WASHINGTON, D.C. -
In light of the Consumer Financial Protection Bureau handing out stern enforcement actions connected with credit bureau reporting, the ranking member of the U.S. House Financial Services Committee now is joining the regulatory fray.
As the chairman-elect of the American Bankers Association attempted to assure the subcommittee about how the industry is committed to consistent, accurate credit reporting, Rep. Maxine Waters released a proposal that would make “sweeping” reforms to the nation’s consumer reporting system.
Waters, a California Democrat, explained her draft proposal, entitled the “Fair Credit Reporting Improvement Act of 2014,” will enhance requirements on the consumer reporting agencies (CRAs), and furnishers that provide information to these CRAs, to guarantee consumers have the capacity to ensure that the information on their credit reports is accurate and complete.
Waters noted her proposal comes in the aftermath of a number of recent court cases, news reports and studies that have detailed the significant problems and flaws in the current consumer reporting system, including the CFPB penalizing First Investors Financial Services Group.
“Credit reports are no longer just used exclusively by lenders in making a credit decision. More and more, credit reports are used in a variety of ways, from employment decisions, to determining a consumer’s ability to rent a home, buy a car, or purchase insurance,” Waters said.
“A person’s credit report is too important in determining access to a wide array of opportunities for these reports to contain inaccurate and incomplete information,” she continued. “This proposal addresses many of the flaws with the existing consumer reporting system, by making common-sense changes that enhance consumers’ rights, create more transparency over the consumer reporting and credit scoring process, and increase the accountability of credit reporting agencies, furnishers and companies that develop credit scoring models and formulas.”
According to the Federal Trade Commission, one in five, or roughly 40 million consumers, have had an error on one of their credit reports. The lawmaker said about 10 million consumers have errors that could increase the cost of credit available to them.
The draft proposal would make several reforms to the Fair Credit Reporting Act. Key provisions include:
— Providing relief to millions of borrowers who were victimized by predatory mortgage lenders and servicers, by removing adverse information about these residential loans that are found to be unfair, deceptive, abusive, fraudulent or illegal.
— Ending the unreasonably long time periods that most adverse information can remain on a person’s credit report, shortening such periods by three years.
— Giving consumers the tools to “truly” verify the accuracy and completeness of their credit reports, by mandating that furnishers retain all records for as long as adverse information about these accounts remains on a person’s credit report.
— Eliminating punitive credit scoring practices by removing fully paid or settled debt from credit reports, including medical debt, which has been found not to be a reliable predictor of a person’s creditworthiness.
— Giving distressed private education loan borrowers the same chance to repair their credit as federal student loan borrowers, by removing adverse information when delinquent private education loan borrowers make consecutive on-time monthly payments for a certain period of time on their loans.
Waters also mentioned the draft proposal also restricts the use of credit reports for employment purposes, which employers are increasingly using to screen qualified job applicants despite a lack of adequate data to show that a person’s credit is predictive of their job performance.
She pointed out the proposal also sets a dollar amount that a consumer can be charged to buy their credit score from CRAs, while also requiring CRAs to provide consumers with a free annual credit or educational credit score upon a consumer’s request.
“Over 10 years ago, Congress tried to strengthen consumer protections, but our consumer reporting system still has a number of systemic flaws. I believe we must take action to end the heartache that has plagued millions of consumers who have been unable to obtain a job, go to college, or buy a car because of their credit score,” Waters said.
“Many of these problems have stemmed our country’s economic growth. This draft proposal attempts to meet our obligation to ensure that consumers who have fallen victim — or fallen on hard times — are not deprived of the chance to achieve the American Dream,” she went on to say.
What Industry Is Already Doing
John Ikard is ABA chairman-elect and chief executive officer of FirstBank, headquartered in Lakewood, Colo. Ikard told House subcommittee members about how banks and other finance companies work diligently to provide accurate information to credit bureaus, which provides tremendous value to consumers and institutions alike.
“For consumers, credit reports provide a compilation of their historical performance on obligations which enables them to shop around for credit from any lender knowing that all lenders have a similar base of detailed information,” Ikard said.
Without these reports, consumers would have to provide extensive documentation lender by lender or be limited to a financial institution that they had previously done business with. Thus, credit reports open up the options for consumers and ensure that they can shop around in a very competitive market — nationwide — for the best loan or account that serves their needs. The greater efficiency and competition means better deals and lower prices for consumers,” he continued.
Ikard emphasized how important credit bureau reports are in the underwriting process, especially if the finance company hasn’t worked with this potential borrower previously.
“Banks benefit because an accurate understanding of a credit applicant’s credit history means they are better able to predict who is likely and unlikely to repay a loan, allowing them to make better decisions on whether to grant credit and at what price. Credit reports have proven to be good predictors of how consumers will manage their finances in the future,” Ikard said. “The ability to make more accurate decisions helps lower their costs, which helps to lower prices for consumers.
“Accuracy within credit reports is critical, of course, to ensure that customers are evaluated and extended loans based on the history of their individual performance,” he continued.
And if there are errors in a person’s credit file?
“Inaccurate reports undermine the value of the system,” Ikard told lawmakers. “An inaccurate report could prevent a qualified borrower from getting the credit that they deserve by making them look less creditworthy. An inaccurate report that is missing negative information could also make a borrower eligible for credit that they are ill prepared to handle. Thus, accurate credit reports ensure that credit is extended to deserving borrowers.”
Ikard wrapped up his prepared testimony in front of the committee by stressing how critical of a resource credit reports are and how they’re just as important to banks and finance companies as they are to consumers.
“Having such an efficient system is critical to credit availability for all deserving borrowers and is a key driver of economic growth, competition, lower prices and better deals for consumers,” he said. “Because the benefits to both customers and lenders are so large, it is in the best interests of both parties to ensure that credit reports are as accurate as possible.
Banks have invested heavily in systems and processes to report accurate data and contribute to this important public good. The system would be unworkable without accurate information that all parties can rely upon,” Ikard continued.
“Having an effective dispute mechanism is critical to this process. But any process can also be abused. Repeated unfounded disputes absorb resources that hurt everyone,” he went on to say. “Changes can be made that would help to stop such abuses without hurting legitimate claims to correct errors.”