Senate Subcommittee Tackles Credit Reports

Friday, 28 Dec 2012 01:02 PM

By Robert Feinberg

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The Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection, chaired by Sen. Sherrod Brown, D-Ohio, heard from three experts on the state of the credit reporting industry. Witnesses were Corey Stone of the Consumer Financial Protection Bureau (CFPB); Stuart Pratt, CEO of the Consumer Data Industry Association; and Chi Chi Wu, an attorney at the National Consumer Law Center.

Perhaps the hearing was prompted by an investigative report by The Columbus Dispatch, which found that only half of disputed issues are being resolved through the normal dispute resolution process, as Brown referred to in his opening statement. The hearing also coincided with the issuance by the CFPB of a report that Stone discussed in his testimony.

Brown mentioned that only 20 percent of consumers obtain copies of their credit reports and that disputes are filed by 8 million consumers regarding 30 million items. He stated that “The current system doesn’t always work for consumers, but it does work for the banking industry.” He complained that the burden of proof is too often placed on consumers, and he concluded that he hopes the subcommittee can work “to create a better and more transparent system.” Brown’s overall tone was more moderate than these remarks would suggest and indicated that he is seeking an accommodation with the industry.

During his questioning of Stone, Sen. Bob Corker, R-Tenn., sought to establish that credit reports are useful to lenders in making credit decisions, and the tone of the questions from Sen. Jeff Merkley, D-Ore., which were focused on medical billing issues, seemed a bit more critical than those of Brown, who took the opportunity to agree with Corker that credit reports provide a valuable service.

In his testimony, Stone listed activities of the CFPB related to credit bureaus: issuance of reports, a consumer advisory, a new rule, an examination procedure and handling consumer complaints. He noted that entities that furnish data to the bureaus often don’t forward to the bureaus documentation they may be received from consumers.

In later discussion, Wu stated that consumer documentation is often reduced to codes or 255-character blurbs.

Also, Pratt pointed out that consumers tend to combine several issues in one letter, and this makes it more difficult than it otherwise would be for the bureaus to distribute the documents if they chose to do so.

Stone had worked in the credit bureau industry as a provider of alternative methods, such as taking remittances into account in evaluating credit. His presentation in general was rather tentative, and he told the subcommittee that the CFPB needs to gather more data before considering any enforcement action against the industry.

During questioning, Brown asked whether it is true that credit bureau revenues come primarily from financial institutions. Stone agreed but added that $1 billion comes from credit monitoring services. (There was no in-depth discussion of the various models of companies that sell credit monitoring services to the public.)

The second panel was quite contentious, in a useful way, because it pitted an evangelist for the credit bureau industry, Pratt, against a dedicated critic, Wu.

Pratt came on strong with “good news” about the industry and pointed to endorsements from agencies like the Bank for International Settlements and the World Bank that seek to promote the greater use of credit reports worldwide. He stated that the association has contracted with an outside group to study the accuracy of credit reports, and the study found that only 1 percent of the time are significant changes made that would affect a consumer’s access to credit.

He asserted that 95 percent of consumers are satisfied with the results of disputes, that disputes are resolved within 14 days and that only 2 to 3 percent of mail from consumers is related to disputes. Pratt concluded with a complaint of his own — as many as 43 percent of the communications they receive are generated from credit repair services, and this clogs up the system. He suggested that consumers would be better off to use services that are available for free than to pay for credit repair.

Wu charged that the credit reporting system “is full of preventable errors,” and she insisted that even a 1 percent error rate is unacceptable. She complained about the outsourcing of document management and estimated that the complaint resolution staff is so thin that only three minutes of staff time is available per complaint.

She expressed hope that the CFPB would institute overdue reforms and that consumers would be given the right to sue for injunctive relief under the Fair Credit Reporting Act. Wu also registered the same complaint as Merkley that consumers are often caught in disputes over medical bills that grow out of referrals to collection agencies, and she questioned whether payment of medical bills is predictive enough to be included in credit scores.

During the questioning, Pratt and Wu clashed over the issue of the dependence of credit bureaus on revenues from lenders, asserting that direct-to-consumer relationships generate more revenue as do relationships with lenders. (To evaluate these claims, it would be necessary to take a closer look at the business model of the consumer business, but the hearing did not address this issue.)

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