House Financial Services Subcommittee on Financial Institutions and Consumer Credit Hearing
Federal Information & News Dispatch, Inc. |
INTRODUCTION AND SUMMARY
Madame Chair, Ranking Member Meeks, and Members of the Subcommittee, the
Credit reports play a critical role in the economic health and well-being of consumers and their families. A good credit history (and its corollary, a good credit score) enables consumers to obtain credit, and to have that credit be fairly priced. Credit reports are also used by other important decisionmakers, such as insurers, landlords, utility providers, and unfortunately, as we discuss below, even employers. Thus, it is no exaggeration to say that a credit history can make or break a consumer's finances.
As
. Medical debts that create negative marks on the credit reports of millions of Americans, even when the debt is the result of insurance disputes or billing errors by providers, or is ultimately settled or paid off. While recent industry changes provide a modicum of relief, more reform is necessary to adequately protect consumers from the unfair impact of medical debts on their credit reports. We strongly support H.R. 1767, the Medical Debt Responsibility Act, which would remove paid or settled medical debts from credit reports. This approach will tremendously benefit consumers, and indeed is probably the simplest and easiest "quick fix" out there to improve the credit records of an enormous number of consumers.
. The use of credit reports by nearly half of employers. Credit checks create a fundamental "Catch-22" for job applicants - a job loss prevents a worker from paying his/her bills, and the resulting damage to a credit report prevents him/her from getting a job. Yet there is no evidence that credit history can predict job performance. Its use in hiring discriminates against African American and Latino job applicants. We urge
. The foreclosure crisis of the late 2000s damaged the credit reports of millions of consumers, shutting them out of affordable credit, insurance, jobs and apartments. Creating a class of consumers that are shut out of so many economic benefits and necessities created a drag on the nation's economy and slowed our recovery. Helping these consumers fix the credit reporting harms caused by the foreclosure crisis would enable them to move on economically, and would in turn, would help with the nation's recovery from the Great Recession.
. The current credit reporting and scoring system is fundamentally flawed. It is an overly blunt instrument that treats consumers who have fallen on bad luck or hard times as being the same as consumers who are truly irresponsible. Many consumers have low scores because of job loss, illness, other "extraordinary life circumstances" - as well as abuse by lenders, debt collectors and others. Some of these consumers could be good borrowers after their misfortune, and would certainly be good workers.
. Credit reports are plagued by inaccuracies, such as files that mix the identities of different consumers; errors caused by debt collectors, creditors and other providers of information; and the fallout caused by identity theft. The
. The nationwide consumer reporting agencies (CRAs) -
For these reasons and others, the credit reporting system in
I. MEDICAL DEBT UNFAIRLY PENALIZES CONSUMERS
The collective scope and impact on medical debt on the credit histories of American consumers is enormous and cannot be overstated. Nearly 75 million working age adults (or about 41%) experienced problems with medical bills in 2012. n2 In addition, 41 million adults (or about 22%) were contacted by a collection agency for unpaid medical bills. n3 Many of these collection agencies provide information about the debts that they collect to the credit reporting agencies. Thus, tens of millions of consumers are likely to have negative information about the existence of medical debt collection account on their credit reports.
Medical debt represents an enormous portion of debt that is collected by debt collectors. A number of studies indicate that the amount of medical debt that is turned over to debt collectors -- and then in turn is reported to the nationwide CRAs (
. A 2003 Federal Reserve study found that over half of entries (52%) on credit reports for collection items are for medical debts. n4
. An
. A 2007 study by Federal Reserve researchers found that that "health-care providers represented the most important group of customers [for debt collectors], accounting for more than a quarter of all revenues." n6
. A 2013
The vast majority of these medical debts are for small amounts. The Federal Reserve study discussed in the first bullet found that over 85% of medical debts on credit reports were for bills under
The tremendous amount of medical debt on credit reports is troubling, because unlike collections for credit accounts, medical bills result from services that are frequently involuntary, unplanned, and unpredictable, and for which prices quotes are rarely provided. Medical debt is different than other types of consumer debt for a number of reasons, including:
. The presence of a third party payor, i.e., the insurance company. A medical bill may be turned over to a debt collector as a result of a bill being unpaid due to a dispute between the insurance company and the provider, a provider's failure to properly bill the insurer, or the insurer's failure to properly reimburse the provider. Even when errors are eventually fixed, they result in long delays during which bills may be sent to debt collectors. An estimated seven million Americans reported that their medical bills had been sent to a debt collector because of a billing mistake. n9
. Consumer confusion over the complexities of health insurance and medical billing. One study found that nearly 40% of Americans do not understand their medical bills. n10 Some of these consumers will let a medical bill go to a collection agency because of this confusion, or they believe that their insurer will pay it.
. The availability of insurance coverage or charity care for low-income consumers. Low-income consumers are sometimes eligible for programs to pay their bills, including government programs (
Moreover, negative marks for medical debt remain on a consumer's credit report even after the medical debt has been fully paid or settled. Even after the bill has a balance of zero, its mere presence as a collection matter remains on the consumer's credit records for seven years and may in some cases adversely impact a consumer's credit score. Previously, medical debt would harm a consumer's credit score in all cases. A
In response to the
The changes by FICO and VantageScore will not completely eliminate the negative impact of medical debt on credit reports. The changes are voluntary and non-binding, which means they could be reversed at any time. They probably will not benefit mortgage applicants, because the changes only affect FICO's latest scoring model, FICO 09. Apparently, neither FICO 09 nor VantageScore is used by mortgage industry giants
Instead, what consumers need is for
II. USE OF CREDIT REPORTS IN EMPLOYMENT IS UNREASONABLE AND DISCRIMINATORY
The use of credit reports in employment is a practice that is harmful and unfair to American workers. Despite many good reasons to avoid engaging in this practice, about half of employers (47%) do so today, n16 a dramatic increase from only 19% in 1996. n17 One survey reported that 1 in 10 respondents who were unemployed had been informed that they would not be hired for a job because of the information in their credit reports. n18
The use of credit reports in employment should be severely restricted for the following reasons.
. Credit checks create a fundamental "Catch-22" for job applicants. A simple reason to oppose the use of credit history for job applications is the sheer, profound absurdity of the practice. Using credit history creates a grotesque conundrum. Simply put, a worker who loses her job is likely fall behind on paying her bills due to lack of income. With the increasing use of credit reports, this worker now finds herself shut out of the job market because she's behind on her bills. This leads to financial spiraling effect: the worse the impact of unemployment on their debts, the harder it is to get a job to pay them off.
. Use of credit checks in hiring prevents economic recovery for millions of Americans. The use of credit history for job applicants is especially absurd after the massive job losses of the Great Recession, which resulted in unemployment rates at times of nearly 10%. For the many workers who have suffered damage from their credit reports because of unemployment or underemployment, the use of credit histories presents yet another barrier for their economic recovery - representing the proverbial practice of "kicking someone when they are down" for millions of job seekers.
. The use of credit checks in hiring discriminates against African American and Latino job applicants. There is no question that African American and Latino applicants fare worse than white applicants when credit histories are considered for job applications. For one thing, these groups are already disproportionately affected by predatory credit practices, such as the marketing of subprime mortgages and overpriced auto loans targeted at these populations. As a result, these groups have suffered higher foreclosure rates. Study after study has documented how, as a group, African Americans and Latinos have lower credit scores than whites. n19 Since credit scores are a translation of the information in credit reports, that means these groups fare worse when their credit reports are considered in employment.
. Credit history does not predict job performance. Credit reports were designed to predict the likelihood that a consumer will make payments on a loan, not whether he or she will steal or behave irresponsibly in the workplace. The overwhelming weight of evidence is that people with impaired credit histories are not more likely to be bad employees or to steal from their employers. The earliest study on this issue concluded there is no correlation between credit history and an employee's job performance, n20 while a more recent study from 2011 also failed to find a link between low credit scores and theft or deviant behavior at work. n21
. As discussed in Section V, credit reports suffer from unacceptable rates of inaccuracy, especially for a purpose as important as use in employment. Fundamentally, the issue at stake is whether workers are fairly judged based on their ability to perform a job or whether they're discriminated against because of their credit history.
III. THE FORECLOSURE CRISIS AND GREAT RECESSION CAUSED ENORMOUS HARM TO CONSUMERS' CREDIT HISTORIES
The foreclosure crisis and the massive unemployment caused by the Great Recession saddled millions of consumers with poor credit histories. These include the over 8 million workers who lost their jobs, n22 as well as the 4.5 million families whose homes were foreclosed upon. Many of these 4.5 million foreclosures were not due to irresponsible borrowing, but phenomena such as:
. Abusive and predatory lending, such as mortgage brokers and lenders who targeted low- income and minority consumers for expensive subprime loans that they could not afford.
. The combination of exploding Adjustable Rate Mortgages (ARMs), negatively amortizing mortgage loans, and the collapse of the housing market, which left many mortgages "underwater," with the homeowner owing more than the home was worth.
. Inability to pay mortgage payments due to unemployment or underemployment caused by the Great Recession.
. Abusive servicing practices, including cramming accounts with illegal fees, failing to process loan modification requests, and gross accounting errors.
These negative impacts of a foreclosure or other mortgage-related event will last for seven years, or ten years in the case of bankruptcies, as these are the current time limits under the Fair Credit Reporting Act for adverse information to remain on a credit report. Thus, consumers who have gone through a foreclosure or other adverse mortgage event are shut out of affordable credit markets for seven years (or ten years, in the case of bankruptcies), and unable to obtain reasonably priced auto loans or credit cards. The damage from a foreclosure or other adverse mortgage-related event could cause a consumer to be denied a job, lose out on a rental apartment after losing his or her home, and pay hundreds of dollars more in auto insurance premiums. The cumulative impact of these financial calamities could strand a consumer economically for years after the foreclosure itself. It could create a self-fulfilling downward spiral in a consumer's economic life.
The depressed credit scores from the foreclosure crisis and the Great Recession also impeded the country's economic recovery. According to some analysts, the Federal Reserve's effort to stimulate the economy with low interest rates has been less than effective because many of the consumers who could most benefit from these rates do not qualify for loans due to low credit scores. n23 In turn, the lack of ability to access low rates means these consumers have less ability to open small businesses or engage in household spending, the very steps needed to help our economy. In an ironic way, credit scoring and reporting have created a vicious cycle - economic harm causes low scores, low scores prevent recovery by shutting out the consumer from benefits that require a high score, and the consumer's lack of recovery drags down the economy as a whole.
The drag on recovery by consumers' low scores is exacerbated by lenders that currently require even higher credit scores to qualify for mortgage loans. The average credit scores required for
The credit reporting damage from the foreclosure crisis was bad enough, creating an economic blacklist affecting millions of consumers. This damage is exacerbated and compounded by the errors, problems, and anomalies caused by servicers and lenders and the credit reporting industry. Examples of errors and anomalies include:
. Reporting short sales as foreclosures. This error is caused because there is no specific code in the standardized format for credit reporting (called the "Metro 2 format") for a short sale.
. Servicers and lenders that seek to collect deficiencies after a short sale or a foreclosure. These collection activities include reporting the deficiency as a collection item on the consumer's credit report, with the resulting harm to the consumer's credit score.
. Credit reports not reflecting the terms of a loan modification. Some servicers and lenders continue to report the mortgage as delinquent, per the original terms, even though the consumer is paying in compliance with the terms of the new modified loan terms.
. Issues regarding loan modification reporting. The code used for loan medications, code AC - "Paying under a partial payment agreement" n25 results in a significant lowering of the consumer's credit score. n26
These issues are discussed in depth in our report, Solving the Credit Conundrum: Helping Consumers' Credit Records Impaired by the Foreclosure Crisis and Great Recession, which is attached to this testimony.
1. Require that adverse information be removed earlier than seven years. The FCRA should be amended to shorten the time periods for negative information to three or four years. There is nothing special about the current seven-year time limit for negative information under the FCRA. It is certainly not universal. For example, the time limits in
2. Require that adverse mortgage information be completely removed in certain circumstances. Negative mortgage-related information should be removed even before a three- or four-year period if the consumer was the victim of lender abuse, or has taken steps to mitigate the loss to the lender, such as a short sale, a deed-in-lieu of foreclosure, or a loan modification. Negative information should also be removed if the mortgage is eligible for relief under settlements negotiated by government agencies with mortgage servicers or lenders, such as the National Mortgage Settlement and the Independent Foreclosure Review (IFR) Payment Agreement. These settlements address abuses by servicers and lenders that resulted in foreclosures, and the borrowers who are entitled to relief should not have their credit reports marred by negative information caused by the servicer or lender.
IV. NEGATIVE CREDIT REPORTS MORE OFTEN REFLECT BAD LUCK, NOT BAD CHARACTER
One of the most pernicious aspects of the use of credit reporting is its use as a proxy for "character." There is a popular conception, not just in the credit industry, but also among employers and the average layperson, that a poor credit score means that the consumer is irresponsible, a deadbeat, lazy, dishonest, or just plain sloppy. However, this stereotype is far from the truth. A bad credit record is often the result of circumstances beyond a consumer's control, such as a job loss, illness, divorce, or death of a spouse, or a local or nationwide economic collapse.
The current credit reporting and scoring system is fundamentally flawed because it is an overly blunt instrument that lumps together defaults and negative events that are caused by very different triggers. Credit scores assume that a foreclosure due to illness resulting in job loss and crippling medical bills should be treated the same, and has the same predictive value, as a foreclosure because the borrower was a real estate investor who abandoned the property. Yet these are two fundamentally different phenomena, and likely two very different consumers.
Indeed, many foreclosures were not caused by bad decisions that borrowers made. Going back more than a decade, origination fraud and abuse by the mortgage industry was endemic - mortgages brokers falsified applications, obtained inflated appraisals, and sold unaffordable products to unsuspecting homeowners, such as adjustable rate mortgages in which the interest rate skyrocketed after the initial "teaser" period. When a loan is abusive, the failure to repay it tells nothing about the borrower's creditworthiness. Another problem is that during the foreclosure crisis, many homeowners who should have been processed for a loan modification were not provided with one. If two homeowners are identically situated, and one gets a loan modification but the other does not, it's hardly fair or useful to reflect that arbitrary result in their credit scores.
The overly crude lumping together of very different consumers makes credit scores less than optimally predictive. This is reflected in, and probably responsible, for the fact that scores are actually quite inaccurate and unpredictive on an individual level. While they can predict the probability that as a group, low-scoring consumers will have a certain percentage of defaults, they cannot predict if any particular person will actually engage in the behavior. In fact, often the probability is greater that a particular low-scoring person will not engage in the negative behavior.
For example, a score of between 500 and 600 is generally considered to be a poor score. Yet at the beginning of the foreclosure crisis in 2007, only about 20% of mortgage borrowers with a credit score in that range were seriously delinquent. n27 Thus, if a score of 600 is used as a cut-off in determining whether to grant a loan, the vast majority of applicants who are denied credit would probably not have become seriously delinquent.
A study by a Federal Reserve researcher and a Swedish scientist, based on consumers in
Thus, it is such "extraordinary life circumstances" within a consumer's life that are often responsible for the delinquencies, defaults, and foreclosures - not bad character, but bad luck. The problem with scoring and reporting is that it exacerbates and entrenches the harm from such circumstances, perpetuating the consumer's decline for at least another seven years. Not only might a consumer lose her home due to these events, but the foreclosure notation will hinder her recovery by denying her future credit, an apartment, and perhaps even a job. Even if the consumer gets a new job, the black marks from the foreclosure will follow her and result in higher prices for credit and insurance, costing hundreds or thousands more. This will, in turn, make it harder for her to pay those insurance or credit bills, and strain her economic recovery.
Furthermore, the credit reporting system, especially foreclosure and adverse mortgage-related information, perpetuate and exacerbate the income and wealth gaps between whites and minority groups. Because African American and Latinos were disproportionately targeted for predatory credit practices, such as the marketing of subprime mortgages and overpriced auto loans targeted at these populations, these groups have suffered higher foreclosure rates. n30 In addition, numerous studies have documented how, as a group, African Americans and Latinos have lower credit scores than whites. n31
We need a better way to judge consumers. We need a system that can distinguish between consumers who are truly irresponsible and those who simply fell on hard times. We need a system that can take into account both economic factors and extraordinary life circumstances particular to an individual consumer. And, we need a system that does not further widen the huge economic chasm between whites and minorities.
V. HIGH STUDENT LOAN DEBT DAMAGES BORROWERS' CREDIT REPORTS
The amount of student loan debt in this country is exploding, burdening millions of consumers. Currently, there are more than 39 million borrowers carrying over
Large debt loads can be harmful, especially for young graduates who are unemployed or employed in low-paying jobs. Their inability to make payments will damage their credit records, creating negative marks that will follow them for seven years or - in the case of some federal student loans - much longer. Unmanageable student loan debts can cause also financial distress that affects the borrower's ability to pay other loans, such as credit cards and auto loans. These issues are especially pronounced for students who obtained little benefit from their "education," such as victims of trade school fraud or other abuse.
Even when the borrower is able to make payments, large debt loads can also be harmful. High debt loads could lower a credit scores, since one of the factors in a credit score is how "maxed out" a consumer is. Large amounts of student loan debt will make the borrower appear very maxed out, especially if the debt exceeds the original loan amount as in the case of student loan deferments. Also, employers use credit reports in hiring, and some may look disfavorably upon high student loan debt loads in their employment decisions. Indeed, one survey reported that 67% of surveyed employers had "little-to-no interest" in job applicants with student loan debts over
VI. COMMON ERRORS IN CREDIT REPORTING
Despite the importance of accurate credit reports and the purpose of the FCRA to promote accuracy, systematic errors are unfortunately common in the credit reporting system. In
The rate of inaccuracy found by the FTC study is unacceptable. It translates into 40 million American who have errors in their credit reports, 26 million of whom have lower scores as a result, and 10 million of whom have errors seriously damaging enough to cause them to be denied or charged more for credit or insurance or even be denied a job.
There are many types of errors in credit reports; we focus on a few of the most egregious. Most importantly, these errors are entirely preventable with some common-sense measures.
A. Mixed Files
One of the most intractable and damaging types of credit reporting errors are mixed or mismerged files. Mixed files occur when credit information relating to one consumer is placed in the file of another. Mismerging occurs most often when two or more consumers have similar names,
Mixed files are unfortunately not an uncommon problem. When the
Mixed files occur largely because the nationwide CRAs do not use sufficiently rigorous criteria to match consumer data precisely. Mostly importantly, they do not match information based on all nine (9) digits of the consumer's SSN. Instead, they will match information based on seven of nine (7 of 9) digits of an SSN if the consumers' names are also similar.
Mixed files could be prevented by requiring the nationwide CRAs to use stricter matching criteria when placing information into a consumer's credit report, most critically an exact match of SSNs. However, the nationwide CRAs have chosen to be excessively and unreasonably over-inclusive because, as the FTC once noted: "lenders may prefer to see all potentially derogatory information about a potential borrower, even if it cannot all be matched to the borrower with certainty. This preference could give the credit bureaus an incentive to design algorithms that are tolerant of mixed files." n35
The nationwide CRAs have been aware of mixed file errors for decades. In the early to mid-1990s, the FTC reached consent orders with the nationwide CRAs requiring them to improve their procedures to prevent mixed files. n36 However, nearly two decades later, mixed files remain a significant problem.
B. Identity Theft
With an estimated eleven million consumers victimized by some form of the crime every year, n37 identity theft itself presents a serious source of inaccuracies in the credit reporting system. The identity thief, however, is not the only culprit. The nationwide CRAs and furnishers bear a share of the blame as well.
The nationwide CRAs' loose matching procedures, discussed above, contribute to identity theft problems. For example, if a thief has only adopted the victim's first name and SSN but not his or her last name or address, the algorithm used by nationwide CRAs to "merge" information often will incorporate the thief's information into the victim's file at the time the bureau compiles the report. Once the fraudulent debt is reported, often after default and non-payment, and especially when collectors begin attempting skip trace searches, the account ends up merged into the victim's file even though many of the identifiers do not match. Accordingly, the "identity theft" can be characterized as a special type of mixed file problem.
C. Furnisher errors
Furnishers can often be the source of errors in credit reports. A furnisher might report the consumer's account with an incorrect payment history, current payment status, or balance. The error might be due to a misapplied payment or data entry error. In the most egregious cases, furnishers will identify the incorrect consumer as owing a debt.
A recent
Another type of common error is the failure to mark accounts as disputed when the consumer has a legitimate bona fide dispute with the furnisher. Marking an account as disputed is required both under the FCRA as well as numerous federal consumer protection laws, such as the Fair Credit Billing Act, the Fair Debt Collection Practices Act and the Real Estate Settlement Procedures Act. One of the
Debt collectors and debt buyers present their own special types of credit reporting errors. These include errors created by the fact that debt buyers and collectors often obtain nothing more than a list of names and SSNs of alleged debtors. Typically, the debt buyer or debt collector does not get any of the critical supporting documentation to establish that the consumer actually owes the debt, it is the correct amount, whether there are any disputes, or even if the collector is dunning the correct consumer. Another problem is the "re-aging" of old accounts so that they stay on the credit report past the FCRA's seven year limit. n40
A report issued by the
D. Solutions
The solutions necessary to solve some of the above problems and to ensure "maximum possible accuracy" for credit reports are simple and straightforward. They include:
1. Requiring the nationwide CRAs to use stricter matching criteria, including matching information based on all nine digits of the consumer's SSN. At a minimum, the
2. In general, the
3. The nationwide CRAs should be required to screen and audit data from furnishers, including analyzing whether certain furnishers are significant sources of errors. They should be required to stop accepting data from furnishers with excessively high numbers of errors.
Finally, one of the most important safeguards for accuracy is the dispute system mandated by the FCRA. Yet as discussed in the next section, this dispute system is broken, and needs significant reform.
VII. THE FCRA-MANDATED CREDIT REPORTING DISPUTE SYSTEM IS A TRAVESTY OF JUSTICE
The FCRA dispute system developed by the credit reporting industry is a travesty of justice. The FCRA requires both CRAs and furnishers to conduct "reasonable" investigations when a consumer disputes an item in his or her credit report as inaccurate or incomplete. However, the system created by the nationwide CRAs to handle disputes is anything but reasonable. Instead, it is a perfunctory process that consists of nothing more than forwarding the consumer's dispute to the furnisher, and parroting whatever the furnisher states in response.
Indeed, prior to mid-2013, the nationwide CRAs did not even bother to send the entire dispute to the furnisher. Instead, the CRA's offshore vendor n43 merely reduced the dispute to a two or three digit code and sent that code alone and without supporting documentation provided by the consumer - documents such as account applications, billing statements, letters, payoff statements and even court judgments that showed overwhelming and even conclusive proof.
After over a decade of criticism by consumer groups and courts, the nationwide CRAs finally began to send the entire dispute to the furnisher in the middle of 2013 - coincidentally the year after the
The fundamental problem with the credit reporting dispute process is the utter and complete bias against consumers by the nationwide CRAs. After a furnisher responds to an FCRA dispute, the nationwide CRAs' main response is to parrot whatever the furnisher says. The CRAs will accept the results of the furnisher's "investigation" even when a simple check would reveal inconsistent information. In other words, the nationwide CRAs' policies are that what the furnisher says is gospel, even when that furnisher is a bad actor with a history of violations. We believe this absolute bias in favor of the furnisher in dispute investigation violates the FCRA.
In fact, a number of courts have chastised the nationwide CRAs for this parroting, and their general failure to do no more than send an ACDV to the furnisher and accept its response. In Saindon v.
The nationwide CRAs' bias in favor of furnishers - their unquestioning acceptance of the furnisher's response despite being presented with evidence and documentation by the consumer - violates the FCRA's protection for consumers. The FCRA places the burden of proof in a dispute investigation on the furnisher, not the consumer, as the Act provides that if disputed information is inaccurate or cannot be verified, it should be deleted. See 15 U.S.C. [Sec.] 1681i(a)(5)(A). Thus, if a consumer provides evidence and documentation that she is correct, and the furnisher responds without such evidence, the disputed information is "unverifiable" by nature, and should be deleted. Yet the nationwide CRAs not only illegally place the burden of proof on the consumer, they go further by always siding with the furnisher and automatically accepting the furnisher's position - even when, in 40% of the cases, the furnisher is a debt collector or debt buyer.
For their part, some furnishers also conduct non-substantive and perfunctory "investigations." These procedures consist of nothing more than verifying the challenged data by comparing the notice of dispute with the recorded information that is itself the very subject of the dispute. For example, in its enforcement action against debt buyer Asset Acceptance, the FTC also noted that Asset only employs 14 to 20 "ACDV specialists" despite receiving half a million credit reporting disputes each year, and expects each each specialist to process at least 18-20 ACDVs per hour - or one dispute every 3.33 minutes. n48
Unsurprisingly, this last example involves a debt collector. As the
It is well past time for the credit reporting dispute system to be reformed. For too long, consumers with the misfortune of being plagued by errors have suffered under an illegal, illogical, and unjust system. Reforming the system will take the efforts of both the
First, the nationwide CRAs must be required to have sufficient trained personnel to actually review and conduct real, independent investigations of consumer disputes. They must be required - as the FCRA and court decisions mandate - to undertake "reasonable" investigations that consist of a "detailed inquiry or systematic examination" n49 of the evidence. This means talking to consumers and furnishers, examining documents in a meaningful manner, using human judgment to analyze a dispute, and making independent decisions. Thus, the nationwide CRAs must provide skilled trained personnel with the discretion to make decisions.
This will require a significant investment of resources by the nationwide CRAs, especially in terms of personnel. But as the court in the
While this obligation to conduct a reasonable investigation may increase the cost and expense to a CRA, it is the necessary cost associated with discharging the congressionally mandated duties placed upon a company choosing to engage in a business that can have such a profound and lasting impact on consumers,... n50
The credit reporting industry will complain, as it often does, that it is not a tribunal or a small claims court. But a CRA need not act as a small claims court to simply determine that information that a consumer owes a debt is inaccurate when the consumer has a bank statement, an executed loan modification, or even a judgment showing that he or she does not owe the debt. Furthermore, in those circumstances where the CRA personnel truly cannot determine whether the consumer or the furnisher is correct, the information should be deleted. After all, the FCRA requires information to be deleted if it "cannot be verified." See 15 U.S.C. [Sec.] 1681i(a)(5)(A).
Another measure to protect consumers when they have a good faith dispute with the furnisher is to mark the debt as such, and exclude it from the credit score. Currently, only some types of disputed debt are excluded from a credit score, and the dividing line is unclear and shifting. Furthermore, exclusion of some disputed debts from the credit score is entire voluntary and the industry could change its mind any time and start scoring all disputes.
Debt collectors must be subject to even stricter screening and oversight. When a debt collector is involved, it is even more critical to have independent review, given the incentives discussed above for the debt collector to ignore disputes and leave errors uncorrected. And there should be a flat-out prohibition against the nationwide CRAs to engage in parroting when a debt collector is involved. It is simply outrageous and unacceptable for the nationwide CRAs to take the unsupported, unsubstantiated word of a debt collector over a consumer, given the incentives that exist and the well-documented abuses of debt buyers. n51
Finally, we urge
VIII. OTHER ISSUES
Beyond the issues addressed above, there are other areas where Congressional action is necessary to ensure that our nation's credit reporting system works fairly for consumers and the general marketplace. They include:
A. Free Credit Scores
Currently, consumers do not have the legal right to a free credit score, unless they are denied credit, must pay a higher price, or after they apply for a mortgage. Consumers should have the right under the FCRA to a free credit score on an annual basis. Ideally, they should have the right to obtain a copy of the credit score most commonly used by lenders. Consumers should also have the right to obtain other types of scores based on their credit or consumer reports, such as insurance credit scores, tenant screening scores, or healthcare scores.
B. Credit Monitoring
The nationwide CRAs and other companies market "free" consumer reports that are not free at all, but are only introductory teasers that convert to an expensive "credit monitoring" subscription. The nationwide CRAs heavily promote these products, including on their websites, in effect steering consumers away from the centralized source for federally-mandated free credit reports, annualcreditreport.com. As a result, more consumers actually ended up obtaining their credit reports through these products than through annualcreditreport.com. According to the
These credit monitoring services are often marketed as a way to prevent identity theft, but they can be ineffective in detecting certain forms, such as when a thief uses the consumer's
C. Utility Data
We remain concerned about efforts to encourage utility companies to report payment information on a monthly or regular basis to credit reporting agencies without adequate consumer protections. A discussion of our concerns is set forth in detail in our prior testimony to this subcommittee. n54
IX. CONCLUSION
American consumers deserve a credit reporting system that is accurate, fair and just. Helping consumers obtain such a system also helps the American economy. To achieve these goals,
. Pass the Medical Debt Responsibility Act, H.R. 1767, which would exclude fully paid and settled medical debt from a consumer's credit report.
. Ban the use of credit reports for employment purposes, with very limited exceptions for only a few specific job positions.
. Shorten the time periods that negative information stays on a credit report to three or four years.
. Require that adverse mortgage information be completely removed in certain circumstances, including if the consumer was the victim of lender or servicer abuse, or the mortgage is eligible for relief under government settlements.
. Require the nationwide CRAs to use stricter matching criteria, including matching information based on all nine digits of the consumer's SSN, or require the
. Require the nationwide CRAs to have sufficient trained personnel to actually review and conduct real, independent investigations of consumer disputes.
. Require that all debts that are the subject of a dispute on a credit report be excluded from a credit score, unless the furnisher or CRA can prove that the dispute is frivolous or irrelevant, and prohibit lenders from considering disputed debts adversely.
. Provide consumers with the right to seek injunctive and declaratory relief.
. Provide consumers with a free annual credit score.
n1
n2
n3 Id.
n4
n5
n6
n7 Federal Trade Comm'n, Structure of Practices of the Debt Buying Industry, at T-4, T-7 (
n8 Avery, et al., supra n. 4, at 69 (Feb. 2003).
n9 Collins, supra note 2, at 6.
n10 Press Release, Intuit Financial Healthcare Check-Up Shows Americans Confused about Medical Statements,
n11
n12
n13
n14
n15 Id.
n16
n17
n18
n19 See Appendix A - List of Studies Showing Racial Disparities in Credit Scores.
n20
n21
n22
n23
n24
n25
n26
n27
n28
n29 Id at 4.
n30
n31 See Appendix A - List of Studies Showing Racial Disparities in Credit Scores.
n32 Press Release, Black Book Research Releases 2014 Student Loan Data: Fewer Major Companies Hiring High Debt College Grads, More Grads Expect Government Loan Bailout to Erase Debts,
n33 Federal Trade Comm'n Report to Congress Under Section 319 of the Fair and Accurate Credit Transactions Act of 2003 (Dec. 2012).
n34
n35
n36 FTC v.
n37 Javelin Strategy & Research, 2010 Identity Fraud Survey Report: Consumer Version 5 (2010) .
n38 See Consent Order, In the Matter of
n39
n40 The
n41
n42
n43 Usually located in
n44 608 F. Supp. 2d 1212, 1217 (
n45 Drew v. Equifax Info. Serv., 2010 WL 5022466 (
n46 753 F. Supp.2d 452, 464 (E.D. Pa.
n47 Id. at 465.
n48 Complaint,
n49 Johnson v. MBNA, 357 F.3d 426, 430-431 (4th Cir. 2004).
n50 Burke v. Experian Info. Solutions, 2011 WL 1085874 (
n51
n52 Consumer Fin. Prot. Bureau, Key Dimensions and Processes, supra note 41, at 27 (2012).
n53 See Consent Order, In the Matter of
n54 Examining the Uses of Consumer Credit Data, Hearing Before
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