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Why the credit report dispute process is broken

Automated dispute system backfires on many consumers

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A federal law is supposed to guarantee that credit report errors get fixed. So why do some people wind up spending months or even years trying to remove legitimate errors that are ruining their credit?

Credit report dispute process
CREDIT REPORT ERRORS:
NO EASY FIXES
Federal law guarantees consumers the right to dispute and remove credit report errors. But a CreditCards.com investigation finds that instead of having disputes individually researched, consumers confront an automated system that compresses their side of a dispute to a few lines of code, discards their evidence and rubber-stamps what lenders say.

Take the case of Rahul Sharma of College Station, Texas. With the Fair Credit Reporting Act in place, it should not have taken Sharma six years and a meeting with a lawyer to get errors ranging from bad Social Security numbers to accounts that weren't his erased from his credit report. But despite the decades-old consumer protection law, which guarantees consumers the right to get legitimate errors off their reports, Sharma fell through the credit reporting system's cracks.

Representatives across the credit reporting and banking industry say that cases like Rahul Sharma's are rare. "Like anything, [the credit reporting dispute process] is not a perfect system," says Nessa Feddis, vice president and general counsel at the American Bankers Association. "Sometimes mistakes happen."

However, consumer advocates and attorneys experienced with handling Fair Credit Reporting Act cases say that Sharma's hellish experience dealing with errors serious enough to deny him credit for more than half a decade is a perfect example of the problems they have been complaining about for years. The automated credit reporting dispute system used by the three major credit bureaus -- Experian, Equifax and TransUnion -- is broken, they say, and is causing too many consumers such as Sharma to miss out on the opportunity to apply for affordable credit, get a job in certain industries or avoid rate hikes on everything from apartment rentals to new cellphones.

"The dispute process has absolutely no value whatsoever for consumers," says Leonard Bennett, a consumer lawyer in Newport News, Va., who has repeatedly testified before Congress about the credit report dispute system.

After a consumer has carefully gathered evidence proving the information isn't theirs and written a detailed dispute explaining the mistake, the credit bureau will usually compress the letter into a two- to three-digit computer code and a 100-character summary, and send it electronically to another automated system, where it may be reviewed solely by another computer, according to court documents and interviews with people familiar with the process. The credit bureaus used to toss consumer evidence as well, but they've since updated the system so that it accepts consumer documents.

If the automated system fails to catch and correct a mistake, consumers can dispute again. However, if they complain too many times, the credit bureaus can legally dismiss the complaints as frivolous and ignore them, trapping consumers in a nightmare of bad credit they didn't earn. Consumers' only way out? Complain to the Consumer Financial Protection Bureau. Or sue.

Bureaus required to investigate disputes
By law, any time a consumer says there is something wrong on his or her reports, the credit bureaus are required to conduct "a reasonable investigation" into the disputed information and remove anything they can't verify as accurate. The reality, however, is that "the credit bureaus actually spend very little time -- only a few minutes, at best -- investigating a consumer's dispute," says DeVonna Joy, an attorney with the Consumer Justice Law Center in Big Bend, Wis.

Consumer lawyers say that the short amount of time that credit bureaus spend investigating consumers' disputes is proof the bureaus are skirting the law.

Credit bureaus say the issue is more complicated. They maintain that their systems are compliant with the Fair Credit Reporting Act and they do the best they can with the resources they have.

"We take our obligations very seriously and complete investigations and disputes as required," says Rod Griffin, director of education at the credit reporting agency Experian. Lenders wouldn't trust them if they didn't, he says. "Businesses rely on the accuracy of the credit history to make sound decisions and if the credit reports were rife with inaccuracy, any usefulness or credibility would be undermined and we would provide no useful service," says Griffin. (Story continues below.)

Rahul Sharma of College Station, Texas, was still a college student when he was rejected for credit the first time he applied. He had never had a U.S. credit card before. But when he pulled his credit report from the credit bureau Experian, he saw, to his surprise, multiple accounts listed in his name.

His credit report also listed several Social Security number variations that weren't his, addresses in cities that he had never been to and many other inaccuracies. "Everything was incorrect," says Sharma. "Even my date of birth was not correct."

Even stranger, most of the information listed on his credit report dated back to before 2005, the year that Sharma moved to the United States from India to study at the University of Arizona. "Eighty percent of these things were dated back before I came," says Sharma. "I don't know where they got all that."

In theory, the timing of the information on the report should have made it relatively easy for Experian to investigate Sharma's disputes and conclude that the information the bureau was reporting was wrong. Sharma says he included dated copies of his U.S. visa information, along with several other documents proving his identity.

However, it didn't matter how many times he sent evidence proving that the information on his reports didn't belong to him. "I couldn't fix it," he says.

It wasn't until Sharma contacted Austin-based lawyer Amy Kleinpeter, six years after he discovered the errors on his report, that he was finally able to get the errors removed.

By then, Sharma says he had lost more than just the ability to borrow at an affordable rate. He had wanted to work in banking or insurance. But "those sectors were out of reach for me," says Sharma. Both industries routinely check applicants' reports.

When Sharma did try to apply for a job that checked his credit history, he was turned down. "I got some letter [saying] your credit history is not good," he says.

Today, Sharma is working for Texas A&M University in College Station and is steadily rebuilding his finances. However, he's still dealing with the fallout from years of bad credit. The errors on his reports are now gone, but he's missed out on six years of building a positive credit history and, as a result, is paying a much higher APR on his loans.

Jerrod Myers
When Jerrod Myers, a disabled veteran living in Independence, Ore., successfully disputed an inaccurate collection account listed on his credit reports, he figured that was the last he'd hear about the mysterious $1,071 cellphone bill to T-Mobile. The debt was promptly deleted from all three of his reports, says Myers. "And I thought that was the end of the matter."
Less than a year later, it popped up again, this time under a different collection agency. The debt was resold to the debt collection firm Midland Credit Management, along with Myers' personal information. When Myers disputed again, the credit bureaus TransUnion and Equifax quickly deleted the account. However, Experian repeatedly verified it.

"It drove me nuts," says Myers. "I kept trying to understand where Experian is coming from," he says. "I asked them point-blank how come this is happening," and the customer service representative told him if the debt collector verified the debt as being correct, then that's how the bureau would report it. "Their whole investigation is nothing but a rubber stamp," he says.

Myers tried calling Midland Credit Management as well, but instead of helping him, the firm demanded that he pay the debt. "The man said, 'I'm not here to dispute the law with you. You need to pay this account,'" says Myers.

Myers refused. "I paid off every debt on my credit report that's legally mine and morally mine because it's the right thing to do," he says. "Then to have these people come out of nowhere, it's like a kick in the gut."
Myers contacted a consumer law firm in Salem and is suing Midland Credit Management for harassment and for failing to properly investigate his dispute.
His credit score, meanwhile, has sharply nosedived, severely limiting his access to affordable credit. "They turn you down right and left," Myers says. "Even to get a car loan, I had to accept the ultimate highest percentage."

"It's been a nightmare."
LoriAnn Pecoraro

LoriAnn Pecoraro of Paramus, N.J., spent close to a year trying to get errors ranging from collection bills that weren't hers to unfamiliar variations of her name and Social Security number off her reports. "If you have ever been robbed before, that's how you feel," says Pecoraro. "You've been robbed of your good name."
Pecoraro says she spent hours every day trying to clear up the mistakes. "I have a binder about six inches thick. It became a second job," she says. "It's a daunting experience. I literally got up in the morning and read everything I possibly could."

Earlier in her career, Pecoraro had worked as a traveling professional for the Cheesecake Factory and moved around every two to three months. As a result, she had a number of temporary addresses on her reports and was mistakenly being tied to utility bills that belonged to other residents that lived in the same apartments. "If you're in a rental apartment, 20 or 30 [people] could have lived there," says Pecoraro. "They can't marry it up to them so they marry it up to the person that they have information on."
Pecoraro also had several medical collection accounts listed on her report, including one for a person with a similar Social Security number.

She made numerous phone calls to the insurance companies, hospital billing departments, utility companies and other businesses tied to her reports. However, she says she kept hitting roadblocks from customer service representatives who told her there was little they could do.

"It's very much an uphill battle," she says. "Not only is this a time-consuming process, it's expensive." To prove that you mailed a dispute, for example, experts recommend that you send it certified mail. But then, "you're talking $5 a pop," says Pecoraro.

Pecoraro was eventually able to get each of the errors cleared from her reports. "I left no stone unturned," she says. However, it took her months of phone calls and mailing letters to do it. "Most people don't have the time to do what I did," she says. "Most people quit."

Markus Horner
Markus Horner, a residential maintenance professional in Sachse, Texas, couldn't believe it when he drove by the address that was being mistakenly reported on his credit report. The Mesquite, Texas, home that he supposedly lived in was a gas station and convenience store. "How am I supposed to live in a gas station?" says Horner.

"I tried disputing it two or three times," he says. But each time, he'd receive a letter saying that the credit bureau had verified the address as being correct. "That's their answer to everything," says Horner. "And when you start questioning it, they say, 'Well, you have to go back to the person that's reported it.' Well, who reported it? 'Well, we won't tell you that.'"

"I quit disputing it after about the third time," he says. "I just gave up. You know the old saying, a Catch-22? That was exactly what I'm in. I'm supposed to figure it out, but I don't know what information I need to help me figure it out."

Horner says he has several other wrong addresses listed on his report, but he's given up trying to fight them and has cut up all of his credit cards.

"There's not a lot the consumer can do," says Horner. "You're pretty well stuck if they say, 'No, it's verified.'" You could write to your congressman, some people recommend, but Horner is skeptical. "You'll get a nice polite form letter saying 'Thank you for your letter. We'll let you know,'" says Horner.

"So where does the consumer go?"

Frank Zocco
Frank Zocco, a financial adviser in West Hartford, Conn., got into trouble with his employer when a settled debt with a collections agency showed up on his credit report during a routine credit check.

As a financial adviser, "you can't have anything on your credit report," says Zocco. "You can't have any past due, outstanding balances … if there is anything on there that's settled, you need to explain it."

The defaulted loan was his, says Zocco. He had missed payments on an old loan after his mother and stepfather were both diagnosed with cancer and his income as a self-employed financial planner wasn't enough to make ends meet. "It was circumstances beyond my control," he says.

However, Zocco says he paid the debt off in 2008 after reaching out to the collections agency that bought it. "I said, 'Is this something we can settle?,'" says Zocco. "He said, 'We can, but it's going to hurt your credit,' … so he said to pay in full."

After Zocco paid off the debt, he received a letter saying that the account was closed and it was being reported as a zero balance. However, he also noticed it said 'settled in full.' But the account wasn't settled, says Zocco. "I paid in full."

It took Zocco numerous phone calls, letters to state officials and threats of a lawsuit to finally get the error cleared. "It took an exorbitant amount of time," he says.

"Part of me feels very bad for the people who don't have the knowledge or the letter writing skills or a job that will allow them to take the time to do this," says Zocco. "You can't pay someone to fight these battles for you. Because if you do, it's going to cost you an arm and a leg. And it's almost like the credit bureaus and the creditors know this and they just back you into a corner."

Watchdog agency steps in
Until recently, the question of whether credit bureaus are investigating consumers' disputes as thoroughly as the law requires has largely been left up to juries to decide on a case-by-case-basis.

Before the federal consumer watchdog agency, the Consumer Financial Protection Bureau, gained regulatory authority on Sept. 30, 2012, the credit reporting industry was regulated solely by the Federal Trade Commission. The FTC occasionally issued enforcement actions against companies that it said violated the Fair Credit Reporting Act. However, the FTC's resources were extremely limited, says Chi Chi Wu, a staff attorney for the National Consumer Law Center in Boston. 

As a result, many of the credit bureaus' dispute practices remained an industry secret, apart from snippets that were revealed in court cases and through congressional testimony, and the bureaus largely escaped serious regulatory scrutiny.

That's changing, however. In October 2012, the CFPB began formally accepting consumer complaints about the credit reporting system and began relaying those complaints directly to the credit bureaus. Around the same time, it also published the first-ever comprehensive report on the credit reporting industry, giving consumers a never-before-seen glimpse behind the scenes. 

Less than a year later, the credit reporting industry updated its dispute system so that consumer documents can be electronically transmitted to lenders and other data furnishers. Previously, any supporting evidence that consumers submitted was left at the agencies' processing centers.

In February 2014, the CFPB issued another formal bulletin, this time warning companies that supply consumer financial information directly to the credit bureaus to properly investigate consumer disputes or else face hefty penalties.

Consumer advocates hope that by shining a bright spotlight on the credit reporting industry and enforcing the Fair Credit Reporting Act, the CFPB will eventually begin answering the highly controversial questions that have split consumer advocates and industry leaders for years. For example: When it comes to credit report disputes, what exactly is a "reasonable investigation" under the law? And are credit bureaus -- and the furnishers that provide them with the information that make up their reports -- expending enough financial resources to keep a reasonable majority of consumers from going through unnecessary turmoil trying to get errors removed from their reports?  

A mostly automated system
If the CFPB decides to schedule any more on-site visits to the credit reporting agencies, consumer advocates say one of the first stops on their route should be the agencies' processing centers where the disputes initially get reviewed.

The dispute process has absolutely no value whatsoever for consumers.

-- Leonard Bennett
Consumer attorney

Most of those trips will require a passport. All three credit bureaus have outsourced at least part of their dispute programs to contractors abroad, says consumer lawyer Leonard Bennett.

There, foreign workers quickly scan consumers' disputes for relevant information and compare them with preset computer codes that describe typical consumer disputes. For example, a code might say "not his/hers" or "claims paid the original creditor before collection status or paid before charge-off." Or, a dispute code may be even more general, such as "consumer states inaccurate information," with a note to the creditor to "provide and confirm complete ID and account information."

Once the worker has determined what code best fits the dispute, he or she will type the code into a brief online form called an Automated Dispute Verification Form (ACDV), along with a 100-character summary (around 20 words) of the dispute and scanned copies of any additional evidence the consumer sent, and send that form electronically to the original furnisher of the information. 

That, says Bennett, is the full extent of the credit bureau's investigation process. "Once the data, your 10-page letter and all your exhibits and documents or affidavit, has been reduced to the two- or three-digit code, the credit bureaus' involvement is over," says Bennett. 

The employees don't conduct any other type of investigation, he says. Instead, their "single job is to read the letter as quickly as possible [and] determine which of a limited number of two- or three-digit codes best describes that consumer dispute."

Norm Magnuson, vice president of the consumer reporting agency trade group, the Consumer Data Industry Association, describes a similar process. "Almost all disputes now are handled electronically," confirms Magnuson. "There's a process where it comes to one of the CRAs and they input what the complaint is about."

Disputes are processed electronically, he says, in order to accommodate as many disputes as possible within the 30-day time frame that credit bureaus are allowed, by law, to investigate a dispute. "The genesis of this is that years and years ago, one of the criticisms was that it took too long to respond to complaints," says Magnuson.

"Almost all of the disputes that come in, they're fairly standard," he adds. However, he admits, some consumers with more complicated disputes do fall through the system's cracks.  

Glossary of terms
  • ABA - American Bankers Association
  • ACDV - Automated Consumer Dispute Verification Form
  • CDIA - Consumer Data Industry Association
  • CFPB - Consumer Financial Protection Bureau
  • CRA - Credit Reporting Agency
  • e-Oscar - Online Solution for Complete and Accurate Credit Reporting
  • FCRA - Fair Credit Reporting Act  
  • FTC - Fair Trade Commission

"We try to devise a system that can accommodate people and get back to them in a timely manner, and I think that's what the system does," says Magnuson. "At least in 97 percent of the cases." 

If consumers' cases are more complicated, they can also try calling a customer service representative by phone, says Experian's Griffin, where they will get more personal attention. "Our representatives spend as much time as necessary to resolve an issue when they are on the phone with someone," he says.

Disputing by phone doesn't necessarily mean consumers will get a full airing of their disputes once they are translated onto paper, says the Consumer Justice Law Center's DeVonna Joy. "In litigation, I get their records and [the dispute] is reduced to one or two sentences and you know they talked more than that," she says.

CRAs leave it up to the furnisher to investigate a dispute
Once the credit bureaus' employees are finished translating a dispute into an ACDV form, they send that form to the original supplier of the information through an electronic portal called e-Oscar. Usually, any supporting evidence that the consumer submitted with the dispute gets left at the bureau's processing center, say consumer lawyers.

"Initially, we don't necessarily transmit all of the documentation that comes to us in every case," says Griffin. "But we'll send it to the lender if necessary."

At that point, the credit bureau's investigation is done. "The credit reporting company's role is to accurately report what lenders are telling us is in their records," says Griffin. "We don't have direct access to a business's records," he says, so the bureaus must rely on the furnisher to investigate their records and ensure that they are accurate.

Consumer advocates say that's not an excuse. "If they don't have access to the files, they should ask for them," says the National Consumer Law Center's Chi Chi Wu. "The credit reporting agencies like to say they're just a library. They're just a database. But that's not true," she says. "The consumer reporting agencies are supposed to have an independent role," says Wu. "They're not supposed to be parroting the furnisher, which is what they're doing now."  

The duty to actively and substantially investigate a dispute -- and examine any relevant evidence -- is in the case law, she says.  

What's a 'reasonable investigation'?
For example, Newport News-based lawyer Leonard Bennett points to a 1997 third circuit case, Cushman v. TransUnion, that he says sets the standard for a "reasonable investigation" under the law. "It's the most-often cited from coast to coast," says Bennett.

We take our obligations very seriously and complete investigations and disputes as required. Businesses rely on the accuracy of the credit history to make sound decisions and if the credit reports were rife with inaccuracy, any usefulness or credibility would be undermined and we would provide no useful service.

-- Rod Griffin
Experian director of education

In that case, the judge ruled that the credit reporting agency TransUnion violated the Fair Credit Reporting Act by failing to compare evidence, such as mismatched handwriting samples, and independently verify the misinformation that the original furnishers, American Express and Chase, were reporting.   

The 1997 case, in which Pennsylvania resident Jennifer Cushman's credit reports were littered with accounts opened by an identity thief, is a good example of how consumers' legitimate errors get repeatedly verified, say the attorneys.

Furnishers, such as banks or debt collectors, are also required by the act to conduct a "reasonable investigation" of a consumer's dispute. However, their investigation processes vary and many rely on automated systems as well.

For example, says Paul Hartwick, a spokesman for J.P. Morgan Chase, in an email, "We may receive credit bureau disputes from either individual consumers or from the credit bureaus. We have automated processes for handling both types of disputes."

Hartwick says that the bank's automated systems are set up to catch more complicated errors, such as when a clerical error at Chase caused the bank to misreport a consumer's information.

However, consumer lawyers say that multiple court cases have demonstrated that many furnishers' investigation systems are inadequate. "All they're doing is checking to see if what's in their computer system is the same information that's in the ACDVs," says Leonard Bennett. So, "what happens is, unless the creditor itself made the correction to its computer system, the dispute process is hopeless," says Bennett.

Nessa Feddis of the American Bankers' Association disagrees with that description. "I don't know how they know that unless they've been inside the bank," says Feddis.  "It can't just be, 'This is what it's in our files and that's what matched,'" she says. "They have to do something more than that."

However, Chi Chi Wu says that evidence shows not all furnishers are double-checking their own information. "In the case law, it's been documented of furnishers where all they do is check their own database," she says.

"In my mind, and I think in the minds of other people, [a reasonable investigation] means actually having a human being look into a matter," says Wu. "None of that happens with an automated system."

Cary Flitter, a consumer lawyer and law professor in Philadelphia, says that credit bureaus and information furnishers' decision to automate the dispute process, rather than staff it with trained investigators, comes down to dollars and cents.

"It's a business decision about the level of accuracy that they want competing with the business cost of fully or properly administering disputes," Flitter says. "At the end of the day, that's where it falls."

"If they get it wrong, they get it wrong," adds Flitter. "The great majority of them don't do anything about it."

See related: Federal bureau now oversees major credit reporting agencies

Updated: July 21, 2014


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