. . . the number of credit-active
consumers who disputed one or more items with an NCRA
[nationwide credit bureau] in 2011 ranges from 1.3 percent to
3.9 percent.''

The Federal government reports continue a consistent narrative
about the integrity of the data contained in credit reports. In
2011, the Political and Economic Research Council study found
that only 1 percent of credit reports contained a material
error.''

Question 3a. Why have your members not been able to help these
people?
Answer. It is very difficult for CDIA to speak to the details of
the consumer experiences discussed during the hearing. However, our
members do stand ready to assist these consumers if problems still
persist and none of our members would be satisfied with the results as
described by these two consumers. Ensuring that systems work for all
consumers is our members' shared goal.

Question 4. I hear from my constituents that they try for months to
get an error fixed and when they finally do, it re-appears six or
twelve months later. Ms. Thomas has experienced the same problem, over
and over again. Why do errors that have been acknowledged as such and
corrected by the nationwide consumer reporting agencies continue to
reappear on consumers' credit reports? The FCRA requires your members
to have ``reasonable procedures'' to prevent the reappearance of errors
in consumers' files that have been deleted. What systems do your
members have in place to prevent such reoccurrences? How can they
possibly be reasonable if these problems continue to persist?
Answer. Our members employ a number of strategies to prevent the
reappearance of errors. For example, the fact that data is deleted due
to a consumer dispute is transmitted back to the originating source of
the data to ensure that the source is aware of the deletion so that it
can take action on its part to not continue to re-report such data.
Once data is deleted, it is maintained in a suppression file (not the
consumers report) so that if a data source re-reports the same
information it is blocked by our members. When a data source attempts
to re-report data contained in a suppression file our members also
notify the data source of this fact to again ensure that the data
source can take actions to prevent downstream attempts to report
previously deleted data.
Data may end up being re-reported where a portfolio is sold and the
account numbers have been changed and the buyer is unaware of problems
with the account due to mismanagement by the seller. In the context of
debt collection agencies, if the client of the agency is not notified
by the collector of the deletion of data due to a dispute submitted by
a consumer to a consumer reporting agency when an account is returned
as uncollectable and the client is unaware of the fact of a deletion of
data and turns the same account over to a new agency for additional
attempts to collect. This may result in an attempt to re-report the
previously deleted account via the new debt collector. CDIA and its
Metro 2 Task Force have issued special guidance to the data furnisher
community to address debt collection practices, debt selling practices
and portfolio sales practices in an effort to ensure that all data
sources are aware of what must be done to prevent the re-reporting of
data. Our members have significantly increased their outreach to and
training (both remote-learning and in-person) of data sources in the
last three years.

Question 5. Your testimony announced that later this year, Equifax,
Experian, and TransUnion would begin to utilize technology that allows
the supporting documentation that consumers submit to be forwarded to
furnishers along with their disputes. While these efforts are
encouraging, they have taken far too long to implement.
Why have your members failed to forward supporting documentation to
furnishers with consumers' disputes? Under the FCRA, your members are
supposed to send the furnisher ``all relevant information regarding the
dispute that the agency has received from the consumer.'' Shouldn't
that include the supporting documentation that consumers submit to
support their disputes? How can these practices possibly comply with
the FCRA?
Answer. Our members designed the eOscar automated dispute system
with the goal of serving consumers and ensuring a proper and timely
transmission of the facts regarding a consumer's dispute. Making sure
consumers are well-served is an important priority.
In terms of what law requires, Federal courts have reviewed the
eOscar system and found it compliant. The Federal Trade Commission's
July 2011 staff report on the FCRA helps clarify the approaches that
may be taken under law when transmitting a dispute where it states the
following with regard to the handling of ``all relevant information'':

``. . . a CRA may provide all relevant information received
from the consumer in the notice of the dispute to the furnisher
by (a) placing a description of the relevant information in the
narrative field (e.g., ``12/15/01 ltr from S. Jones at Sears
states never late'' or ``point-of-contact D. Smith at 203-555-
1212''); and (b) employing a code that adequately and fully
describes the nature of the evidence received from the
consumer.

Our members want to meet consumer expectations and one measurement
of the results of their efforts is the 2011 PERC study which reported
that 95 percent of consumers were satisfied with the results of the
reinvestigation of the data they disputed. The new eOscar enhancement
which will require images of consumer-submitted information to be
viewed by lenders is a significant new technology undertaking which is
driven by our members' desire for ongoing improvements that benefit
consumers. While our members have chosen to build a new enhancement to
the eOscar system, it is not being installed in response to a question
of the current system's compliance with the FCRA.

Question 5a. Why has it taken so long to do something that seems so
fundamental to the process, and so simple to do?
Answer. The timing of the decision to add an enhancement to the
current system is based on a number of factors:

We believe that with the new CFPB as our regulator we can
address various legal issues that have been relevant to our
discussions in the past. Questions of law have been a
significant impediment to moving forward in the past.

Since the Metro 2 data format was issued our members have
actively worked with the data furnishing community (over 10,000
sources) to convert them to this new format. Only recently, and
in part as a result of both relatively new rules regarding
accuracy and integrity as well as the creation of the CFPB,
have we seen the majority of data sources convert to furnishing
data in the Metro 2 Format which is the format upon which the
eOscar system is based.

Similar to our members' experience with Metro 2 adoption
rates, it has taken significant time and investment to move
virtually all data furnishers onto the eOscar platform and only
recently has adoption be sufficient to consider adding
enhancements such as the new imaging project.

Free from the lender when receiving an adverse action
notice.

Free from the lender when receiving a risk-based pricing
notice.

Free from the lender when a consumer makes an application
for a mortgage.

At a fair and reasonable fee upon request of the consumer.

In establishing significant access to credit scores for consumers
when purchased by lenders it has recognized that credit scores are a
significant investment in software design and ultimately are
intellectual property and that those who invest in the development of
credit scoring software should be compensated. Congress has created a
careful balance of providing free access to credit report disclosures
(the data which underlies credit scores), free access to scores
purchased by lenders (whether it is a credit approval or declination)
and a regulated ``fair and reasonable'' price for credit scores
otherwise obtained by consumers from consumer reporting agencies.

Question 6a. Should Congress consider legislation that would
require companies that generate credit scores to provide a free annual
credit score to consumers similar to the requirement in place for free
credit reports? Why or why not?
Answer. No, for the reasons stated in the previous question.
Congress has already ensured that consumers have access to credit
scores in general and specifically in the context of many common credit
transactions.

Question 6b. If there is no single credit score, should consumer
reporting agencies be allowed to market and sell consumers ``their''
credit score? Do those practices violate Section 5?
Answer. CDIA member products which provide access to credit scores
are a benefit to consumers. Our members should be allowed to market and
sell their credit scores to consumers and there is no Section 5
question on the table with regard to them.
Because there is no single credit score in the marketplace all
score disclosures serve the important purpose of expanding financial
literacy of consumers. In fact, in 2012 the Consumer Federation of
America stated that ``[w]hat's most important about a score is not its
absolute level, but its relation to other scores from the same
source.'' In other words the disclosure of a score is educational. It
helps consumers understand where they fall relative to the rest of the
consumer population.
The CFPB's reports on credit scores set the record straight with
regard to making credit scores available in the marketplace. Consider
the two very important points excerpted from the July 2011 report:

``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.''

``lenders use credit scores produced by many different
scoring models.''

The CFPB's September 2012 report made clear that credit scores of
all types correlate closely with each other and thus all serve a
valuable educational purpose for consumers. Consider the following
excerpt from the executive summary of their report:

``Correlations across the results of scoring models were
high, generally over .90 (out of a possible one).''

It is clear that the current marketplace of credit score access is
benefitting consumers and expanding their understanding of a variety of
core financial literacy issues, including taking advantage of having
access to free credit reports on an annual basis.
______

Response to Written Questions Submitted by Hon. Claire Mccaskill to
J. Howard Beales III
Question 1. While access to their credit report is important
information for consumers to have, we know the consumer's credit score
is an important tool used by creditors in determining a consumer's
creditworthiness. Should consumers be entitled to receive a free credit
score along with their free credit report? Why or why not?
Answer. Consumers should not be entitled to receive a free credit
score along with their free credit report. The requirement to provide
each consumer with a free credit report each year is a useful mechanism
to help assure the accuracy of credit reports. Consumers are often the
only ones who can identify errors in their credit report, so inspecting
credit reports and disputing inaccuracies increases the value of the
credit reporting system for everyone. When it first supported the
requirement for a free annual report in 2003, the FTC specifically
pointed to this benefit of free disclosure.\1\
---------------------------------------------------------------------------
\1\ Prepared Statement of the Federal Trade Commission on The Fair
Credit Reporting Act Before the Senate Committee on Banking, Housing,
and Urban Affairs, July 10, 2003.
---------------------------------------------------------------------------
In contrast, a credit score is an analytical summary derived from
the information in a credit report. Although consumers can identify
errors in the underlying credit report, they cannot identify errors in
their score. Thus, unlike credit report disclosure, score disclosure
would not advance the public purpose of improving the accuracy of
credit reports. Moreover, because there are numerous credit scoring
models in widespread use, disclosing a single score could do more to
create consumer confusion than it would do to enhance consumer
education.
Some credit scoring models are developed by the credit reporting
agencies themselves. Others are developed by third party providers such
as Fair Issac. Still others are developed by individual creditors, may
be different for different types of transactions, and may incorporate
information that is not available in the credit report itself. Thus, a
single credit report can generate numerous credit scores, depending on
the creditor and the scoring model employed. Credit reporting agencies
may not even know some of these scores. They may provide third party
scores as a service to their customers, but they do so under a license
from the third party score developer, and would likely have to pay to
give a consumer a copy of that score. Requiring any business to
purchase a product from another business for the sole purposes of
giving it to consumers for free is problematic at best. Although credit
reporting agencies could provide their own scores, those scores may not
be as widely used as other scores in making credit decisions.

Question 2. Should Congress consider legislation that would require
companies that generate credit scores to provide a free annual credit
score to consumers similar to the requirement in place for free credit
reports? Why or why not?
Answer. No. As discussed above, providing consumers with their
credit score does not serve the public purpose of enhancing the
accuracy of the credit reporting system. If scores are to be provided,
the logical place to do so would be to require the lender to disclose
the score as part of an adverse action notice. Even there, however, the
score may distract consumers from the more useful information contained
in adverse action notices, particularly the key elements of their
credit report that produce the largest reductions in their credit
score.

Question 3. If there is no single credit score, should consumer
reporting agencies be allowed to market and sell consumers ``their''
credit score? Do those practices violate Section 5?
Answer. Restricting the ability of participants in the credit
reporting system to market credit scores, truthfully, to interested
consumers would serve no useful purpose. Sellers should be clear that
they are offering a score, and avoid creating the misimpression that
the offered score is the consumer's only score.