Welcome to this meeting of the Consumer Advisory Board. We find great value in the dialogue we have with our CAB members, who share with us their perspective, their expertise, and their experience. All of that improves our work in many ways. We are here together because each of us cares deeply about how consumers are being treated in the consumer financial marketplace. Today, I want to talk to you specifically about some of the work we are doing and the tangible progress we are making in the consumer reporting marketplace.
Consumer reporting, also known as credit reporting, is an important market that for many years has not been very transparent and generally is not well understood by consumers. It is also one of the markets where people cannot vote with their feet by choosing another provider if they are dissatisfied, which means that industry incentives and practices are not always aligned with the interests of consumers. It is a business-to-business ecosystem where consumers traditionally have had little power to insist on improved practices or fair treatment.
Nonetheless, the data managed by the consumer reporting companies – and the scores generated from that data – exert a tremendous influence over the ways and means of people’s financial lives. Credit reports on a consumer’s financial behavior can determine eligibility for credit cards, car loans, mortgages, and more – and they often affect how much a consumer will have to pay. If a credit record appears to show a greater risk of failing to repay a loan, then the consumer can be denied any credit at all and likely will be charged higher interest rates on any loan that actually is offered to them.
In 2012, the Consumer Financial Protection Bureau became the first government agency ever to supervise the national consumer reporting companies. Even more than that, the Bureau became to first federal agency to supervise all sides of the credit reporting market, from the consumer reporting companies that collect the information to the various companies that furnish it to them. For the first time, it became possible for a single agency to see across the entire credit reporting ecosystem and hold all of the key parties responsible for issues of data accuracy and dispute handling; no finger-pointing could deflect accountability.
Today we are releasing a report offering more detail on the problems we have uncovered and corrected in the consumer reporting industry through our oversight work over the past several years. It tells a fascinating and eye-opening story. We have pressed the consumer reporting companies to fix data accuracy and repair dispute handling, and we have pressed those who furnish data to clean up the information they are supplying to the consumer reporting companies. Although much more improvement still is needed, we are making real headway. And the importance of this work for the overall welfare of consumers is truly enormous.
Before we started supervising the consumer reporting industry, accountability occurred only through sporadic enforcement actions and private litigation. There was no direct and continuing oversight to address the problems consumers had with the industry. Standards on the accuracy of information in consumer credit files were distinctly sub-par. For general industry purposes, the data may have been good enough if lenders found it helpful in gauging credit risk, but that rough-and-ready standard did not work well for individual consumers. Indeed, in 2012, the Federal Trade Commission released the results of a study it conducted of the accuracy of credit reports. It found that at least one-in-five consumers had an error on at least one of their credit reports and for one-in-five of those the error was sufficiently serious to materially affect their credit score. This translates into many millions of American consumers.
Consumers also complain about the great difficulties they encounter in getting errors corrected. They often find themselves with little or no recourse if they are stymied or things go wrong. I recall the kinds of stories I heard in Ohio when we were working on credit freeze legislation – sometimes it took well over a year and a shoebox full of contacts to get any results, and many matters ended in complete failure. Some errors are 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 those errors fixed.
Yet people continue to tell us just how hard it is for them to get errors corrected. Our latest Monthly Complaint Report, released a few days ago, shows that consumers continue to struggle to resolve errors on their credit reports. As of last month, the Bureau has handled approximately 186,000 credit reporting complaints, with many expressing common issues over time.
Having said that, though, we are moving the needle. Five years ago, we first began to conduct on-site examinations to see whether and how consumer reporting companies were complying with the law and whether their practices posed risks to consumers. We have gained a more thorough understanding of their business models and business practices. But most importantly, we began to work with them to correct the many problems we found and to resolve matters that were causing harm to consumers.
Until we gained the authority to do this work, no state or federal regulator was in position to hold these companies regularly accountable and none could generate a complete picture of what was happening inside their operations. So we began monitoring and examining them just as we monitor and examine the biggest banks, giving us a clear window into the entire credit reporting system. The companies became subject to review of their compliance systems and procedures through on-site examinations, discussions with relevant personnel, and reporting requirements. This is a very different and much more systematic approach than merely subjecting them to sporadic law enforcement actions, as had occurred previously.
Our approach has been holistic – addressing not just the consumer reporting companies themselves, but also the banks and other financial companies that supply them with data, including mortgages, student loans, auto loans, credit cards, and debts in collection. In 2013, we published a bulletin emphasizing that we would hold furnishers accountable for their obligation to investigate disputes forwarded to them by the consumer reporting companies. We explicitly noted that they must review all relevant information provided with the disputes, including documents submitted by consumers. We had found that was not the norm. We also continue to educate the public about the importance of checking their credit reports, what to look for, and how to dispute any errors in their reports.
The approach is in line with our fundamental understanding that the consumer reporting market is not simply a business-to-business market. Instead, it is a market that deals with the precious and personal information of many millions of individual consumers, with huge impact on their lives. In treating the consumer reporting companies accordingly, our approach has worked a substantial change in their approach and in their outlook for consumers.
As outlined in today’s special edition of Supervision Highlights, our oversight teams have focused their work on data accuracy, repairing dispute handling, and cleaning up information supplied by furnishers. As our report shows in much greater detail, our corrective actions have had a considerable positive impact for consumers.
First, in our earlier exams when we first started supervising the consumer reporting companies for data accuracy, we were surprised to find that their quality control systems were either rudimentary or virtually non-existent. Without strong controls in place to check the accuracy of their records, however, data quality could not be assured. So we directed them to make a number of changes to improve in this area, which they did. In our more recent exams, we have found that quality control programs have now been instituted, which include testing to identify whether credit reports are being produced for the wrong consumers and whether they contain mixed-up files. The companies are also taking better corrective actions when errors are identified and making more systematic improvements to prevent the same errors from happening again.
Second, we have imposed extensive corrections to the processes for consumers to dispute the information contained in their credit reports. At the outset, we found that those processes were badly broken. Our examiners discovered that one or more of the consumer reporting companies was not following the federal requirement that they must send a notice to consumers clearly stating the results of their investigation of disputes. Our examiners also found that companies were failing even to consider documentation that consumers had provided in some disputed matters. So we imposed specific corrective actions to require the companies to improve their dispute investigation systems. Since we began to focus on this area, we have directed them to do a better job of investigating disputes and providing more complete response letters to consumers. And we are making it a point to follow up on these directives.
Third, we are also cleaning up the information that the consumer reporting companies receive from those who furnish it to them. We are all familiar with the data problem of “garbage in, garbage out.” Through our reviews at both the banks and other furnishers, our examiners found widespread problems indicating that they were supplying incorrect information to the consumer reporting companies and failing to follow an adequate process to correct the information when consumers disputed it. So we directed them to undertake specific improvements, such as maintaining evidence that they are accurately handling disputes and conducting reasonable investigations. As a result of our reviews, many furnishers have recognized the need to dedicate more resources to ensuring the integrity of the data they provide to the consumer reporting companies and to address errors when they are brought to the furnishers’ attention. This includes better handling of disputes, notifying consumers of results, and taking corrective action when inaccurate information is found to have been supplied.
During our examinations over the past several years – encompassing various kinds of financial institutions, not just the consumer reporting companies – when examiners have found violations of law, they have directed the companies to change their conduct and remediate consumers. In certain instances, as appropriate, the Bureau’s supervisory activity also results in enforcement actions, such as the actions recently taken against some of the consumer reporting companies for deceiving consumers about the utility and actual cost of the credit scores sold to them. The Bureau has also taken an enforcement action against Wells Fargo, as a furnisher, for failing to update or correct inaccurate, negative information reported to the consumer reporting companies about student loans. This all goes to say that while we make every effort to correct problems through the use of our supervisory authorities, when enforcement action is needed on behalf of consumers, we are willing and able to use that tool as well.
Our oversight activity is prompting an entirely different approach to ensuring compliance at the major consumer reporting companies and their data furnishers. We are requiring them to engage in proactive attention to compliance, rather than a defensive and reactive approach to the issues raised by data accuracy and dispute handling. We believe this proactive approach will continue to benefit consumers – and the lenders that use credit reports – for many years to come.
Another way to help improve the consumer reporting market is to get consumers more directly involved. If consumers begin to demand more, they can compel both the consumer reporting companies and furnishers to become more responsive and responsible to the public. This means turning the established business-to-business model of credit reporting to focus more squarely on the needs and rights of consumers.
In order to make this happen, it is necessary to stimulate even greater consumer awareness of the credit reporting system and how it matters to people’s lives. People cannot take control of their finances if they do not recognize how this system exerts substantial influence over their financial choices. We have attacked this problem by championing the Open Credit Score initiative and related developments, which are aimed at making credit scores and credit reporting information more readily available to consumers at no cost. Years ago, people were given the right to check their credit reports for free with each of the three largest consumer reporting companies and with other specialty companies every year. But credit scores were not made available in the same way, even though seeing one of their credit scores tends to give consumers unique insights into the meaning of all the cumulative information contained in their credit files and, in fact, credit scores are what matters most to many lenders. The Open Credit Score initiative is now taking on this problem by encouraging industry to continue to expand access to free credit scores and by building consumer awareness of the availability of credit scores and credit reports. It also is helping consumers understand how they can use this information to achieve their own financial goals through expanded educational efforts by a growing roster of consumer lenders and others.
Today we are boosting this awareness by releasing a list of companies that have informed the Bureau that they offer their existing credit card customers free and ready access to one or more of their credit scores. Some lenders have gone further and now offer this same service to all consumers, whether or not they are existing customers. To check out the Open Credit Score Company List, go to our website at consumerfinance.gov. If other companies that are providing this service or choose to provide it wish to be added to the list, they can do so as well.
Looking ahead, we will continue our work to hold the consumer reporting companies and furnishers accountable for complying with the requirements of the law and treating consumers fairly. This is a realistic and responsible standard that accords with the important ways this industry affects people’s financial lives. Given the tremendous impact of credit reports and credit scores on consumers, we must be sure that the consumer reporting system works well for each individual consumer. We are committed to making further improvements in this market.
Our ultimate vision is a consumer reporting market that works efficiently to ensure that access to consumer credit is based on accurate information. We expect consumer reporting companies and furnishers to operate effective systems that identify and correct errors in consumer reports before they are sent to users. These systems will likely combine the quality control, data monitoring, and auditing processes that many companies are in the process of building out now. We believe these changes are creating a much-needed system of continuous improvement in data accuracy.
We also expect improvements in the market to ensure that consumers have a fair opportunity to have their disputes resolved timely and thoroughly, with inaccurate information being corrected. The responsibility to address these inquiries falls on both consumer reporting companies and furnishers: under the law, each must reasonably investigate disputes and clearly communicate the results to the consumer. This requires appropriate investments and system upgrades as they cannot simply pass the buck to one another. And the era of “dispute purgatory,” where consumers have to spend months or even years making repeated efforts to dispute inaccurate, negative information in order to get someone’s attention, should become a thing of the past.
At the same time, we and other law enforcement officials will be policing and supporting this market by working to root out scammers and fraudsters. We want to protect consumers against those who peddle false claims, such as when credit repair companies guarantee that negative information, even if it is accurate, will be removed from people’s credit files if they just dispute it enough times. The truth is that negative accurate credit information is unlikely to be removed and is best cured by the passage of time and by paying your bills on time. Everyone in the consumer reporting market, including both consumers and providers, will benefit from the work we are doing to strengthen the marketplace against such illegal activity.
In short, our oversight work has spurred a great deal of progress by the consumer reporting companies and their data furnishers in the past several years in improving data accuracy and dispute handling. Nonetheless, there is more to be done to improve these practices. So we look forward to hearing from the Consumer Advisory Board members to further inform our approach. In addition to our work on credit reporting, we will also discuss our recent enforcement work and new steps we are taking to enhance the experience during our complaint process. As always, we are thinking hard about these issues and we are open to your suggestions. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.