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In committee votes this week (7/16) and last week (7/11), the U.S. House Financial Services Committee sent a package of credit reporting reforms on to the House floor. The Big 3 national credit bureaus have been the most-complained-about financial firms to the CFPB for four years running, predating the Equifax breach.
The votes represent the first major Congressional action to rein in the so-called Big 3 credit bureaus - Equifax, Experian and Trans Union - and other smaller, specialized bureaus and credit scoring companies, since 2003, when the Fair and Accurate Credit Transactions Act became law. The 2018 passage of federal free credit freeze legislation (see below) was based not on federal leadership but on passage of 50 state credit freeze laws between 2002-2016 and consideration or passage of about a dozen state free freeze upgrades after the Equifax breach in 2016. Wisely, in passage of FACTA, Congress had allowed states to continue to lead in most areas, including prevention of identity theft. So they did.
The package of bills passed this month includes most sections of the comprehensive Consumer Credit Reporting Reform Act developed over several years by Financial Services Committee Chairwoman Maxine Waters (CA). We testified in support of the reform package at a full committee hearing in February.
Elements of the package sent to the House floor include:
Restricting the Use of Credit Reports for Employment Decisions: H.R. 3614, the Restricting Use of Credit Checks for Employment Decisions Act (Lawson-FL), would ban the use of credit reports for most employment decisions, except when required by law or for a national security clearance. Several states and cities have already enacted similar reforms, reflecting a growing concern that credit reports shouldn't be used to deny jobs in a sluggish economy, whether due to mistakes or even late credit card payments, especially when the industry has never demonstrated a correlation, let alone a causal relationship, between reports and predicting job suitability or performance.
Providing Free Credit Scores Used By Lenders Along With Reports: H.R. 3618, the Free Credit Scores for Consumers Act of 2019 (Beatty-OH), will solve a long-standing problem in credit reporting. In the early 1990s, the FTC proposed that scores were part of reports and should be disclosed with them, but caved after a phalanx of industry lobbyists put pressure on them to back down. California realtors and consumer groups then had to pass a state law in 2000 prohibiting credit bureau contracts from preventing users (such as real estate agents) from even showing consumers their scores. The bureaus then realized that consumers afraid of paying too much for credit would pay hundreds of dollars a year for credit score monitoring products and began aggressively selling so-called "educational scores" to consumers, but not the scores actually used by lenders. One wag has referred to these as "FAKO, not FICO," scores (most lenders use a variant of the Fair Isaac Company FICO credit score). The previous CFPB director, Rich Cordray, imposed civil penalties on the Big 3 (Trans Union and Equifax, then Experian) for deceptive marketing of these highly-profitable "educational score" subscription products.
Shortening Time Periods for Negative Information on Reports: H.R. 3622, the Restoring Unfairly Impaired Credit and Protecting Consumers Act (Tlaib-MI), would shorten the time period in which adverse information would stay on a consumer report from seven years to four years, making it easier for consumers to rehabilitate their credit histories. The most important information in credit scoring is the most recent information (1-2 years). Older information is much less predictive. Importantly, among other changes, the bill would eliminate two industry-demanded flaws in S2155, the massive deregulatory package passed in 2018. S2155 established a national free credit freeze, but preempted stronger state free laws that apply in more circumstances; S2155 gave servicemembers additional credit monitoring rights, but without providing a remedy if the bureau did not provide them. It was outrageous that the only two consumer provisions intended as "sweeteners" in a sweepingly deregulatory bill were skewed toward industry, not consumers.
Creating a Right To Appeal Credit Bureau Decisions: H.R. 3642, the Improving Credit Reporting for All Consumers Act (Adams-NC), would vastly improve the Kafka-esque process for consumers to resolve inaccuracies on their credit reports. A key provision creates a landmark new right to appeal credit reporting decisions.
Helping Private Student Loan Borrowers Clean Up Their Reports: H.R. 3621, the Student Borrower Credit Improvement Act (Pressley-MA), would allow private student loan borrowers to remove adverse information for certain defaulted or delinquent loans when they demonstrate a history of recent timely repayment.
Providing Oversight of Credit Scoring Model Development: H.R. 3629, the Clarity in Credit Score Formation Act of 2019 (Lynch-MA), would direct the CFPB to set standards for credit scoring models, to ensure their models are objective, fair and in compliance with civil rights and fair lending laws.
The committee is expected to schedule votes on additional legislation to strengthen requirements to ensure the accuracy of credit reports, provide greater consumer rights in credit reporting disputes and make other changes. A draft proposal (Gottheimer-NJ) is one further reform bill that would make a series of additional changes derived from the Consumer Credit Reporting Reform Act's provisions.
I often say that the credit bureau are unaccountable, unelected gatekeepers to financial or employment opportunity. Further, I say that fighting the credit bureaus is a never-ending battle akin to The Hundred Years War because the bureaus refuse to treat consumers fairly. The original Fair Credit Reporting Act passed in 1970 and it has been amended significantly in 1996, 2003 and 2010 (with establishment of the CFPB, which was given more tools than the FTC had). But more always needs to be done.
I also often say that credit reporting deserves strict regulation because credit reporting is a flawed market where you cannot vote with your feet. You can pick your friends and you can pick, and change, your bank (or credit union) but you cannot change your credit bureau. Positively, since the Equifax breach, policymakers finally understand that we aren't customers of the credit bureaus and, further, that the bureaus treat consumers as products, not customers. The remedies in the current law, unfortunately, have been inadequate to force the credit bureaus to improve their business model to correct these marketplace flaws and improve the accuracy of reports so that fewer consumers face credit or employment denial due to their mistakes.
The steps taken this month by the House Financial Services Committee offer a key path toward cleaning up the credit bureaus and making the financial markets work better for all consumers.
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