Consumer watchdog pulls back curtain on credit reporting agencies

By Kelly Dilworth

Ever wonder what the credit reporting agencies actually do with your credit information before selling it to lenders? You're in luck. The Consumer Financial Protection Bureau (CFPB) has pulled back the curtain on the notoriously secretive industry, which collects and sells billions of bits of consumer data, and has issued a comprehensive report on the big three credit bureaus, Experian, Equifax and TransUnion.

The report, released Dec. 13, is the first of its kind to look behind the scenes at the big three credit reporting agencies and report to the public exactly how the credit bureaus handle consumer data and investigate errors in consumer reports.

"Today's study helps bring clarity to the confusing world of credit reports," said CFPB Director Richard Cordray in a press call Dec. 12. "It will help educate regulators and consumers about how this important industry works. If consumers know how these companies handle their credit histories, they can make better decisions on how to manage their financial lives."

The report is also intended to give regulators a deeper understanding of how the industry operates before the CFPB takes any kind of regulatory action, said a senior CFPB official in Wednesday's press call. The CFPB formally began overseeing credit reporting agencies Sept. 30, and began accepting consumer complaints about their credit reports in October.

Until now, details about how the credit reporting industry handles consumer credit data were largely secret, apart from what's been revealed through court cases and government testimony. The information in Thursday's report was culled from a combination of publicly available information and direct interviews with the credit reporting agencies, a CFPB official said.

Here's just some of what the CFPB uncovered in its report:

• Credit cards matter -- a lot. Every month, the three largest credit bureaus collect information on more than 1.3 billion consumer trade lines, including credit card accounts, mortgages, auto loans and other types of consumer loans. Credit cards are, by far, the most common type of loan listed on a credit report, accounting for a whopping 60 percent of all loans recorded by the credit bureaus. "Today's report found that credit card history makes up more than half of the information on an average credit report," said Cordray in a press call. "This means credit cards are given great weight in credit profiles -- a lesson that consumers could end up learning the hard way." The lopsided importance that credit cards have for many people's credit files was one of the most significant findings of Thursday's report, said a CFBP official in a press call, underscoring the fact that a single missed payment or inaccuracy can make a big impact on a consumer's credit score.      
• Credit report errors arise from many sources, including mismatched files. The way that consumers are matched to the information in their credit files varies, depending on the credit bureau. Some credit bureaus assign consumers a personal identification number (PIN) and attach that PIN to information in other databases based on algorithms that find the consumer that best matches the header information of the account. When a consumer's credit report is requested, the bureau pulls it together in real-time using the PIN to link together the databases. Other bureaus keep consumers' information together in one "file" and match new information to the file using personal identifiers such as a name, Social Security number or date of birth. Which system works best for maintaining accurate files is unknown, says the CFPB. However, a number of errors arise from matching consumer credit information to the wrong consumer. For example, files sometimes get mixed up when a creditor asks for a consumer's report, but doesn't include identifying information, such as a Social Security number. Or a file may get mixed when a consumer is mistaken for a family member that shares the same name. Other common causes of credit report errors include data entry mistakes, identity theft, incomplete public records information, failure by a debt buyer to disclose who sold it the debt and incorrect updates by either a creditor or credit bureau to an existing debt or public record, such as a tax lien.  
• Credit bureaus are relying on lenders to investigate errors. As previously reported by CreditCards.com, credit bureaus largely depend on lenders and furnishers of consumer credit data to investigate credit report disputes. Consumers contacted the credit reporting agencies approximately 8 million times in 2011 to initiate a credit dispute. But only a small fraction of those disputes were resolved internally by credit bureau staff. According to the report, the vast majority of credit report disputes -- 85 percent -- are passed on to data furnishers to investigate and resolve. "The [national credit reporting agencies] report that in seeking to maximize accuracy and in resolving disputes, they rely on furnishers meeting their obligations under the [Fair Credit Reporting Act] to report information accurately and to respond to disputes appropriately," said the CFPB in the report.   
• Credit bureaus aren't passing on your documents. Consumer lawyers have long complained that credit bureaus aren't passing consumers' evidence to lenders, even though the credit bureaus rely on lenders to investigate the dispute. In its report, the CFPB confirmed that in the majority of cases credit bureaus compress a consumer's dispute into a preset code indicating what the dispute is about and submit the code to lenders through an electronic portal called e-Oscar. The credit bureaus rarely, if ever, pass on documents that consumers submitted as evidence of their dispute, said the CFPB in the press call. In the majority of cases, the code is all they send. Only 26 percent of disputes passed on to a lender or data furnisher include text alongside the code that explains in more detail what the dispute is about.
• Problems with collection accounts are the most frequently cited consumer complaint. Debt collectors -- and the collection accounts they report to the credit bureaus -- are the most frequent targets of consumers' ire, according to the report. Nearly 40 percent of all disputes handled by the credit reporting agencies are related to a collection account. The higher volume may, in part, be due to consumers' incentive to dispute negative information, said the CFPB. The frequency with which old debts are bought and sold by debt collection agencies - and the way some collection agencies handle reporting the accounts to the credit bureaus -- may also contribute to the substantially higher number of consumer disputes.    
• Consumers aren't checking their information. It's unknown how many consumer credit reports have errors on them, said the CFPB. However, far too many consumers are leaving it up to the credit reporting agencies to make sure their reports are accurate. Only about one in five consumers with a credit history check their credit reports in a given year, said the CFPB. "This is a shame because the most effective way for consumers to identify errors in their reports is to obtain copies of them and review them," said Cordray in the press call. "This is also a shame because -- while we do not know for sure how common these errors are -- we know that people do find errors.  And if consumers are not checking their reports, these errors can persist and pop up when a consumer can least afford them, blocking them from borrowing money for a larger purchase or causing them to pay a higher rate of interest than they should."

See related: CFPB opens federal complaint system to credit report disputes

Published: December 13, 2012

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