The FACT Act's Hidden Costs

  There is no getting around that government regulation brings with it another layer of operating costs. Whether it involves the implementation of a new technology, reporting system or accounting procedure, regulatory compliance often does not come cheap.
  In most cases, the expenses for a new software system or operational procedure can be calculated in advance of compliance. But so-called soft costs, such as exactly how many more workers may be needed to do what the new rules require, can be difficult to predict. Hence, it is hard for businesses to get a true handle on their cost increases until they have lived with the new regulations for a while.
  That scenario is certainly expected to hold true with the Fair and Accurate Credit Transactions Act of 2003, or FACT Act. President Bush signed the sweeping legislation last December, but many of its major provisions don't go into effect until Dec. 1. Federal bank regulators as well as the Federal Trade Commission, which has jurisdiction over credit-reporting agencies as well as third-party collection agencies, have been spending much of this year gathering comments and cranking out regulations to implement the new law. The FACT Act updates the 34-year-old Fair Credit Reporting Act, the law governing the use of credit reports, and has major provisions intended to reduce identity theft, the early 21st Century's most notorious nonviolent crime.
  Under the FACT Act, collections agencies that provide the credit-reporting agencies with consumer data are responsible for resolving disputed information that appears on a consumer's credit report. In the past, collections agencies that spotted a discrepancy on a credit report contacted one or all of the credit bureaus about the error, which then worked with the data supplier, such as a card issuer, to resolve the dispute.
  Subsequently, dispute resolution often took months as the consumer wound her way through a maze of contacts to find the party responsible for the error in the first place. Such lengthy dispute resolutions will no longer be the case under the FACT Act, which squarely places the liability for resolution of disputed credit-report data on the furnisher of the data in question. The definition of a data provider includes collections agencies that purchase portfolios of charged-off receivables and amend the credit reports of affected consumers as they work the accounts.
  With this in mind, collections agencies as well as lenders expect their operating costs to rise beyond merely the price increase for credit reports announced this summer by the three major credit-reporting agencies.
  "With any regulatory change there are broader cost implications than the immediate exercise of compliance," explains Nessa Feddis, senior federal counsel for the American Bankers Association, Washington D.C. "A lot of indirect costs can be expected."
  Investigating Complaints
  A substantial portion of those costs will fall on collections agencies, which must report consumer disputes that come to them regarding information contained in their credit reports. A likely example is if a consumer contests a delinquency by claiming the transaction or transactions in question resulted from identity theft. Many of the additional costs incurred by collections agencies during the dispute resolution process will result from increased staff to investigate complaints.
  "We are going to have to spend a lot more time investigating disputes and filing reports on the dispute resolution process," says Brian Callahan, vice president of financial reporting for Horsham, Pa.-based NCO Group Inc., a leading collections agency. "This means more manpower to resolve disputes, which right now makes it tough to quantify the actual cost increase, because it is too early in the process."
  These costs come on top of the July announcement that Atlanta-based Equifax Inc. and Chicago-based TransUnion will charge their business customers 11 cents more per credit report starting in December. Costa Mesa, Calif.-based Experian followed by upping the price of a credit report for commercial clients by 8%. Experian won't say why it chose a percentage-based increase rather than a flat fee.
  The three national credit-reporting agencies explained the increases reflect their cost of doing business under the FACT Act. Neither Equifax nor Trans Union executives were available for interviews.
  About a month after announcing its price hike, Equifax pushed back implementation from the original Oct. 1 date to Dec. 1 to coincide with the official start of the FACT Act. Equifax told CCM sister publication CardLine in August the October date was intended as a way to initiate a dialogue with its commercial clients about the pending increase. Having achieved that goal, Equifax opted to move it back to coincide with the compliance date for the new law. Equifax says the increase will apply to consumer-oriented products and to credit card issuers using Equifax data to develop prescreened lists of prospects for card solicitations.
  While none of the Big 3 credit bureaus revealed what they charged commercial customers before the price hike, Experian is offering a 50% discount on credit reports ordered during the fourth quarter. Experian is offering the incentives as a way for clients to adequately budget for the increased beginning in 2005.
  Performance Criteria
  Once the discount period ends, Experian intends to offer commercial customers a new set of incentives starting in 2005 that can help reduce the cost of a credit report. The incentives will be based on performance criteria that include furnishing data in Metro 2, a data-reporting format preferred by the credit bureaus. Currently, about one-third of Experian's customers use the format, according to Peg Smith, an Experian vice president.
  Metro 2 works in conjunction with E-Oscar, a Web-based software platform that allows furnishers of credit data and the bureaus to communicate more efficiently about consumer credit-report disputes. Furnishers also must achieve a 95% success rate when it comes to handling consumer disputes over data quality in order to qualify for Experian's discount. Experian expects to announce more details about incentives available in 2005 after Nov. 1.
  The FACT Act stipulates that consumers can request one free report annually containing data from each credit-reporting agency. The credit bureaus are required to build a centralized system for ordering and handling data disputes. The system is intended to help the bureaus better anticipate the crush of orders for free credit reports. Consumers can request a report via the Internet, e-mail, and phone or by letter. Prior to the FACT Act, only seven states had laws requiring the bureaus to provide a free credit report annually to consumers upon request.
  "Right now the cost of providing free credit reports is opaque, because we have no idea of how many reports will be requested or in what time frame," says Smith. "We are figuring three times the current volume of requests."
  Unknown Costs
  While the number of actual requests can exceed the projected amount, there is a larger, unknown cost over which the industry is holding its breath-the cost of dispute resolution.
  "Data disputes or consumer questions about data will be the bigger cost to us," says Smith. "The cost of doing business will rise for us and our clients, directly and indirectly."
  Prior to the FACT Act, Experian employed about 400 personnel to handle disputes. That workforce could grow about 50%, according to Smith. Hence, collections agencies and card issuers fully expect these and other indirect costs associated with FACT Act compliance to be passed down the line.
  "Dispute resolution is going to put pressure on the credit bureaus to process data differently, and they will likely pass along those additional costs to their business clients," predicts NCO's Callahan.
  Experian's Smith acknowledges that the additional staff needed to handle dispute resolution will certainly increase her firm's cost of doing business. The difficulty is that the ultimate number of new workers can only be estimated at this point.
  Despite this uncertainty, the dispute resolution requirements of the FACT Act represent a compromise by collections agencies, the broader lending industry and consumer groups, according to Washington observers. ACA International, the Edina, Minn.-based trade association for collections agencies, echoes that sentiment. ACA championed the data-responsibility amendment in the FACT Act, according to Rozanne Andersen, vice president and general counsel.
  "The amendment shifts the liability to the logical source-the data originator," says Andersen.
  Prior to the amendment, the liability for correcting a data dispute was not as well defined, says Andersen. That posed potential problems for collections agencies working charged-off accounts for card issuers. Although the agencies typically updated credit reports with information they received from the creditor client, they were sometimes incorrectly listed as the original source of the data.
  "Now if an agency updates a credit report using credit-grantor data, the liability falls on the originator of the data," says Andersen
  Data Integrity
  Purchasers of charged-off credit card accounts that update the accounts they're working with new information, however, become data originators and hence do have liability. But that is not as frightening a prospect as collections agencies might think, even though identity theft leads to a large number of disputes by consumers deemed to be delinquent. While some credit reports do contain such errors, the integrity of the data is good, for the most part, the credit bureaus claim.
  "If credit-report data was not of good quality, loss rates would be higher," says Smith, who notes that card issuers pull credit reports in advance of making preapproved offers.
  Issuers making preapproved offers are expected to face cost increases beyond those passed along by the credit bureaus. The FACT Act requires lenders making such offers to notify customers not receiving the lowest interest rate made available through the offer of why they are being charged a higher rate. Sending the notices not only increases costs, but also puts a higher premium on data quality, since consumers receiving a less favorable rate could argue misinformation exists in their credit reports.
  "This is going to complicate matters, because consumers can contest the decision," says the ABA's Feddis. "There is not going to be a lot of room for error."
  The credit industry also is voicing concerns that the dispute resolution provision of the FACT Act may serve as an invitation to so-called credit doctors to bombard credit bureaus, card issuers and even collections agencies with claims that information in a consumer's credit report is inaccurate.
  Giving rise to such speculation is that as of August, the Federal Trade Commission had left open for comment the definition of identity theft as it relates to the FACT Act. What worries card-industry experts is that the final definition could be so broad it may encompass activity not previously considered to be fraud due to identity theft. The law outlines procedures for how credit-report furnishers and users should respond to consumer reports of suspected identity theft.
  "At issue is what will constitute an identity-theft alert," says Christine Pratt, senior analyst, consumer lending and bank cards for TowerGroup, a Needham, Mass.-based research firm owned by MasterCard International.
  The good news for credit data providers, according to Pratt, is that of the 215,000 incidents of identity theft reported to the FTC in 2003, only 83,000 were related to credit card accounts. "Most identity-theft complaints are related to Social Security checks, government checks and a perpetrator taking over a bank account," says Pratt. "Considering that there are about 616 million credit card accounts, the number of reported incidents is a tiny percentage."
  NCO's Callahan adds that collections agencies are already versed in dealing with disputes concerning identity theft and that many collections agents are capable of flagging indications of ID theft on a credit report.
  "The FTC is expected to fine-tune its definition of identity theft, but we don't see that as a problem," he says. "Besides, we usually know when we are dealing with identity theft."
  'Formalized Approach'
  That's a plus, since many agencies do not expect the FACT Act to change their treatment strategies for delinquent accounts. St. Louis-based Outsourcing Solutions Inc., a big collections agency, says the impact of the FACT Act on its treatment strategies is likely to be minimal. If anything, FACT Act compliance will simply "require a more formalized approach to certain relevant practices," says Dick Seeling, vice president compliance and risk management for OSI.
  Despite the increased cost of doing business, card-industry experts agree the FACT Act is a good compromise for issuers and collections agencies. Without a federal law, more state legislatures certainly would have put similar laws on the books, but with their own flavor. Smith says that before passage of the FACT Act, Experian counted 800 bills at the state level related to issues encompassed by the new law. One bill proposed that consumers be notified every time a copy of their credit history is pulled.
  "The cost of free credit reports is the price the industry must and is willing to pay," she adds.
  But until the FACT Act takes full effect, collections agencies can only estimate what those costs will be.