Credit Bureaus Quietly Fix Reporting Flaws

A class-action lawsuit against the three major credit bureaus made headlines last week when a federal appeals court threw out a proposed $45 million settlement. But the court case has a larger significance, which is just now coming into view: it's led to major improvements in how the three companies generate consumer credit reports.

In the lawsuit, thousands of U.S. consumers allege that Equifax, Experian and TransUnion were issuing credit reports that dinged them for debts they had already discharged in bankruptcy. To address the problem, all three companies have made the necessary changes to their databases, says John Ulzheimer, who served as the plaintiffs' expert witness.

"What the bureaus did has actually been very, very effective," says Ulzheimer, the president of consumer education at SmartCredit.com. "Because of these changes, you have millions of consumer disputes that are not being filed."

Under the old system, borrowers had to provide evidence that their debts had been discharged in bankruptcy in order to get the records expunged. So the onus was on consumers to challenge errors that might lead to a higher cost of credit.

Now those records are automatically deleted from credit files unless the lender presents evidence that the debt was not discharged in court. For banks and other buyers of credit reports, the changes provide a more accurate picture of the consumer's current debt obligations.

The three credit bureaus made the changes several years ago, according to Ulzheimer. But with the class-action suit still pending, they had not publicized the improvements.

Experian declined to discuss the changes. Equifax and TransUnion did not return calls seeking comment.

Despite the improvements, consumer credit reports still contain many errors. Five percent of U.S. consumers have errors on their reports that could lead to them paying more for a financial product, according to a recent study by the Federal Trade Commission.

But most of the errors on consumer credit reports today cannot be fixed with the implementation of broad, system-wide changes, like those that remedied the problems with bankruptcy-related debt, according to Ulzheimer.

In most instances, errors on credit reports will not be noticed unless consumers flag them, he says. "Otherwise no one will know that something is wrong."

The recent appeals court decision in the credit reporting suit scrapped a monetary settlement that the three agencies reached with affected consumers.

Under the proposed settlement, the plaintiffs named in the suit were to receive up to $5,000 each, while other members of the class who suffered harm would get $150 to $750 each. Lawyers for the plaintiffs were to receive a total of $16.7 million.

The Ninth Circuit Court of Appeals concluded that because the named plaintiffs stood to recover more money than the other members of the class, they had a financial incentive to support it, regardless of its fairness.

It's not clear whether the decision will have much impact on other class-action suits. "I don't think it's got any really broad significance," says Alan Kaplinsky, an attorney at Ballard Spahr.

He believes that the financial terms of the deal would have been OK'd if the settlement had been written differently.

Michael Caddell represents plaintiffs in the case. He vows to revise the settlement to address the appeals court's concern that it disproportionately benefited the named plaintiffs.

"We're going to go back and see if we can't make it right," he says.