Credit Repositories Agree to Ease Correction Process

The Big Three credit repositories – Equifax, Experian, and Trans Union – have entered into a consent agreement with New York State Attorney General Eric Schneiderman under which they will change the practices they follow when consumers complain about incorrect data on their credit reports. The credit repositories (sometimes inaccurately called credit bureaus) collect and maintain information about the financial habits of 200 million Americans, which is just above everyone in the United States over the age of 18.

The last time the credit reporting system was overhauled was back in 2003, when the Fair and Accurate Credit Transactions Act, supposedly accelerated the dispute process for the consumer when an error was related to fraud or identity theft. The law didn’t work.

60 Minutes Blow The Whistle on the Big Three

A 2013 60 Minutes report delineated the extent of the credit reporting nightmare with a succession of anecdotes that included interviews with consumers who had been victimized by the credit repositories and were thwarted in their attempts to get issues created by identity theft removed. According to the 60 Minutes report, more than 40 million Americans have incorrect information on their credit reports. More than 20 million have incorrect data on their credit reports that could prevent them from getting a loan, an apartment, a job, or even auto insurance.

The Empire Strikes Back

Discrepancies in the 60 Minutes report itself, were challenged online by Experian, which posted an item on its website claiming that the Federal Trade Commission report on an eight-year study of the credit reporting industry concluded that 98 percent of the credit reports studied were “materially accurate.” Despite that protestation, the 60 Minutes segment featured an on-camera statement from Federal Trade Commission Chairman Jon Leibowitz, who said: “Here’s what we found. Some pretty troubling information. One out of five Americans has an error on their credit report. And one out of 10 has an error on their credit report that might lower their credit score.”

Lies, Damned Lies and Statistics

This raises an interesting question: How could they possibly know? The only people who could stipulate to the accuracy of their credit reports would be the consumers themselves and the only way to find out whether they thought their credit reports were accurate would be to interview them all — on the same day. Credit reports change monthly based on the acquisition of new information. Therefore, consumers who believed that their credit reports were accurate in January might find them no longer accurate in February, if they even bothered to check. (Only 20 percent of the eligible consumers check their credit reports annually.) Over time, however, as errors accumulated on credit reports, the cumulative effect of those errors, which could only be determined by interviewing everyone in the sample group each month during the study, could snowball into that 20 million era threshold.

(Digging a little deeper into this story, it turns out that the FTC asked 1,001 participants to review 2,968 credit reports with a researcher who helped them to identify the issues on their credit reports, which means that a sample of 1,001 data points was used to reflect the realities experienced by 200 million Americans. These numbers suggest that each participant reviewed one credit report from each of the three credit repositories. The numbers also suggest that researchers could not find 35 credit reports belonging to the members of the sample group.)

The key to understanding these statistics is the length of time derogatory information stays on a credit report. Inquiries remain on the credit report for two years. Delinquent accounts remain on the credit reports for seven years. Bankruptcies and foreclosures have a ten-year lifespan. Therefore, as derogatories accumulate, they also tend to permeate the consumer’s credit profile to the point where a six year-old unsatisfied collect can continue to damage the consumer ability to borrow even after the creditors themselves have failed and gone out of business. This creates a situation in which the consumer has no one to challenge to get false derogatories off their credit reports.

Discrepancies are Built Into The System

Even if they did bother to check, as the 60 Minutes report noted, consumers might not be looking at the same credit report that their lending institutions were looking at. In fact, the credit reports you get from the websites like CreditKarma and their competitors are not the same ones that lenders and creditors see. For one thing, the scores are almost always higher, often by more than 50 to 100 points.

Perhaps FTC Chairman Leibowitz should huddle with Maneesha Mithal, the associate director of the FTC’s Division of Privacy and Identity Protection, who testified before Congress that “26 percent of consumers reported a potential material error on one or more of their three reports and filed a dispute with at least one credit reporting agency (CRA) and half of these consumers experienced a change in their credit score. For five percent of consumers, the error on their credit report could lead to them paying more for products such as auto loans and insurance.”

Those are some pretty significant and as-yet unexplained discrepancies. The fact remains, however, that the three repositories which, together, have a stranglehold on consumer credit ratings, decided to accept the consent decree rather than face New York State in court over the reforms that NY AG Schneiderman demanded from them.

The Wall Street Journal report on the agreement misnamed the three credit repositories as the three biggest credit bureaus: there are only three. While there are hundreds of credit bureaus that repackage and sell the information obtained from the repositories, there are only three agencies – officially termed credit repositories – that actually collect and curate that data.

A Short History of the Credit Business

Most people do not know why there are three credit bureaus in the first place. The answer, as any mortgage broker will tell you, is that the individual credit reports from the three repositories are never in full agreement with each other. There are always discrepancies and that is why a consumer’s credit scores will vary from one repository to another. If there were only one repository, that agency would have absolute dictatorial power over the financial life of every American. If there were only two repositories, which one would creditors believe? With three bureaus, lenders split the difference and use the median or middle credit score, even though it would make more sense to take the average of the three.

Equifax (EQ) was founded in 1899 under the name Retail Credit Company, and is the oldest credit repository in the United States. The publicly traded company posts annual revenues of $1.5 billion. Equifax had the credit reporting business to itself until privately held Trans Union (TU) was founded in 1968, but TU did not become a nationwide credit repository until 1988. Its current revenues are estimated at around $1 billion annually. Experian was founded by the TRW conglomerate in 1970, which operated the agency under the name TRW Informational Services. The company was acquired by a British firm, GUS, which also owns Commercial Credit Nottingham in 1996, in a deal with Mitt Romney’s Bain Capital group, which means that one-third of America’s consumer financial data is controlled by a foreign corporation. Most recent revenue reports put their earnings at around $1 billion annually.

A report from the Consumer Financial Protection Bureau, a government agency, reports that 15 percent of the complaints submitted by consumers to the credit repositories are resolved internally, but the remaining 85 percent are referred to the creditor who submitted the data, which is rather like giving the fox the keys to the hen-house. If the creditor confirms the data, the repositories simply accept that confirmation as the final word on the matter.

The New Normal

Under the newly agreed upon rules, the repositories would have to wait 180 days before putting medical collections on a credit report to give health insurance companies time to catch up and pay the claims for which consumers have been getting dinged because of the tardy payments from insurers. Some 43 million (21.5 percent) Americans have medical collections on their credit reports, which account for 52 percent of all derogatory comments on credit files.

The credit repositories also agreed to tighten up their internal procedures by assigning trained analysts to investigate consumer complaints with the power to change credit reports to reflect the information they receive, but the overall process remains the same and remains as convoluted as it was before the new rules were set to go into effect over the next 37 months. Despite the window dressing, the fact remains that consumers are guilty until proven innocent, and the burden of proof is on them, not the creditors, to disprove the creditor’s erroneous data.

Despite protestations to the contrary, yesterday’s agreement vindicates the 60 Minutes news team that put together their exposé of the credit industry, but consumers aren’t out of the woods yet. Reportorial confusion has resulted in the conflation of new rules governing the correction of mixed credit files with the more common issue of erroneous reports from creditors. The credit repositories agreed to assign specially trained employees to review evidence documenting mixed files. They also agreed to require documentation from creditors to support their derogatory reports, but no one is saying how that is going to work as 200 million Americans suddenly start reviewing their credit reports and finding errors they didn’t know were there.

Most people do not look at their credit reports because they don’t have to. Their financial lives are in order. Credit reports only become an issue when someone is turned down for credit. Now, with this consent agreement, millions of Americans are going to be reviewing the credit reports specifically because the agreement requires the credit repositories to underwrite a vigorous media campaign, encouraging Americans to do just that. The log jam could begin to resemble the Los Angeles Freeway System at rush hour on a Friday afternoon.

The bottom line for people with credit report issues is that they may have a foot in the door, but that’s a long way off from a seat at the table. Getting your credit reports repaired may get easier, but that doesn’t mean that it will be easy.