Congress Takes Aim at Credit Reporting
Are credit reports becoming a sore point between you and your customers? Have you turned down any of your customers based on information in their credit reports only to find out later their reports were inaccurate or incomplete? Are you satisfied with the quality of the data you are receiving from credit bureaus?
One thing is for sure: your customers aren't.
In the last year, complaints about credit bureaus have sky-rocketed to the top of the Federal Trade Commission's list of consumer gripes, outdistancing even the perennial favorite: auto repair shops. The news media are filled with horror stories about consumers battling unresponsive credit bureaus. AT&T Universal Card Services, the major new card issuer, joined the fray when it began requiring credit bureaus to improve responsiveness to AT&T card applicants.
Congress Expected to Act
This fall, the House Subcommittee on Consumer Affairs and Coinage is expected to start overhauling the 21-year-old Fair Credit Reporting Act. And it is clear that credit bureaus aren't the only ones who will be feeling the legislative heat. Subscribers - banks, card issuers, collection agencies, and others that report information to credit bureaus - are coming under greater scrutiny for their role in the credit reporting system.
What are some of the proposed requirements and how will they affect you as a credit grantor?
* Accuracy. Consumer groups are calling on Congress to mandate stricter accuracy standards in the collection, sorting, and reporting of data by credit bureaus. But it would be unfair to blame only the credit bureaus for inaccuracy problems, since many errors in credit reports originate with the subscribers - banks, car dealers, collection agencies, finance companies, employers, and insurance companies - who reported the data in the first place.
Some credit grantors so frequently provide bad data to bureaus that other credit grantors don't even consider their information when evaluating applications. Even those credit grantors that consistently supply good data sometimes make mistakes: a disputed balance is erroneously reported as delinquent, or an account that has been paid off and closed is still listed on the report as open with a sizable balance, for example.
Better Response Needed
To improve accuracy, subscribers must improve their procedures for responding to consumer disputes. Currently, when a credit bureau receives a dispute letter from a consumer alleging that information in his file is wrong, it forwards that dispute to the subscriber who reported the information.
At many banks and retail credit offices, responding to requests for reverification takes a low priority. Some credit grantors respond to disputes without conducting a careful investigation, while others never respond at all. If the credit bureau does not receive a response to the dispute within a reasonable time period, it must by law drop the information from the credit file.
The problem is, if the subscriber's records still contain the erroneous data, the next time its tapes are sent to the credit bureau, the same information is likely to go right back on the file.
Consumer groups want subscribers to be required to respond promptly when consumers dispute the information they have reported to credit bureaus as inaccurate or incomplete.
Pressure for Corrections
If the contested information could not be verified within a reasonable time period, the credit bureau would be required to remove the data permanently from the consumer's file. If the subscriber reported the erroneous information to more than one credit bureau, it would be required to provide a correction to each of the bureaus to which it reports.
In addition, if a dispute is reinvestigated and the information is determined to be correct as reported, the credit bureau would be required to tell the consumer who, specifically, it contacted in the reinvestigation. If the consumer still thinks the information is wrong, he will be able easily to contact the subscriber to pursue the dispute.
By designating a specific person or department to handle credit file disputes, credit grantors will also be able to respond quickly to consumers who choose to bypass the credit bureau when trying to correct erroneous file information.
* Financial privacy. Most Americans expect their personal financial data to be held in confidence by credit bureaus and financial institutions. But some well-publicized credit bureau break-ins - as well as news stories about the numerous ways credit data is packaged and sold by bureaus - are shaking consumers' faith in the security of the system.
The credit industry wants to curb unauthorized access of credit files by imposing tougher penalties on people who have already illegally peeked at them, but consumer groups think that's like closing the barn door after the horse is out.
This proposed solution doesn't solve the problem of users who legally have access to credit files, but use them for unwarranted purposes. Auto dealers who surreptitiously pull credit files of car shoppers who are out on test drives are the classic example of this type of questionable snooping.
To put a stop to both types of unauthorized access, consumer groups are proposing that Congress require all subscribers to obtain written permission from consumers before pulling their files. Credit grantors would be required to keep copies of those authorizations for two years, and make them available to consumers or credit bureaus who claim unauthorized access.
Complying with such a requirement should not be difficult for most subscribers, since most already require signatures on applications, and since the Equal Credit Opportunity Act requires that most credit applications must be kept on file for two years.
Consumer groups also propose that Congress tighten the definition of credit reports and credit reporting agencies so that banks selling marketing lists containing information about their customers' credit habits would be subject to the FCRA.
Equifax recently announced that it would stop selling marketing lists containing information derived from credit files, and TRW has been sued by New York Attorney General Robert Abrams for selling such lists.
Credit card issuers, however, can sell similar lists derived from information in their customer files and, as long as they don't sell them for credit granting purposes, are generally exempt from the act. Consumer groups want to hold credit grantors to the same standards of confidentiality as apply to credit bureaus.
* Consumer education. Most consumers don't understand how the credit reporting system works. They don't know who compiles credit reports, how to get them, or how to read them. One of the main thrusts of the legislative proposals is to equip consumers with the information they need to monitor their own credit files. Several of those proposals would require subscribers to provide consumers with information about their rights under the FCRA.
We believe subscribers are ideal candidates for this educational role, since they have direct and often ongoing contact with consumers through applications, adverse-action letters, billing statements, and other correspondence.
Credit grantors are likely to react to many of these proposals as too burdensome or expensive to implement. But the benefit to the industry is clear: accurate, complete credit bureau data mean better loan decisions. The only way to ensure maximum accuracy of credit files is to allow consumers to see them, and then promptly correct errors.
It's far more beneficial to credit card issuers and their customers to fix errors this way, than to wait until customers are angry because they have been turned down for a card. Wouldn't loan officers rather spend their time approving loans than trying to sort out mixed-up credit reports?
Errors Could Be Numerous
Even the credit bureau industry acknowledges that about a fourth of the reports obtained by consumers are disputed and subsequently corrected. If only a small percentage of those errors are serious enough to cause rejection for loans, however, that still means hundreds of thousands of consumers that credit grantors could be turning into customers for loans, overdraft lines of credit, and credit cards.
Many of the reforms now before Congress would provide increased access to credit and greater confidence in the credit system, which means card issuers will have more satisfied customers.
PHOTO : GERRI DETWEILER looks at likely impact of action in Congress.