Congress Eyeing Banks as Culprits In Credit Reports
Although credit reporting bureaus have taken much of the blame for inaccurate consumer credit ratings, Congress is now turning the spotlight on banks and others that provide the data.
Financial institutions and consumer finance companies are protected by the Fair Credit Reporting Act, which stipulates that the sources of financial data are not legally liable for errors that arise in credit reports.
But Washington is feeling the heat from angry consumers. The Federal Trade Commission testified that 9,000 inquiries and complaints came in last year about inaccurate credit reports, making them the single biggest source of complaints to the agency.
As a result, a number of bills are winding their way through Congress. Some propose to extend liability to the sources of credit report data, making it easier for consumers to sue banks and other credit grantors if they are found to be responsible for errors.
Bank-Bureau Cooperation
Bankers, hoping to forestall further regulation, said they favor closer cooperation with the Big Three national credit bureaus - TRW Inc., Equifax Inc., and Marmon Holdings' Trans Union Credit Information Co.-to correct inaccurate information.
But banks argue that since reporting errors are often beyond their control, they should not have the same legal exposure as credit bureaus. Most mistakes arise when credit bureaus misapply information accurately supplied by banks, the banks say.
"We know there's a problem, and we would want to be part of a responsible effort to correct these types of problems," said Lee S. Adams, vice president and general counsel at the Bank One, Columbus, subsidiary of Banc One Corp., one of the country's largest credit card issuers. "However, we would not be in favor of being treated the same as credit bureaus, because we fulfill a different part in the process."
Panel to Consolidate Bills
Rep. Esteban E. Torres, D-Calif., chairman of the House Banking Subcommittee on Consumer Affairs, plans to introduce a bill this month that would improve the accuracy of reports and make it easier for consumers to get errors corrected. At the same time, it could increase banks' liability when inaccuracies arise or persist in credit reports.
The subcommittee is reviewing six bills on the issue of credit reporting, and Rep. Torres hopes to incorporate into his bill the proposals of the other lawmakers.
While it is not yet clear that Rep. Torres' consolidated bill would extend liability to banks, three of the bills he is reviewing would do so. One would extend liability to banks but impose different responsibilities on credit granters and credit bureaus.
Consumers Union's View
"We think that, to the extent that creditors are acting as bureaus to their own customers, by supplying information about their payment histories to outsiders, [creditors] should be treated like credit bureaus under the Act," said Michele Meier, counsel for government affairs at Consumers Union in Washington.
Albert Jacquez, staff director of the consumer affairs subcommittee, said the Fair Credit Reporting Act requires that consumers allege "willful negligence" on the part of credit bureaus in order to sue.
Inaccuracies in credit reports occur typically in one of several ways. One of the most common occurs after information has left the credit granters' hands, when the credit bureau mistakenly matches credit information from a bank or department store to the wrong consumer.
Probability Methods
Credit bureaus use probability scoring techniques to determine whether to apply a piece of data from a credit granter to a certain account. In cases where there is no exact match with a name or account, a probability algorithm is used to determine whether a new file should be started or the data applied to an existing file.
Recent lawsuits against TRW in New York State and in Texas have alleged that the company was too lax in this area, by applying information to wrong accounts in many cases instead of creating new files.
Observers said the data received from banks is generally fairly accurate.
"My impression is the information the banks send us is pretty correct," said Oscar Marquis, vice president and general counsel at Chicago-based Trans Union. Banks generate statements and invoices from the same information so that inaccurate information would be disputed by consumers very quickly, he said.
Credit Grantors' Errors
But some inaccuracies slip through due to mistakes made by credit grantors.
These can occur when a bank or department store mistakenly applies a charge to a consumer. The consumer may catch the error in his account statement, but by that time, the information has already been sent on to a credit bureau and may have been picked up by all three major bureaus.
Banks, for example, may continue to bill a consumer for credit card fees long after the consumer has canceled the credit card and changed addresses. The bank may then report the customer as delinquent.
Antimistake Legislation
Rep. Torres' office is considering several measures to reduce mistakes. It may require that, once an error has been identified, it must be corrected in a relatively short period, such as 30 days.
Mr. Jacquez, the congressional aide, said another suggestion has been use of an audit to determine just how well or poorly credit grantors and bureaus are fixing errors. The subcommittee is also looking into giving regulatory responsibility over the consumer credit industry to the Federal Trade Commission. Currently, the FTC has enforcement responsibility only over credit bureaus.
The three national credit bureaus are also discussing linking up in some way so that, when updated information comes into one credit bureau, the other two are automatically notified, according to Norm Magnusson, a spokesman for the Association of Credit Bureaus, Washington.
Improvement Adopted
Some changes have already been made. Last month, credit grantors began using a single form that notifies all national credit bureaus simultaneously of changes or updates in a consumer's record.
Credit bureaus are also growing sensitive to consumer complaints about a lack of confidentiality in credit reports. Many have been active in repackaging consumer data for use by marketers. But last month, after heavy criticism from consumer advocates, Equifax said it would abandon that business.
