Can the Credit Bureaus Finally Be Tamed?

WASHINGTON — A landmark agreement signed by one of the country's largest credit bureaus and hailed by federal and state officials as a "tough fix-it order" was supposed to usher in a new era where such firms would clean up inaccuracies and better respond to consumer complaints.

But nearly 25 years after the deal in question was penned with TRW, now known as Experian, and despite two subsequent legislative overhauls, glitches in the credit reporting system remain widespread.

As a result, regulators and law enforcement officials are again raising the stakes for the credit reporting industry, which tracks consumer debts and bill-paying habits to sell to banks and other lenders. 

The industry is now facing considerable scrutiny, including new oversight from the Consumer Financial Protection Bureau and a number of state attorneys general, though the piecemeal changes don't yet amount to enough for critics — particularly absent a headline-grabbing crackdown with real teeth. 

"They still need to be dragged kicking and screaming," said Ed Mierzwinski, the consumer program director at the U.S. Public Interest Research Group.

The Problems

Lawyers, advocates and regulators point to three related challenges that have long plagued credit reporting: accuracy of the information lenders submit; credit bureaus' own data quality checks; and the handling of errors when they are discovered.

A widely cited study by the Federal Trade Commission in 2012 found that one in four consumers have potential mistakes on their credit reports. Worse, one in 20 may have errors significant enough to negatively impact how much he or she pays for a loan, or whether credit is provided at all. Given that 220 million Americans are now on file with the bureaus, that's 11 million consumers with possibly material errors on the reports they will use to buy a house, car or even secure a job.

Such inaccuracies give rise to millions of disputes every year. Experian, Equifax and Transunion, the three main credit bureaus, were contacted a combined 8 million times in 2011. The CFPB received nearly 45,000 complaints in 2014, the third highest consumer area for complaints behind debt collection and mortgages. 

Opponents have branded the dispute process as a virtual merry-go-round of frustration.

"It's a Kafkaesque process," said Chi Chi Wu, a staff attorney at the National Consumer Law Center.

Instead of conducting substantive investigations when consumers lodge a complaint, the bureaus have typically relied on an automated system that boils down concerns into two- or three-digit codes that are sent to the creditors and others that provided the data, known as furnishers. Those lenders, in turn, may do little more than a simple check to see if the data in their systems matches what's already in the report, and whatever decision the furnisher comes to is generally accepted by the credit bureaus as true. That blind acceptance is known as "parroting" and it largely disregards a consumer's concerns or any supporting materials he or she might produce.

Steps Forward

Recent actions by regulators and state officials take aim at both the accuracy and dispute resolution problems that have plagued the industry for decades, nudging the credit bureaus and their furnishers in the right direction.

The Consumer Financial Protection Bureau began examining the largest credit reporting agencies in the summer of 2012 — a process that observers have described as intense and practically continuous. The agency has since come down with several significant orders that could help reshape key aspects of the industry. 

Perhaps most significantly, regulators have started requiring the credit bureaus to update their systems so that consumers can attach supplemental documents to their disputes, which will in turn be sent to the companies that initially provided the information. In addition , the credit bureaus are now required to submit accuracy reports detailing which lenders and industries have the most consumer disputes and to remedy accuracy problems when they are spotted. The CFPB has also worked with credit card companies to provide free credit scores to millions of customers, along with publishing a number of studies related to the industry. 

State AGs, meanwhile, reached two key agreements with the big three credit bureaus after years of investigation and negotiations. New York Attorney General Eric Schneiderman signed the first national deal in March, while 31 states finalized a second agreement in May. Most importantly, the settlements require the bureaus to put trained eyes on the stickiest credit errors, rather than relying on automated systems alone, and mandate that the bureaus provide a 180-day grace period for the reporting of medical debt so patients and families have time to sort out insurance delays and disputes. The credit bureaus will phase in numerous changes over the next three years.

A spokesman for Mike DeWine, Ohio's AG, who led the multistate agreement, said in a statement that the office will continue monitoring the credit bureaus and furnishers, emphasizing that the settlement "requires the credit reporting agencies to do a better, more careful job and to produce more accurate credit reports" and "requires them to be much more responsive when consumers call to correct mistakes."

"Under our settlement, the credit reporting agencies are required to track problem data furnishers, and if we ask for a list of those problem data furnishers, the credit reporting agencies will have to provide it to us. That's important because it will allow us to root out the source of bad information and take corrective action as needed," the spokesman added. "We also will continue to help consumers resolve complaints and correct the effects of identity theft through our complaint resolution process and identity theft unit."

The New York AG's office did not respond to requests for comment. 

Stuart Pratt, president and chief executive of the Consumer Data Information Association, the industry's trade group, said the credit bureaus continue to look for ways to improve — both on their own and with government. He also emphasized that the AG settlements were voluntary and didn't specify any violations of the law.

Pratt, who also serves as a spokesman for Experian, Equifax and Transunion, pointed out that the popular FTC study, which found that one in four credit reports may contain some kind of error, also concluded that 98% of files contain the information needed for lenders to accurately predict credit risk. And the credit bureaus have a 95% consumer satisfaction rate when it comes to resolving disputes, according to an industry-funded report from 2011.

"What we're focused on is the 2% — how do we improve on that really incredible accuracy rate of 98%?" he said, calling the industry's work with the CFPB "collaborative and collegial."

Structural Issues

Still, despite some of the improvements over the past couple of years, opponents worry that the incentives, particularly the economic ones, aren't yet strong enough to usher in wholesale reforms.

Broadly speaking, the credit reporting bureaus evolved from providing information to consumers about their credit to being data analysts for mortgage lenders, auto dealers and banks. The lender — rather than the consumer — is now the customer. That mindset has shaped the industry's evolution and could prove difficult to shake.

Advocates warn, for example, that while the recent state AG deals have garnered national attention, they may not be pointed or punishing enough to prompt lasting change. They argue there's little precedent for providing workers with the discretion to resolve disputes, and turning back the clock on the decades-long move to automate key aspects of the complaints process could prove a major challenge. Offshore vendors generally handle information related to disputes, with little ability to do more than translate complaints into digital codes.

"What you're doing with these settlements is, you're throwing a lot of aspirations and goals at a process that can only be increased by spending money and hiring people and creating a real environment for qualitative investigations to be completed," said James Francis, a consumer attorney at the law firm Francis & Mailman, who added that many of the changes being hailed to improve accuracy and the dispute investigation process were already required under existing law.

The Fair Credit Reporting Act has long directed the industry to "follow reasonable procedures to assure maximum possible accuracy of information" in producing credit reports. Critics argue that some of the reforms being lauded now should have already constituted "reasonable" efforts at achieving the highest possible levels of accuracy.

The industry's growing business in credit monitoring and education products further complicates the problem because the bureaus essentially profit from consumer insecurity about stolen credit information and identity theft. Those fears, along with general concerns about credit reporting errors, drive the sale of monitoring products, which go for as much as $19.95 a month. Worse, the products can provide a false sense of security, because they only monitor certain kinds of fraud and there can be a lag before relevant information shows up on a credit report.

Experian boasted in an investor presentation in May that consumer monitoring and identity protection accounted for 21% of revenue last year. Equifax, meanwhile, reported to the SEC in April that its "personal solutions" segment — products sold directly to consumers, including monitoring services — earned the company over $65 million, about 10% of total operating revenue for the first quarter of 2015.

"The credit reporting agencies are set up to profit from their own inaccurate information," said Leonard Bennett, a founding partner at Consumer Litigation Associates, who specializes in credit reporting cases. "They market their companies as if the bureau systems are objective, neutral libraries of information. But these are private businesses engaged in making money and selling a product — they are not government agencies."

Early in its tenure, the CFPB cracked down on the sale of add-on products like identity theft monitoring by banks and credit card companies, but has so far focused on dubious marketing practices, not the value of the underlying products.

"Only Getting Started"

For those hoping to see broader change, the good news is there are few signs of regulators backing off the credit bureaus anytime soon, leaving open the possibility of more action down the road.

"We are already bringing significant new improvements to the credit reporting system − and we are only getting started," Richard Cordray, director of the CFPB, vowed earlier this year. "Despite the credit reporting industry's commercial success in selling credit monitoring services, its core credit reporting system has not yet evolved to become very responsive to the public."

The transfer of authority from the FTC to the CFPB three years ago shifted the balance of power, because the consumer agency has unprecedented authority to conduct examinations and write rules for nonbanks, including the largest credit reporting agencies. Direct supervision of the industry, including the big three bureaus, gives regulators an unprecedented look under the hood at how the companies operate, as well as their defects, a crucial development that's likely to shape how the industry responds to scrutiny going forward.

"The CFPB, while they've taken many actions against unscrupulous lenders and overly aggressive marketing practices, haven't come down with the hammer on the credit bureaus," said John Ulzheimer, president of consumer education at CreditSesame.com. "The fact that the credit bureaus are being as cooperative as they seem to be with the states, that's maybe because the CFPB is the older, stronger and bigger brother watching to make sure everybody is playing fairly."

The lack of a major enforcement action so far has surprised some in the industry, who anticipated a tougher stance from the agency.

"I think everyone is waiting for the other shoe to drop," said Kim Phan, of counsel at Ballard Spahr.

The prospect has consumer advocates salivating in the hopes it could spur something more akin to lasting change.

"I would love to see an enforcement action against one of the bureaus and for them to have to take out their wallets," said PIRG's Mierzwinski. "The business model has historically been, let's not fix mistakes or improve the system, let's pay very modest penalties on consumer lawsuits and to the AGs every once and a while."

Regulators recently cited several key concerns with the industry's data collection practices and oversight in the CFPB's "supervisory highlights" report for summer 2015. Examiners found flaws at "one or more" of the bureaus with respect to how the companies monitored data from lenders and public records providers and a lack of quality controls for assessing the accuracy of consumer data in reports. The findings do not delve into specifics, but the agency does note that corrective action was demanded in some cases.

Equifax disclosed to the SEC last spring that it received a civil investigative demand from the CFPB in February 2014 "as part of its investigation to determine whether nationwide consumer reporting agencies have been or are engaging in unlawful acts or practices relating to the advertising, marketing, sale or provision of consumer reports, credit scores or credit monitoring products." Experian told analysts last summer that it got a similar request from regulators. Transunion, which is privately held, has not publicly discussed the issue.

A CFPB spokesperson said the agency would not confirm or comment on enforcement matters.

Furnisher Focus

Large swaths of the financial industry also face heightened compliance challenges as a result of the focus on credit reporting. Regulators and law enforcement are turning up the heat on debt collectors, auto dealers and credit card companies to provide accurate information and thoroughly investigate disputes they receive directly or from the credit bureaus.

"You have to go at the problem from both ends — with the bureaus and the furnishers — because they are responsible for different kinds of errors," said NCLC's Wu.

The CFPB warned creditors against punting on consumer disputes in the fall of 2013, and more recently told the credit bureaus they will need to start submitting periodic accuracy reports, including data about furnisher dispute rates. The AG settlements include a similar provision about collecting furnisher information, though the multistate deal goes further by mandating that dispute data be handed over to the states upon request.

"This information has been very private, so in a way it could be a 'gotcha' for an institution for which it seemed like some percentage of disputes was fine for them," said Mercedes Tunstall, a partner at Pillsbury Winthrop Shaw Pittman. "Nothing intentional or systematic — it just seemed like that was the normal course of business for them."

The new reporting duties may also disrupt the symbiosis between financial institutions and the bureaus. The credit reporting agencies need the data collected by furnishers to create their reports, which are then often sold to the same companies to inform lending decisions.

"Introducing a potentially adversarial aspect to that a voluntary relationship is extremely problematic," said Phan. "That the credit reporting agencies could be forced to basically play tattle tale on their furnishers really undermines that relationship."

Last year the CFPB brought actions against several furnishers, including an auto dealer and an auto financer, for providing faulty data to the credit bureaus. The agency also charged American Express in 2012 for failing to report some consumer disputes to the credit bureaus as part of a broader action against the credit card company. 

Just last month, the consumer agency cracked down on a medical debt collector, Syndicated Office Systems, in part for failing to respond to consumers about a disputed debt within the required 30 days.

The latest action "demonstrates what we can expect to see over the next several months — violations related to credit reporting and furnisher duties," said Rick Fischer, a senior partner at Morrison Foerster.

And while the agency has started with nonbank firms such as auto dealers and debt collectors, the effort may well spread from there.

"The big risk here over the long term is not for the credit bureaus, it's for furnishers — companies that regularly furnish information to credit bureaus, but do not have adequate policies and procedures to investigate disputes received directly or through credit bureaus," Fischer added. "The CFPB may start with debt collectors and non-banks lenders, but banks won't be far behind, if they're behind at all."

More broadly, the added pressure raises fundamental questions about the practice of passing along data to the credit bureaus. Because the process is voluntary, it's possible some creditors could consider pulling back on reporting as a result of the increased liability.

It's not clear that's a viable option, however, because the entire credit reporting system falls apart if the data supply begins to resemble Swiss cheese. Regulators have also grown increasingly worried about those with thin or nonexistent records, and firms looking to scale back or quash their furnishing duties could, in a roundabout way, find themselves exacerbating the problem.

Instead, the way forward is likely to include ongoing updates to the policies and procedures used by creditors and the reporting agencies. The era of big data almost requires it. As more of our financial lives are captured online, standards for accuracy and scope are bound to increase.

But critics of the current system say they want more than tweaks. They're hungry for a cultural shift in the industry that won't come cheaply or easily — if it comes at all.

"We've made great strides, but the credit bureaus are still not completely brought to heel," Mierzwinski said.