The Federal Trade Commission is causing consternation in the credit reporting business with its latest interpretation of the Fair Credit Reporting Act.
The commission is seeking public comment on its commentary, published in the Federal Register on June 17, regarding the disclosure of so called "risk scores," which lenders use to determine a consumer's credit worthiness and future payment patterns.
The FTC, the agency responsible for enforcing and interpreting the act, is proposing that credit bureaus disclose these numerical scores to consumers who request their credit reports. Currently, the scores are only available to the bureaus' clients.
Credit reporting companies do not support the FTC's position because, among other reasons, they believe that explaining how the scores are calculated would confuse consumers.
TRW Information Services, for example, uses more than 25 models for developing these scores, which synthesize the information that is disclosed to consumers into one mathematical calculation.
The Orange, Calif., credit reporting company developed three of its own standard scoring methods. It also customizes scores for its clients based on their credit underwriting criteria, and it subscribes to various risk models from companies that develop credit data bases like Fair, Isaacs & Co. Each method uses a different scale, so a 695 score could be considered good by one lender and bad by another, said a spokeswoman for TRW.
Wants Scores Explained
The FTC's proposal would require that an explanation accompany these scores. The agency also proposes that credit bureaus provide consumers with each type of risk score that was furnished to clients within the last six months preceding the consumer's request, or within two years if the report was for employment purposes.
Credit bureaus maintain that their customer service staff will be deluged by calls from consumers who do not understand the explanations. The expense incurred from handling an increase in questions will be passed along to consumers eventually.
Credit reporting companies also say it is unfair to ask their clients and vendors to reveal the key factors they use to create a score, because it would allow a competitor to access this proprietary information.
To avoid disclosing vauable modeling information to competitors, lenders may be forced to add a processing agent to the scoring method, said a spokes-woman for TRW.
Since the FTC commentary only addresses credit reporting companies, a third party would be exempt from the agency's proposal, and would therefore provide a way to get around it.
Finally, credit reporting companies argue that the risk score is essentially meaningless to consumers because the numbers can change frequently, based on a consumer's evolving credit record.
Rewriting the Law?
Martin E. Abrams, director of privacy and consumer policy for TRW, cautions that the FTC commentary, "is really trying to establish a new law, and that should be of concern to the whole industry."
A spokesman for Equifax Financial Information Services said, "We support a score disclosure approach that is simple, clear, educational, balanced and meaningful, and we question whether the FTC's proposed amendment meets that criterion."
The commentary, open for comment until Aug. 18, serves as an important guide for the industry, consumer groups, and the courts, but credit bureaus are quick to point out that it does not have regulatory power.
"We can also say what we believe the law is," said Mr. Abrams.
Scores Used as Substitute
Consumerists favor the FTC's position. Ed Mierzwinski of U.S. Public Interest Research Group said that in some cases risk scores are substituted for credit reports so they are a very significant part of a lenders decision to give a consumer credit.
It doesn't matter whether the score fluctuates because consumers can still benefit from monitoring if their scores are going up or down, Mr. Mierzwinski argues.
"Not everyone will understand the language initially," said William Leibovici, who heads up Maryland's consumer protection division and is a member of the fair credit reporting task force of the National Association of Attorneys General.
But disclosing risk scores to the public is important because they, "provide a potential creditor with a quick read on the consumer, and it will be equally beneficial for the consumer to have this information," Mr. Leibovici added.
The FTC has been battling the industry on this issue for a number of years. In 1992 it amended its commentary to say that credit bureaus should "disclose riskscores to any consumers who request information about themselves that is maintained by the bureau."
This statement, however, was "not specific enough and left questions unanswere," said Clarke Brinckerhoff, of the FTC's division of credit practices. Consequently, credit bureaus sought further clarification, and that is what the FTC delivered on June 17.
The FTC requested comments on a number of questions at the end of its commentary, one of which asks whether there is "some approach other than disclosure of actual risk scores that would better inform consumers of the information about them being reported by consumer reporting agencies?"
This question is likely to be the focus of the responses from companies in the credit reporting industry. Mr. Abrams agreed that disclosing some kind of generic score "makes more sense."