Thank you for joining us as we meet with our Consumer Advisory Board. We always look forward to this dialogue, as the members share with us their perspective, their expertise, and their actual experience on the ground. We are all here because we care deeply about how people are being treated in the consumer financial marketplace.
A year ago, I focused my remarks to this group on the work the Consumer Financial Protection Bureau is doing on credit reporting. Today, I would like to give you an update on that work in anticipation of our discussion. Every consumer who seeks to make use of credit to help manage his or her financial affairs is affected by this industry, whether they are aware of it or not.
In fact, the credit reporting industry has profound effects on the ways and means of people’s lives. For decades now, these effects have been positive in various respects. Most Americans have a credit file. In fact, each of the three biggest credit reporting companies maintains files on over 200 million consumers. People’s ability to access credit, and how much they pay for credit, is typically governed by what is contained in their credit profiles. Without credit reporting and credit scoring, financial providers could not effectively assess and manage credit risk, and the supply of credit would be more erratic and more deeply constrained. And so this industry enables people to access money they do not actually have, based on estimates of their future likelihood of repaying what they are permitted to borrow on credit.
At the same time, credit reports and credit scores can determine the terms of people’s mortgages, whether they qualify for auto loans, or if they are eligible for different credit cards. These effects on people’s lives are obviously very significant. As this data shapes and determines so many of our prospects, it is important to ensure that the credit reporting industry performs well in its high-volume work of assembling and maintaining the personal financial information of so many million Americans.
It is also important to recognize that the influence of the credit reporting industry has expanded in other ways over time, going well beyond credit itself. The uses made of this information have widened. It is allowed in some states (though prohibited in others) for the price of insurance premiums to vary depending on the individual’s credit profile. And though the practice is controversial in some quarters, it is now more common for a potential employer to review a consumer’s credit report as a factor in making a hiring decision. Landlords may also consider this information before deciding whether to approve a potential renter or the amount of a security deposit to require. In short, credit reports, and the scores derived from them, have come to play an even more fundamental role in determining whether and how each of us will be able to take advantage of opportunities to shape our futures.
Because of the importance that credit reports have in consumers’ lives, we all need this industry to operate at the highest levels of quality and performance. As consumers develop greater awareness of these issues and intersect more routinely with the credit reporting companies, we need those companies to become more responsive to the very people whose information, after all, is the core element of their business. The information on our credit reports is, after all, our information, not theirs.
So we are focused on improving the accessibility of credit reports and improving their accuracy. We have heard consumers complain regularly about the challenges they face in getting a copy of their credit report or in getting wrong information corrected on their report. In a market like this one, where consumers cannot “vote with their feet” by taking their business elsewhere, it is even more important that the Consumer Bureau is focusing its work on bringing about greater transparency and accountability.
Last year, we launched an initiative to encourage credit card companies to make credit scoring information more easily and regularly available to credit card customers at no cost. At that time, just a few credit card issuers – notably, Barclays, Discover, and First National Bank of Omaha – had made credit scores available to consumers on their billing statements or by some other means. Now, more than a dozen issuers are providing scores directly and freely to consumers on a regular basis, including a significant share of the largest issuers. As part of this initiative, we estimate that over 50 million consumers already have the opportunity to see their credit score in this way. This number is poised to expand considerably this year as other credit card issuers, large and small, are now committing to making credit scores freely available to their cardholders.
This initiative is crucial because it will build awareness among the general public and help focus consumers more consciously on how their credit profiles affect their lives. As more consumers see their credit scores on a regular basis, and especially if they see their credit scores changing over time, they will be motivated to understand more about the impact of this aspect of their financial lives. For example, the Bureau encourages consumers to regularly check their credit reports, for free, through AnnualCreditReport.com. Regular credit report checks can make it easier for consumers to spot changes and make it more likely that consumers will take action to identify and correct potential errors.
As public awareness grows and spreads, people also will likely want to learn more about how to improve their credit scores and build their credit profiles in ways that will make them better managers of their financial affairs and more attractive candidates for credit. This is a win-win both for consumers themselves and for financial service providers. In the past, too many people were unaware of the importance of their credit standing until it was too late: after a credit application had been denied or identity theft had already caused extensive damage.
Although credit scores provide just a partial picture of one’s finances, making the scores available to consumers for free will help prompt busy Americans to review their credit standing and take action accordingly. An improved credit score will open up much greater access to credit and render the available credit more affordable than before. That will translate into a direct and substantial improvement in their financial lives.
To better understand people’s perspectives on their credit scores, we have been conducting focus groups with consumers from a diverse set of demographics across the country. We are quite interested to learn about consumers’ experiences in checking their credit report or credit score and what motivates them to do it.
Many of the people we talked with said they had seen their credit score in the past year, and some said they saw it on their credit card statement. So that indicates some of the progress the open credit score initiative is already making. Some consumers told us that if they were anticipating an upcoming loan or big financial transaction, they might check their credit reports or scores proactively. Other consumers said they had done so reactively, in response to an incidence of fraud or after they had been denied credit. The key point, again, is that consumers who actively monitor and manage their credit standing to improve their creditworthiness should, on average, be better informed consumers who are less likely to become delinquent or default.
In the focus groups, consumers reported some of their greatest concerns and greatest gaps in knowledge. While many consumers seem to understand the importance of their credit reports and scores, they are confused about why different scores and reports exist. And while there is some degree of awareness of the big three credit reporting companies, there is little familiarity with the many smaller companies that cater to certain specialty markets, such as screening tenants or job applicants.
To shed more light on these matters, for the past few years the Bureau has published a list of the names and contact information of nationwide and specialty credit reporting companies. This year our list has grown to about fifty companies; they collect a wide array of consumer data which, in turn, they report to their corporate clients. The list makes it easier for consumers to see and understand who is collecting what information about them. The list also tells consumers why fact-checking and keeping tabs on their personal reports are so important. It provides instructions for how to access their personal reports. The list also links to Bureau resources that help consumers get answers to frequently asked questions. All of this information is available on our website at consumerfinance.gov.
Consumers bear their own share of responsibility to monitor and manage their credit standing, but we want to make it easier for them to do that. Efforts like the open credit score initiative are encouraging greater access to credit scores. Our list of credit reporting companies helps people understand and act on the data that is collected and reported about them. As the economy continues on its current path to recovery, consumers should have the confidence that their credit reports are accurate and reliable, and that credit decisions made about them are made fairly because they are based on the right information.
To help achieve these outcomes, we have targeted substantial resources toward the issue of accuracy of consumer information, and we will continue to do so. We are the first federal government agency to supervise the larger players in the credit reporting market. And it is important to have at least some sense of how massive this industry really is. As I mentioned earlier, each of the three largest credit reporting companies has credit files on over 200 million Americans. For decades, these companies grew up in a business-to-business market. They receive information about consumers from creditors and other data furnishers, assemble it into organized and comprehensive data that they maintain and refine, then sell it back to creditors and a growing number of other businesses. The buyers are willing to pay for this aggregated information because they can use it to develop a broader perspective on the credit risk posed by current and potential customers before deciding what credit to offer them, on what terms, and at what price – or to screen them for various other purposes.
What is notable about the growth of this industry is that though it has long been built upon the foundation of personal financial information about the public, individual consumers have had surprisingly little involvement with it. Players in a sporting contest pay very close attention to whether those keeping score are getting it right. But in the much greater game of life, individual people have had far less understanding and recognition about how the credit reporting system is treating them. They have not been routinely aware of or active in checking up on their assessors, and so they have generally not exerted much influence on the conduct and operations of the industry. Despite the credit reporting industry’s commercial success in selling credit monitoring services, its core credit reporting system has not yet evolved to become very responsive to the public.
This is now changing in light of recent developments. Notably, the Consumer Bureau has begun to exercise direct oversight over the larger credit reporting companies, including the three nationwide credit reporting companies. We also supervise the larger creditors and some of the other businesses (such as debt collectors) that furnish information on their customers’ accounts to populate credit reports. The breadth of our authority and our work affords us a unique perspective that allows us to play a positive role in identifying how consumers are affected by the interplay between credit reporting companies and the businesses that furnish information to them. The open credit score initiative also holds promise to broaden public awareness of the industry and stimulate change to turn it more in a consumer-facing direction.
Using our supervision and enforcement authorities, we are already bringing significant new improvements to the credit reporting system − and we are only getting started. Credit reporting companies are now making investments to ensure that they are more closely following the law. We have prompted them to ensure that they pass along to data furnishers all the relevant information that consumers provide when disputing an item on their credit report, rather than reducing the matter to a bare dispute code generated by an online system with no factual support. By this means, a process that often did not lead anywhere is being replaced by a more informed process that can more easily get errors and mistakes successfully resolved. We are also working to ensure that the credit reporting companies are focused on how well the furnishers are meeting their obligations to report information that is accurate and to properly investigate potential errors. This is consistent with fair treatment of consumers and respect for their individual dignity.
In December, we announced that we would be requiring the largest credit reporting companies to provide us with regular, standardized accuracy reports as part of our ongoing examinations about key risk areas for consumers. These reports will specify the number of times consumers dispute information on their credit reports during that period. It will also list furnishers with the most disputes, industries with the most disputes, and furnishers with particularly high dispute rates relative to their peers.
We want to see how disputes get resolved as part of our work to ensure that millions of consumers are not being wrongly denied access to credit or charged more than they should be for taking out a loan. Moreover, we are seeking to ensure that the credit reporting companies are taking all reasonable measures to assure maximum possible accuracy as required by the Fair Credit Reporting Act. After all, even an accuracy rate that seems high taken in the aggregate – say, 95 percent, for example – would mean that over ten million consumers could have problems in their credit reports that can impede their path forward in their financial lives.
Moreover, our work on credit reporting has not been limited to the accuracy issues reported by consumers. We have focused on the reporting of medical debt in collections because of concerns that some reported information may not be a true reflection of a consumer’s creditworthiness. From one medical incident – a single trip to the hospital or a period of treatment for an illness – there can be multiple bills from multiple providers, which may or may not be covered by insurance. As a result, consumers might not know which medical debts they are responsible for paying or in what amounts. As a result of a recent Bureau study, credit scoring models are being re-evaluated and adjusted to avoid overly penalizing consumers for medical debts.
This is appropriate given the pervasive role these issues play in people’s lives. Confidence in the accuracy and reliability of the financial system is essential. Last month, we published a study defining financial well-being for consumers. We found that consumers who reported high levels of financial well-being defined it as having financial security and financial freedom of choice, both in the present and in the future. Consumers certainly will feel greater assurance about their financial well-being as they can more readily access their credit reports and credit scores and feel more confident that they can get errors fixed to ensure the reliability of their credit profiles. That is part of our vision for the credit reporting industry.
We know that the members of our Consumer Advisory Board have valuable insights to offer from their own experiences with these topics and more. So thank you for being here today and we look forward to a vigorous discussion.
The Consumer Financial Protection Bureau (CFPB) 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 www.consumerfinance.gov.