Last week the Consumer Financial Protection Bureau (CFPB) released a study focusing on the “infrastructure and processes” used by the three major Nationwide Credit Reporting Agencies, Experian, Equifax and Transunion (NCRAs).
The study focused on the vital role the credit reporting industry plays in lives of consumers regarding finding credit and managing debt in addition to the accuracy of information being reported in credit files.
It stated “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.”
The study primarily concentrated on the basic systems used to collect, organize and maintain consumer data. Richard Cordray, CFPB Director said “…the study brings us one big step forward in understanding this industry and making it more transparent for consumers. The industry is critical in our economy. Without credit reporting, many consumers would likely be unable to get credit.”
Cordray further said only 1 in 5 Americans check their credit reports each year. “This is a shame because the most effective way for consumers to identify errors in their reports is to obtain copies of them and review them. This is also a shame because — while we do not know for sure how common these errors are — we know that people do find errors. And if consumers are not checking their reports, these errors can persist and pop up when a consumer can least afford them, blocking them for borrowing money for a larger purchase or causing them to pay a higher rate of interest than they should,” he said.
Some of the major findings of the study were as follows:
The U.S. credit reporting system encompasses a vast flow and store of information. The NCRAs (Experian, Equifax and Transunion) 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% of all trade lines.
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.
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%), 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% of trade line disputes internally (without furnisher involvement) and refer the remaining 85% 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.
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% of the trade lines they furnish in a given year. Almost 40% of disputes handled by the NCRAs on average can be linked to collections items.
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
On September 30, 2012, the CFPB began to supervise companies with annual receipts over $7 million from “consumer reporting.” 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.
As a result, 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. If you have a complaint or an unresolved dispute, contact the Consumer Financial Protection Bureau.