Consumer Protection

FTC Finds Consumer Credit Reports Rife With Errors

A Federal Trade Commission investigation of the U.S. credit reporting industry turned up some dismal findings for consumers. The comprehensive study found that 5 percent of consumers identified errors on one of their three major credit reports that were significant enough to affect their eligibility for loans and insurance, as well as the rates they would pay.

The FTC report, which was announced on Monday, is based on work with 1,001 participants who reviewed 2,968 credit reports with study associates who helped them identify and correct possible errors. The credit reports with potential errors were sent to Fair Isaac for rescoring. Once the dispute process was completed, the study participants were given new credit reports and scores.

First of Its Kind

The FTC billed the study as the first of its kind. Indeed, one of the problems with the credit reporting industry is that there is little to no quantifiable data to use as a basis for policy decisions.

Until now, there have been no major federal government studies that quantify how difficult or easy it is for average consumers to correct valid inaccuracies in their reports, according to Michael Salinger, a Boston University professor who previously served as director of the FTC’s Bureau of Economics.

To be sure, there have been plenty of reports and anecdotal evidence from other agencies and private sector organizations capturing the difficulty consumers have in navigating credit reporting agency processes. In a year-long investigation, The Columbus Dispatch found that thousands of consumers had been denied loans because of credit report errors.

Why Aren’t Businesses More Concerned?

Even with the new data, “there is a lot we don’t know about credit reports and errors,” Salinger told CRM Buyer.

For instance, there have also been no major federal government studies of whether the errors on consumers’ credit reports skew in both directions — that is, whether credit bureaus are missing late or defaulted payments that should be included in a report but aren’t, thus giving lenders a false picture of a consumer’s risk profile. It is unclear whether the FTC study addressed that issue.

It is therefore surprising that the push to reform credit bureaus only seems to come from consumer advocates, Salinger said. “I would expect the credit bureaus’ customers — business users — to want that information to be as accurate as possible.”

Clearly, mistakes affecting consumers have a greater impact. A person could be required to pay a much higher interest rate for a car loan, or tens of thousands of dollars more for a mortgage, or be shut out of the lending market altogether.

Auto insurers also routinely use credit scores in developing their pricing methodologies, Salinger said.

That is why this report by the FTC is important, he continued. “Credit scores are used for a wide range of reasons, some of which people understand — such as home loans — and some of which people don’t.”

Taking On the Agencies

For this reason, challenging any errors found on a report is crucial, Salinger said.

Another issue the FTC report addresses is the widely held perception that dealing with credit reporting agencies is akin to navigating one of Dante’s Circles of Hell.

In short, while the findings do point to many consumers walking away frustrated by their dealings with the credit reporting agencies, it is also clear that some consumers can get resolutions of their issues. The bad news is that these people appear to be in the minority.

Among the FTC’s findings:

  • On at least one of their three credit reports, one in five consumers had an error that was corrected by a credit reporting agency after it was disputed;
  • Four out of five consumers who filed disputes experienced some modification to their credit report;
  • Slightly more than one in 10 consumers saw a change in their credit score after the credit reporting agency modified errors on their credit report; and
  • Approximately one in 20 consumers had a maximum score change of more than 25 points, while one in 250 consumers had a maximum score change of more than 100 points.

What many consumers don’t understand is that getting an error corrected requires participation from the lender as well as the credit reporting agency, Consumer Data Industry Association spokesperson Norm Magnuson told CRM Buyer.

The law calls for the credit reporting agency to reinvestigate any errors in a credit report. When the agency gets a report of an error from a consumer it sends it on to the lender, which has 30 days to respond.

In at least 15 percent of instances, the credit bureau is able to fix the error without the consumer waiting 30 days, often because it was able to spot the issue and make the fix on its own, he said, citing figures from a December 2012 report by the Consumer Finance Protection Bureau, which regulates credit agencies.

Also, errors are not fixed in real time but rather every reporting cycle, Magnuson noted, which could confuse some consumers when they check back to see if their report has been corrected.

It is not that credit reporting agencies want to have errors in their reports, he said. “Would we like to see that 5 percent figure decline? Absolutely — and we will continue to work toward that.”

An FTC spokesperson was not immediately available to comment for this story.

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