Prepared Remarks by Richard Cordray on Credit Reporting
Director of the Consumer Financial Protection Bureau
Credit Reporting Field Hearing
July 16, 2012
Thank you all for coming today. We are glad to be here in Detroit to hold this field hearing.
I myself am Midwestern born and bred, from neighboring Ohio, and received my undergraduate degree from Michigan State University, where I was a classmate of Magic Johnson and where I still have many lasting friends. So I am well aware that this state has suffered greatly in the last ten years with the one-two punch of lost manufacturing jobs and then the foreclosure crisis. People here, as in some other parts of the country, understand what it means to fight hard to find traction in a tough economy. After the financial crisis and extreme credit crunch of 2007-2008, tens of millions of Americans are now being pursued by debt collectors. Many people’s credit ratings have taken a hit and now they are having a tough time regaining their financial footing. They are blocked from obtaining access to the credit that is often so essential to meaningful opportunity – to get an education, start a business, or buy a house.
We understand these realities at the Consumer Financial Protection Bureau because we hear about them from consumers every day. We also believe it is important to get out of Washington and listen directly to consumers by meeting them face to face. So we are glad to be with you today and to have you help us better understand how credit reporting companies (also called consumer reporting companies) affect people’s daily lives for better and for worse.
These businesses track your credit history and payment records, and they analyze the information to determine what risks are posed by extending credit to you in the form of any kind of loan. Over the years, they have made it possible for a broad system of individual credit to grow and develop in this country, which has encouraged and promoted people’s pursuit of the American dream of financial success. But, whether you realize it or not, their scorekeeping exerts a tremendous and growing influence over the ways and means of your financial lives. And so it is important for all of us to understand more about their work and the ways it can affect us.
Today, the Consumer Bureau is issuing a new regulation to expand our supervision program to oversee these credit reporting companies. The authority to supervise firms is the authority to conduct on-site examinations of whether and how they are complying with the law. It affords an opportunity to gain a more thorough understanding of their business models and their business practices, to work with them to correct any problems we find, and to find ways to resolve matters that may be causing harm to consumers.
Before we open this hearing, I want to take a few minutes to discuss the credit reporting market and our role in overseeing it. This is a field hearing. We are here to listen, to learn, and to gather on-the-ground information that will help inform our approach. We are thinking hard about issues in the credit reporting market, and we do not yet have all the answers worked out by any means. We need your help and your insight.
As Henry Ford once said, “If there is any one secret of success, it lies in the ability to get the other person’s point of view and see things from that person’s angle, as well as from your own.” We believe in the wisdom of that statement. So, please, tell us what you think.
Let me start by talking about the credit reporting market.
Credit reporting plays a critical role in consumers’ financial lives, a role that most people do not recognize because it is usually not very visible to them. Credit reports on a consumer’s financial behavior can determine a consumer’s eligibility for credit cards, car loans, and home mortgage loans – and they often affect how much a consumer is going to pay for that loan. If you have a credit record that appears to show a greater risk that you will fail to repay a loan, then you may be denied credit and you likely will be charged higher interest rates on any loan offered to you.
Our credit reporting system involves several key participants. First are the creditors and others that supply the information about your financial behavior, which can include your credit card issuers, your mortgage company, or companies that are collecting debts they claim you owe, among others. Second are those that collect and sell the information, which are the credit reporting companies. Third are those that use the information, which largely consist of financial institutions, but can also include insurance companies, auto dealers, retail stores, and even prospective employers. Fourth are consumers themselves, who are the object of all this scrutiny and who are immediately affected by it. All of these participants play important roles in ensuring that the credit reporting system operates effectively to help consumer credit markets work better for us all.
The credit reporting market is huge. Almost every adult in America has a credit file. Estimates are that each of the three biggest credit reporting companies maintains files on about 200 million Americans gleaned from over 10,000 providers of information. The amount of information collected and exchanged is astounding. Each year, approximately 3 billion credit reports are issued and more than 36 billion updates are made to consumer credit files.
A credit report contains information about the consumer’s transactions – including loans that a consumer has paid on time, has paid late, has not paid, or has paid off, along with current amounts and sources of debt. The credit reporting companies also collect and report on information about consumers’ finances available from public records, including civil judgments, liens, and bankruptcies from thousands of federal, state, and local courts and public offices.
The information contained in consumers’ credit reports is used to derive their credit scores, such as various versions of the three-digit FICO score. Credit scores translate this great mass of information into a single number that indicates, in shorthand, a consumer’s expected likelihood of repaying a loan. Generally, the lower the score, the lower a consumer’s likelihood of repaying the loan compared to other consumers.
But credit reports are also used in a wide range of other types of decision-making – including determinations about eligibility for rental housing, what deposits are required for utility or telephone service, and premiums for auto and homeowners’ insurance. Credit reports are even sometimes used to determine eligibility for a job. Banks, landlords, cell phone providers, and all kinds of other companies rely on the accuracy of this information to make good decisions and manage their risk of suffering losses.
Credit reporting is an important element in promoting access to credit that a consumer can afford to repay. Without credit reporting, consumers would not be able to get credit except from those who have already had direct experience with them, for example from local merchants who know whether or not they regularly pay their bills. This was the case fifty or a hundred years ago with “store credit,” or when consumers really only had the option of going to their local bank. But now, consumers can instantly access credit because lenders everywhere can look to credit scores to provide a uniform benchmark for assessing risk. Conversely, credit reporting may also help reinforce consumer incentives to avoid falling behind on payments, or not paying back loans at all. After all, many consumers are aware that they should make efforts to build solid credit.
So this critical market is at the heart of our lending systems. It has enabled many of us to get credit and to afford a home or a college education.
But it is also clearly a market that can cause considerable problems for consumers. For example, sometimes credit reports contain errors that inaccurately reflect people’s financial histories and can unfairly block them from getting approved for credit or can make it cost more than it should. Consumers also can encounter great difficulties at times in getting errors corrected. When the Consumer Bureau first opened its doors almost a year ago, we asked people to share their consumer experiences with us. We have heard reports since from many consumers that their credit reports are not accurate, and it is difficult to get them corrected. Because of the critical role that credit reports play in consumers’ lives, it is our job to make sure we understand the full extent of these problems and address them effectively.
Given its enormity, given its influence, and given its wide impact on our overall economy, you can see that there is much at stake in ensuring that the credit reporting market is working properly for consumers.
Today the Consumer Bureau is announcing that we will be supervising the credit reporting companies that are the larger participants in this marketplace. These companies have never before been subject to a federal supervision program. Starting this September, we will be monitoring and examining them just as we monitor and examine the big banks. Our new supervision authority means that we will now have a clear window into the entire credit reporting system.
Up to this point, no single federal government agency could access all the information necessary to generate a complete picture of what was happening inside these companies. Now, the Consumer Bureau has the clear authority to oversee this industry, including the very largest credit reporting companies. Our oversight will also extend to specialty credit reporting companies, such as those that focus on payday loans or checking accounts, as well as resellers of credit reports and those that analyze credit report information. This new supervisory authority will complement our existing authority over the creditors that supply much of the information to the credit reporting companies.
Our country’s credit system is a resource in which we all have much at stake – both directly and indirectly – and we need this system to operate effectively in order for the credit markets to work properly and fairly.
Because no federal agency has previously had the kind of broad access to information about the operations of the credit reporting companies that the Bureau will now have, there is much we do not know yet about the true risks that consumers face in this market. As we go forward, we will be gathering data to determine how the various parts of the Consumer Bureau can best act to protect consumers. We start with three areas of focus.
First, our oversight of the credit reporting companies will help us make sure that the information provided to them is itself reliable. Lenders and others who furnish information to the credit reporting companies are legally required to have policies in place about the accuracy and integrity of the information they report – which includes identifying consumers accurately, correctly recounting their actual payment history, and keeping their information and recordkeeping in order. Otherwise, their sloppy work becomes the true source of harm to the consumer’s overall creditworthiness. We want to deepen our understanding of the recordkeeping and reporting practices by lenders and we want to see what the credit reporting companies can be doing to test and screen for the quality of information they receive.
Second, given the number of complaints we have already heard from consumers, and the findings reached in some (but not all) reports on the subject, we want and need to know more about the accuracy of how the credit reporting companies assemble and maintain the information contained in consumer credit reports. Accuracy is critical for consumers and for markets. We recognize that achieving such accuracy takes a great deal of discipline and effort, particularly for a company that is handling and processing a huge volume of information. But because of the increasingly significant role these reports are taking on in our financial lives, the collateral consequences of mistakes can greatly harm consumers. The wrong information may cause them to be denied a loan, to be charged a much higher interest rate, or to be passed over for a job, causing them serious economic hardship. And inaccurate credit reports also deprive lenders of essential information they need to assess credit risk properly.
Third, we are keenly interested in understanding more about the problems and frustrations that consumers tell us they encounter in trying to resolve disputes about the information contained in their credit reports. Some errors may be unavoidable even in the best of systems. But when consumers find what they perceive to be erroneous information in their credit reports, they should not be burdened by unreasonably laborious processes to get errors removed from their files. There are certainly valid reasons why a credit reporting company must conduct a reasonable investigation when a consumer disputes information, and follow the procedures outlined in the law. But the harm done by errors is borne above all by consumers, and they deserve straightforward, effective, and timely mechanisms for addressing disputed items.
These initial areas of concern – accuracy of the information received by the credit reporting companies, their accuracy in assembling and maintaining that information, and the processes that govern error resolution – are just a start. They are the obvious and essential basics. But as we learn more about this market from consumers, from the supervised firms, and from others, we will adapt and adjust. The Fair Credit Reporting Act sets out an ambitious goal: Credit reporting companies “shall follow reasonable procedures to assure maximum possible accuracy of the information” contained in credit reports. In this context, we are here to correct what is not going well, and we are here to see that this market is made to work better for those who are affected the most. And we will exercise our supervisory authority to make sure that the consumer financial laws are being followed.
So the credit reporting industry is continuing to become more central to peoples’ lives just at a time when they are experiencing widespread problems with credit availability. Many Americans have been greatly affected by the financial crisis, the housing crash, and the deep recession that followed. Today, because of accumulated debts, foreclosures, and bankruptcy filings, many people have more negative information on their credit reports than they did before the crisis. In fact, I am sure that some people in this audience, unfortunately, can attest to that.
As I said earlier, this country’s credit reporting system is a resource in which we all have a stake. That system must merit our trust and confidence for the credit markets to be perceived as fair. We all share in this responsibility. But the credit reporting market is not one where consumers can shop around among different providers, for people have no choice about whether to have any of the credit reporting companies keep track of their credit history. That is why the Consumer Bureau’s new authority is so important, and why it must be exercised carefully and effectively.
What consumers can do, however, is be smart about how they manage their own credit. They need to know how to build up their creditworthiness, so that they can take control over their credit history in a positive way. They also need to be aware that federal law gives them the right to a free credit report from each of the nationwide credit reporting companies – which can be obtained at www.annualcreditreport.com − once a year. It is critical for each of us to exercise that right. Keep in mind that nobody else has as much incentive to protect you as you have to protect yourself. Checking your credit report can reveal odd entries you do not recognize, which may be signs of identity theft. It also can uncover errors that will hurt your creditworthiness unless you dispute them and get them fixed. I urge every consumer to perform this self-check at least once every year. Starting today, we are including advice about how to do that in the “Ask CFPB” function on the Consumer Bureau’s website at www.consumerfinance.gov. Our website also provides tips for consumers on how to manage their credit generally – how to get and keep a good credit score and how to navigate the consumer credit markets.
So as we wade in to these issues, we look forward to hearing more from you both today and in the future. Share your thoughts and experiences. We are intent upon hearing from consumers about their personal experiences to inform our work. To quote Henry Ford once again: “Coming together is a beginning; keeping together is progress; working together is success.” Thank you.