Ed's Blog

Two big consumer stories so far this week offer hope to consumers victimized by credit bureau errors and, more generally, by an inability to take credit bureaus, credit card companies, banks or payday lenders to court when harmed. On Monday, New York's Attorney General Eric Schneiderman signed a groundbreaking agreement with the Big Three credit bureaus, Equifax, Trans Union and Experian. Then today, the CFPB released a report finding that consumers are harmed by small-print forced arbitration clauses in credit card and other contracts that allow firms to break the law with impunity, as the clauses immunize them from legal action by harmed consumers. The CFPB will hold a webcast public hearing at 11am Eastern time today Tuesday to discuss the report's findings. The findings of the report allow the bureau, by law, to pursue new rules to protect consumers.

Big Story #1: More On The Importance of the Settlement With the Credit Bureaus:

The settlement is important because the firms, as I told Bloomberg: "have become gatekeepers to economic and employment success in the U.S." The action is expected to greatly improve the accuracy of mistaken-ridden credit reports that harm consumers seeking credit or jobs. Forcing credit bureaus to do a better job is also important because, as CFPB director Rich Corday has pointed out on a number of occasions, credit reporting is a dead-end market where consumers have no choices. You can pick your friends and you can pick your bank, but you cannot pick your credit bureau. You cannot vote with your feet when a credit bureau makes a mistake and ignores your efforts to fix it.

The settlement requires the bureaus to have humans verify the results of reinvestigations of certain disputes; the normal practice has been that computers at a furnisher (creditor or debt collector) share summarized codes with the bureau's computers. But as I pointed out to CNBC: "They're just verifying sameness, not correctness," —which is what can keep wrong information on the report." 

The settlement also delays reporting of alleged unpaid medical debt by 180 days, since so much medical debt, often for small amounts, is merely the result of impatient, fast-on-the-trigger hospitals and doctors selling unpaid consumer bills to sloppy and often unscrupulous debt buyer firms before slow-on-the-draw insurance companies have sorted out and paid claims. The CFPB has found that false medical debt claims litter credit reports; further, leading credit score firm FICO, among others, has determined that medical debt is not a legitimate indicator of creditworthiness. A recent CFPB study points out problems with medical debt reporting in detail.

We've been fighting the credit bureau wars for 25 years.  One of our early 1990s reports, part of our "Nightmare On Credit Street" series that helped lead to hard-fought 1996 reforms, was based on consumer complaints to the FTC. It focused on the very issue that may finally be solved by this enforcement action: the credit bureaus routinely take the word of creditors in disputes but ignore consumers. As we noted in that report, "Consumers are outraged that the credit bureau says: "Item remains, confirmed by source." They want to to know: "Who is this source?" Our latest 2013 report, "Big Credit Bureaus, Big Mistakes," based on complaints to the CFPB, confirmed that serious problems still exist.

We urged Congress to pass upgrades to credit reporting law in 1996 to require the credit bureaus and those "sources" (generally creditors or debt collectors) to improve accuracy but the credit bureaus ignored it, so we helped pass another law in 2003, and they ignored that one, too, so in 2010, we fought to give the new CFPB broad authority over credit bureaus, including the ability to "examine" them-- essentially to look inside their previously black-box operations. A 2012 CFPB study detailed endemic problems at the credit bureaus and led to a key concession: the bureaus agreed to send furnishers all supporting documentation for a consumer's dispute. Previously, they had only sent the codes. (Apparently, the bureaus have only just now learned that email allows file attachments.) CFPB bulletin explains. (pdf) The CFPB's work has formed the foundation for this important New York enforcement action.

General Schneiderman's action is a big victory in the credit bureau wars, but we'll remain vigilant and we'll keep pushing. Expect further action by other leading state Attorneys General and both the CFPB and the FTC.

Big Story #2: Why the CFPB Arbitration Study Could Lead to A Fairer Marketplace:

Today, the CFPB released a report finding that consumers are harmed by small-print forced arbitration clauses in credit card and other contracts that allow firms to break the law with impunity, as the clauses immunize them from legal action by harmed consumers. The CFPB will hold a webcast public hearing at 11am Eastern time today Tuesday to discuss the report's findings. The findings of the report allow the bureau, by law, to pursue new rules to protect consumers. Highlights from the CFPB release accompanying the comprehensive 728-page pdf report available here (html):

"[A]rbitration agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions. The report found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements. The Bureau’s report also found that more than 75 percent of consumers surveyed did not know whether they were subject to an arbitration clause in their agreements with their financial service providers, and fewer than 7 percent of those covered by arbitration clauses realized that the clauses restricted their ability to sue in court."

Here is a shorter 4-page pdf CFPB fact sheet on the report. Excerpt from the prepared remarks of CFPB director Rich Cordray at the hearing today:

"In discussing these findings, it is important to bear in mind that when it comes to consumer finance, arbitration clauses are contained in standard-form contracts, where the terms are not subject to negotiation. Like the other terms of most contracts for consumer financial products or services, they are essentially “take-it-or-leave-it” propositions. Consumers may open a new account or procure a new product without being aware of what the contract says or without fully understanding its implications. As part of the study we are releasing today, we looked at arbitration clauses in at least six different consumer finance markets."

As the director's remarks point out, the problem is with pre-dispute arbitration, forced onto consumers. No one opposes arbitration agreements entered into after a dispute is arisen. But boilerplate arbitration clauses in take-it-or-leave-it contracts affect financial contracts, cell phone and health insurance contracts and even nursing home contracts. Anticipated CFPB action will be a huge step toward reform that will make markets work better.

The idea of the CFPB needs no defense, only more defenders.

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