Rep. Maxine Waters, D-Calif., plans to introduce the Fair Credit Reporting Improvement Act of 2014 on Wednesday, a measure to overhaul the 44-year-old law governing how lenders report consumer payments to credit bureaus.
Her plan would add nearly 20 provisions or repairs, including proposals to shorten the amount of time negative marks remain on a credit report from seven to four years, remove all settled debts from reports and erase private student loan defaults for borrowers once they make nine consecutive, timely payments.
Waters is the top Democrat on the House Financial Services Committee. Updating the Fair Credit Reporting Act, according to Waters, could help millions of Americans receive better interest rates on mortgages, autos and student loans.
Potential problems in the reporting process have drawn attention this year, in part, after a study released by the Consumer Financial Protection Bureau, using data from five million anonymous credit records, found consumers may be unfairly penalized for medical debts that go to collections.
Consumers with medical bills in collection can see their credit scores hit by as much as 22 points, the study revealed, compared to those with other types of debt. The CFPB said credit scoring models were unfairly penalizing people with medical debt because they do not differentiate between medical versus non-medical debts nor paid versus unpaid medical bills when in collection.
Unlike other types of debt, medical bills are typically the result of unpredictable and pricey events that are not always immediately covered by insurance. The CFPB found that people saddled with such debt had otherwise good track records of paying their bills on time, leading the bureau to conclude that unpaid medical debt was not a clear indicator of credit risk.
Waters sent a letter to House Financial Services Committee chairman Jeb Hensarling (R-Tex.) after the CFPB report, requesting a hearing on the state of the credit reporting system.
On Wednesday, the committee will hear testimony from academics, consumer attorneys and industry representatives about the issue.
Key provisions of the Fair Credit Reporting Improvement Act of 2014:
Provide relief to millions of borrowers victimized by predatory mortgage lenders and servicers, by removing adverse information about these residential loans that are found to be unfair, deceptive, abusive, fraudulent or illegal.
Shorten the time that most adverse information can remain on a credit report by three years.
Give consumers the ability to verify the accuracy and completeness of their credit reports, by mandating furnishers retain all relevant records for as long as adverse information remains on a persons credit report.
Give distressed private education loan borrowers the same chance to repair their credit as federal student loan borrowers, by removing adverse information when delinquent borrowers make nine consecutive, on-time monthly payments on their loans.
Eliminate punitive credit scoring practices by removing fully paid or settled debt from credit reports, including medical debt, which has been found not to be a reliable predictor of a persons creditworthiness.
Prohibit companies from using credit checks to weed out job applicants. Advocacy groups and lawmakers say the practice leads to long-term unemployment and disproportionately impacts women and minorities whose credit was damaged during the financial crisis.
Fair Isaac announced in August plans to refine its credit scoring model to offer options to differentiate medical from non-medical collection agency accounts. The Minneapolis-based company decided on the new approach after meeting with major lenders, large customers and regulators. The groups suggested medical debt is unfairly penalizing consumers' scores.
The revamped credit score model will not weigh medical debt as heavily as previous versions, a key change given that medical debt accounts for nearly half of all unpaid collections on consumers' credit reports. The new model also includes fresh methods for evaluating consumers with limited credit history.
Fair Isaac is providing the model to the credit bureaus, which will start their own testing and verification process, Anthony Sprauve, a Fair Isaac senior consumer credit specialist, said in August. Once that is done, the general scorecard will be made available to lenders.
Waters said while Fair Isaacs decision is an important step, it is not comprehensive reform.
Waters hopes to get the Senate to introduce a companion version of her bill.