Written by NACA Executive Director, Ira Rheingold & NACA Member, Jeff Sovern
Posted by the New York Times: http://www.nytimes.com/2013/07/11/opinion/to-catch-a-creditor.html
IN 1999, Judy Ann Thomas of Elyria, Ohio, applied for a loan. But the bank mixed up her record with the file of a Utah woman named Judith Kendall — their Social Security numbers have seven digits in common. Because Ms. Kendall had a poor credit score, Ms. Thomas didn’t get the loan.
In the years since, as Ms. Thomas testified before Congress in May, she has repeatedly asked credit bureaus to correct her records, only to have her files re-contaminated. In 2010, when she applied for a job, the prospective employer questioned Ms. Thomas’s honesty after receiving Ms. Kendall’s records in response to a background check.
Ms. Thomas’s situation is not unique. Earlier this year the Federal Trade Commission completed a multiyear study of credit-report errors and found that nearly 20 percent of consumers had errors in at least one of their credit files, and that 13 percent saw an improvement in their scores when the errors were corrected.
Confused files, like Ms. Thomas’s, are also common. A 2012 study by The Columbus Dispatch analyzed 30,000 complaints to the F.T.C.; of those, 1,500 people reported that their files included someone else’s information. Nearly a third said the credit agencies did not correct the errors, despite being asked to do so.
Most egregious, almost 200 people said their reports showed them as deceased. At least one consumer, upon complaining to a credit bureau, was told that it had investigated and verified the report of his death.
While federal law requires credit bureaus to conduct a reasonable investigation of consumer complaints, the marketplace can penalize credit bureaus that investigate too aggressively. Credit bureaus are heavily dependent on lenders for both revenue and the information the bureaus package and sell; if a credit bureau presses a lender too hard, the lender could patronize a different bureau and withhold data about its customers.
In contrast, consumers have little power over credit-reporting agencies. Consumers cannot, for example, block credit bureaus from obtaining information about their transactions.
Consequently, credit bureaus have every reason to favor lenders’ interests when investigating complaints.
For their part, lenders may benefit when credit bureaus report consumer defaults, even incorrectly, because such reports put pressure on consumers who wish to maintain good credit ratings to pay even disputed claims.
To be sure, credit bureaus sell credit-monitoring services to consumers, but those services create odd conflicts for the bureaus. If credit reports were to become completely accurate, consumers wouldn’t need credit monitoring, and the bureaus would lose revenue.
We do not mean to suggest that a bureau or lender would deliberately report errors. But when credit bureaus decide between investing in improving the accuracy of their reports to help consumers, or in profit-making credit-monitoring services, the choice is obvious.
Meanwhile, “reasonable investigations” by the bureaus are almost meaninglessly brief, with almost no communication with the lender. Similarly, the lender may arrive at its determination by comparing the disputed item with the same records that gave rise to the dispute in the first place.
Only now, decades after Congress established the reasonable-investigation requirement, are credit bureaus experimenting with sending lenders the actual consumer complaints. In theory, the Consumer Financial Protection Bureau could do more to make the investigations more aggressive — but unfortunately, the bureau, still in its infancy and embroiled in disputes over whether its director was properly appointed, hasn’t done so.
In short, it’s up to Congress to act. It could, for one thing, improve accuracy by imposing liability on lenders for failing to conduct investigations when consumers complain to them. As it stands, consumers cannot sue lenders for failing to investigate without first complaining to a credit bureau, something consumers may not know to do. If consumers had greater rights against lenders, no doubt lenders would be more cautious about the accuracy of their records.
Moreover, the C.F.P.B. and the F.T.C. should insist that the bureaus be more careful in matching files to consumers, by, for example, requiring that all nine Social Security digits match, instead of just the seven that Judy Ann Thomas and Judith Kendall shared.
Congress could also require greater accuracy from credit bureaus and lenders, and it could give consumers the power to seek injunctions against bureaus to stop them from using inaccurate files.
The market failed Ms. Thomas, and existing laws have not solved the problem. We should fix those laws so that consumers who play by the rules can have good credit, jobs and the financial stability they seek.
Jeff Sovern is a professor at St. John’s University School of Law and a coordinator of the Consumer Law and Policy Blog. Ira Rheingold is executive director of the National Association of Consumer Advocates.