Legal information about credit reporting
Introduction The consumer data industry collects and subsequently provides information to firms about behavior when consumers conduct various financial transactions. Firms use this data to determine whether consumers have engaged in behaviors that could be costly or beneficial to the firms. For example, lenders rely upon credit reports and scoring systems to determine the likelihood that prospective borrowers will repay their loans. The data may also be used to predict consumer behaviors that would financially benefit firms. Although the general public is likely to be more familiar with the use of credit reporting and scoring to qualify for mortgage and other consumer loans, the scope of consumer data use is much broader. Insured depository institutions (i.e., banks and credit unions) rely on consumer data service providers to determine whether to make checking accounts or loans available to individuals. Insurance companies use consumer data to determine what insurance products to make available and to set policy premiums.1 Some payday lenders use data regarding the management of checking accounts and payment of telecommunications bills to determine the likelihood that a consumer will fail to repay small-dollar cash advances. Merchants rely on the consumer data industry to determine whether to approve payment by check or electronic payment card. Employers may use consumer data information to screen prospective employees to determine, for example, the likelihood of fraudulent behavior. In short, numerous firms rely upon consumer data to identify and evaluate the risks associated with entering into financial relationships or transactions with consumers. Reliance by firms on consumer data significantly affects consumer access to financial products or opportunities. For example, negative or derogatory information, such as multiple overdrafts, involuntary account closures, loan defaults, and fraud incidents, may influence a lender to deny a consumer access to credit. Further, such information may stay on a consumer’s reports for several years. The inclusion of negative information may be particularly limiting to consumers under circumstances in which such information is inaccurate or needs to be updated to reflect more current and possibly more favorable financial situations. Furthermore, consumers may find the process of making corrections to consumer data reports to be time-consuming, complex, and perhaps ineffective. The exclusion of more favorable information, such as the timely repayment of noncredit obligations, from standard credit reporting or scoring models may also limit credit access. This report first provides background information on the consumer data industry and various specialty areas. The report examines one prominent specialty area—consumer scoring—and describes various factors used to calculate credit scores. Next, the report provides a general description of the current regulatory framework of the consumer data industry. Finally, the report discusses selected policy issues pertaining to consumer data reports. Specifically, the report addresses policy issues concerning (1) inaccurate or disputed consumer data provided in consumer data reports; (2) how long negative or derogatory information should remain in consumer data reports; (3) differences in billing and collection practices that can adversely affect consumer data reports, an issue of particular concern with medical billing practices; (4) consumers’ rights; (5) whether uses of credit bureau data outside of the financial services, such as for employment decisions, adversely affect consumers and should be limited; (6) whether the use of alternative consumer data or newer versions of credit scores may increase accuracy and credit access; and (7) how to address data protection and security issues in consumer data reporting. For each policy issue, the report addresses corresponding legislative and regulatory developments. In the 116th Congress, credit reporting and the consumer data industry is a topic of interest.2 On January 29, 2020, the House passed the Comprehensive Credit Reporting Enhancement, Disclosure, Innovation, and Transparency Act of 2020 (Comprehensive CREDIT Act; H.R. 3621). Originally a narrower bill, H.R. 3621 was amended in committee to include other bills marked up and ordered reported by the House Financial Services Committee: H.R. 3614 (The Restricting Credit Checks for Employment Decisions Act, Title VI of bill); H.R. 3618 (The Free Credit Scores for Consumers Act of 2019, Title II of bill); H.R. 3622 (Restoring Unfairly Impaired Credit and Protection Consumers Act, Title IV of bill); H.R. 3629 (The Clarity in Credit Score Formation Act of 2019, Title V of bill); and H.R. 3642 (The Improving Credit Reporting for All Consumers Act, Title I and VII of the bill). In addition, in December 2019, the committee marked up and ordered reported two bills, the Protecting Your Credit Score Act of 2019 (H.R. 5332) and the Consumer Protection for Medical Debt Collections Act (H.R. 5330).3 Where relevant, this report discusses the approach these bills would take to address the policy issues examined. When H.R. 3621 is addressed, the references are to the bill as passed by the House. Where H.R. 5330 and H.R. 5332 are addressed, the references are to the bills after committee amendment.
The Consumer Data Industry and Specialty Services This section provides background information on the consumer data industry, which generally includes credit reporting agencies (CRAs), also referred to as credit bureaus (both terms are used interchangeably in this report). This section also provides background on credit scoring, a specialty service the industry provides, including a summary of the key factors known to affect credit scores. Consumer Reporting Services According to the Fair Credit Reporting Act (FCRA), which generally regulates the business of credit reporting, CRAs are firms that prepare consumer reports based upon individuals’ financial transactions history data.5 Such data may include historical information about credit repayment, tenant payment, employment, insurance claims, arrests, bankruptcies, and check writing and account management. Consumer files, however, do not contain information on consumer income or assets.6 Consumer reports generally may not include information on items such as race or ethnicity, religious or political preference, or medical history.7 Equifax, Experian, and TransUnion are the three largest nationwide providers of credit reports.8 Other CRAs provide a variety of specialized consumer reporting services.9 Some specialty CRAs collect data regarding payment for phone, utilities (e.g., electric, gas, water), and telecommunication (e.g., cable) services.10 Utility and telecommunication service providers use the reports to verify the identity of customers and determine downpayment requirements for new customers. Property management companies and rent payment services may report to CRAs that specialize in collecting rent payment data for tenant and employment screening.11 Some CRAs specialize in consumer reporting for the underbanked, near prime, and subprime consumer segments, including consumers with minimal recorded data.12 Some CRAs specialize in debt collection (recovering past due funds) and fraud verification data. 13 Firms that use consumer reports may also report information to CRAs, thus serving as furnishers. A tradeline is an account attached to a particular consumer that is reported to a CRA by a furnisher. 20 A tradeline serves as a record of the transaction (payment) activity associated with the account. Furnishing tradelines is voluntary, and furnishers are not required to submit tradelines to all CRAs. Furnishers also have different business models and policies, resulting in different reporting practices. Some furnishers may report all unpaid customer obligations that were deemed uncollectible and written off their balance sheets; some report when money balances owed surpass minimum threshold levels; some report only the principal balances owed minus the penalties and fees; and others may report all monies owed. Furnishers also have discretion over the types of obligations they wish to report.21 Benefits to users of consumer data increase as more individual companies choose to participate as furnishers, but furnishers do incur costs to report data. To become furnishers, firms must be approved and comply with the policies of a CRA, such as fee registration requirements.22 The transfer of consumer data involves security risks, and many CRAs have adopted standardized reporting formats and requirements approved by the Consumer Data Industry Association (CDIA) for transferring data.23 Furnishers must be able to comply with industry data transfer requirements or some CRAs are unlikely to accept their data. Compliance may require investing in technology compatible with the computer systems of a CRA. Compliance costs may be more burdensome for smaller firms, causing some to choose not to be furnishers. In addition, entities that elect to become furnishers face legal obligations under the FCRA.24 The FCRA requires furnishers to report accurate and complete information as well as to investigate consumer disputes. Hence, reporting obligations could possibly, under some circumstances, result in legal costs, which may also influence a firm’s decision to become a furnisher. Business models and policies of CRAs are also different. Different CRAs may collect the same information on the same individuals but adopt different conventions for storing the information. One CRA may report a delinquent debt obligation separately from the penalties and fees whereas another CRA may choose to combine both items into one entry. Consequently, consumer reports obtained from different CRAs on the same consumer are likely to differ due to different policies adopted by furnishers, CRAs, or both. Credit Scoring Services A consumer score is a (numeric) metric that can be used to predict a variety of financial behaviors.25 Consumer credit scores are prepared for lenders to determine, for example, the likelihood of loan default. Other consumer scores can be prepared to predict the likelihood of filing an insurance claim, overdrawing a bank account, failing to pay a utility bill, committing fraud, or a host of other adverse financial behaviors. Consumer scores are typically computed using the information obtained from one or more consumer reports. Rather than maintaining a repository of credit records, some firms are primarily engaged in the production of consumer scores.26 Hence, consumer scoring can be considered a specialty service in the consumer data industry. For example, if a user of a consumer report subsequently wants a consumer score, it may be charged an additional fee. Given the variety of different financial behaviors to predict, there are many consumer scores that can be calculated. Consumer scores for the same individual and behavior calculated by different scoring firms are also likely to differ. Consumer scoring firms may have purchased consumer information from different CRAs, which have their own policies for storing and reporting information. Each scoring firm has its own proprietary statistical model(s), meaning that each firm decides what consumer information should be included and excluded from calculations. Each firm can choose its own weighting algorithms. For example, included information can be equally weighted, or heavier weights can be placed on more recent information or on information otherwise deemed more pertinent. Sometimes the consumer scoring firm selects the appropriate weighting scheme, and sometimes the requestor of a consumer score may provide instructions to the preparer. Hence, consumers may not see the actual scores used until after the decisionmaking firms release them, particularly in cases when customized scores were requested and used in the decisionmaking process.
Some Factors Frequently Used to Calculate Credit Scores27 Lenders, whether for mortgages or other forms of consumer loans (e.g., credit card loans, installment loans, and automobile loans), rely upon credit scores, which are calculated to represent the risk of delinquency or default of consumers seeking credit. To calculate a credit score, credit scoring models generally obtain the following factors from a credit report. Payment history. A lender is concerned about the borrower paying past credit accounts on time. The payment history includes information related to late or missed payments, how late, amount owed, bankruptcies, foreclosures, lawsuits, and wage garnishments. Negative information on a credit report negatively affects a credit score. Credit utilization. This factor measures the amount of outstanding debt a consumer has accumulated relative to his or her credit limit. An individual with $3,000 in charges on a credit card with a $5,000 limit would have a credit utilization rate of 60%. A high credit utilization rate negatively affects a credit score. Length of credit history. The more experience an individual has using credit, the easier it is for a lender to determine how well or poorly additional credit will be managed. Calculating credit scores may be impossible for “invisible” consumers (i.e., consumers with either no credit history or an insufficient credit history). New credit accounts or requests. There are two types of inquiries. A soft inquiry occurs when consumers request to check their credit reports, typically for accuracies or to dispute information, but there is no corresponding request for credit. Users of credit reports do not receive information regarding soft inquiries. A hard inquiry occurs when consumers apply for credit, and action is required by users of credit reports, typically to make approval or rejection decisions. Hence, making numerous different credit requests, particularly over a short period of time, generally can negatively affect a score. If a consumer shops for credit, which would be indicated by applying for the same type of credit within a short period of time (e.g., two to six weeks), then that activity would count only as one hard inquiry in most credit scores. 28 Prescreening, which is used frequently in credit card solicitations, does not count as a “firm offer of credit or insurance” and, therefore, does not affect consumer credit scores. 29 Credit mix. Demonstrating the ability to manage multiple types of credit obligations (i.e., revolving, installment, mortgage credit, and finance company credit) influences a credit score. For example, the ability to maintain a stable debt-to-income ratio, preferably below 28%, despite having a mix of credit types, indicates the ability to manage credit. Having most of one’s credit consist of credit from indirect lenders, such as department stores and rent-to-own stores, may not be viewed as favorably in some credit scoring models as credit from direct lenders, such as banks and credit unions. Firms that prepare or users that purchase credit scores can decide how much weight to apply to each factor, and they may include additional predictive factors (e.g., information found on the credit application such as income and employment history) in the calculations. The Equal Credit Opportunity Act, however, prohibits characteristics such as race, sex, marital status, national origin, and religion from being used in credit scoring models.30 Information for consumers on how to improve and maintain a good credit score is available from the Consumer Financial Protection Bureau (see https://www.consumerfinance.gov/consumer-tools/credit-reports-and-scores/).
Existing Consumer Protections and Regulation of Credit Reporting Agencies This section provides a brief overview of existing consumer protections and regulation related to credit reporting. As noted, the Fair Credit Reporting Act (FCRA), enacted in 1970, is the main statute regulating the credit reporting industry. The FCRA requires “that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information.” 31 The FCRA establishes consumers’ rights in relation to their credit reports, as well as permissible uses of credit reports. It also imposes certain responsibilities on those who collect, furnish, and use the information contained in consumers’ credit reports.32 The FCRA includes consumer protection provisions. Under the FCRA, consumers must be told when their information from a CRA has been used after an adverse action (generally a denial of credit) has occurred, and disclosure of that information must be made free of charge.33 Consumers have a right to one free credit report every year (from each of the three largest nationwide credit reporting providers) even in the absence of an adverse action (e.g., credit denial). Consumers also have the right to dispute inaccurate or incomplete information in their report. After a consumer alerts a CRA of such a discrepancy, the CRA must investigate and correct errors, usually within 30 days. The FCRA also limits the length of time negative information may remain on reports. Negative collection tradelines typically stay on credit reports for 7 years, even if the consumer pays in full the item in collection; a tradeline associated with a personal bankruptcy stays on a credit report for 10 years.34 The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)35 established the Bureau of Consumer Financial Protection (CFPB), consolidating many federal consumer financial protection powers from other federal agencies. The CFPB has rulemaking and enforcement authorities over all CRAs for certain consumer protection laws; it has supervisory authority, or the authority to conduct examinations, over the larger CRAs. In July 2012, the CFPB announced that it would supervise CRAs with $7 million or more in annual receipts, which included 30 firms representing approximately 94% of the market.36 The CFPB conducts examinations of the CRAs, reviewing procedures and operating systems regarding the management of consumer data and enforcing applicable laws. In 2017, the CFPB released a report of its supervisory work in the credit reporting system.37 The report discusses the CFPB’s efforts to work with credit bureaus and financial firms to improve credit reporting in three specific areas: data accuracy, dispute handling and resolution, and furnisher reporting. As the report describes, credit bureaus and financial firms have developed data governance and quality control programs to monitor data accuracy through working with the CFPB. In addition, the CFPB has encouraged credit bureaus to improve their dispute and resolution processes, including making it easier and more informative for consumers.38 Recently, Congress has also been interested in improving consumer protections in the credit reporting system, particularly in response to the 2017 Equifax data breach, which exposed personal information of millions of consumers. 39 The 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (P.L. 115-174) established new consumer protections relating to credit reporting, including the right to a free credit freeze. Credit freezes allow consumers to stop new credit from being opened in their name, to protect themselves from fraud and identity theft.
Policy Issues This section examines selected policy issues pertaining to the use of credit reports and scores in consumer lending decisions. For each policy issue, the report highlights recent legislative and regulatory developments and discusses selected legislative proposals from the 116th Congress that would address the issue. Inaccurate or Disputed Information The accuracy of consumer information in consumer data reports has been an ongoing policy concern. Inaccurate information in a credit report may limit a consumer’s access to credit in some cases or increase the costs to the consumer of obtaining credit in others. In 2012, the Federal Trade Commission (FTC) reported that 26% of participants in a survey of credit report accuracy were able to identify at least one potentially material error on at least one of approximately three different credit reports prepared using their consumer information.40 After the reports were corrected, 13% of participants in the FTC study saw one or more of their credit scores increase. For those who saw an increase, over 40% of their scores rose by more than 20 points, which could increase the likelihood that the consumer would be offered less expensive credit terms. Credit reporting inaccuracies may occur for various reasons. Consumers may inadvertently provide inaccurate data when applying for financial services. Furnishers may inadvertently input inaccurate information into their databases. Matching information to the proper individual poses challenges, such as in cases when multiple individuals have similar names and spellings. In some cases, the information may be properly matched, but the individual could be a victim of fraud or identity theft. The predictive power of consumer data, or the ability to accurately predict a consumer’s likelihood to default on a loan, would be enhanced to the extent that consumer tradelines are regularly updated with correct and current information. As mentioned in the previous section, the CFPB has recently encouraged credit bureaus and financial firms to improve data accuracy in credit reporting. For example, since 2014, the CFPB has required the largest consumer reporting firms to provide standardized accuracy reports on a regular basis.41 The accuracy reports must specify the frequency that consumers dispute information, list furnishers and industries with the most disputes, and provide dispute resolution information. According to the CFPB, the top 100 furnishers provide 76% of tradeline information to the largest nationwide CRAs, and the furnishers regularly update the account status of reported tradelines.42 In addition, the larger CRAs have also made improvements to the communication tool they use to facilitate the dispute resolution process between consumers and furnishers.43 Further, effective July 1, 2017, the CRAs enhanced public record data standards for the collection and timely updating of civil judgements and tax liens.44 Public record data must contain minimum identifying information (i.e., name, address, and Social Security number or date of birth) and must be updated at least every 90 days; otherwise, the tax lien and civil judgment information will no longer be reported. According to the CFPB, this led to the removal of most civil judgements and half of all tax liens in credit reports for the nationwide CRAs. 45 The accuracy of credit reports, nonetheless, ultimately depends upon consumers to monitor and dispute any discrepancies. H.R. 3621 and H.R. 5332 would address some concerns relating to inaccurate or disputed data by establishing new consumer rights around the dispute process. Both bills would guarantee consumers more information about dispute investigations and would grant consumers the right to appeal disputes to credit bureaus, thus formalizing the process. 46 It also would explicitly establish consumers’ right to seek injunctive relief, a legal remedy where a court requires future behavior change (e.g., removing adverse information from a credit record). 47 Moreover, it would provide credit restoration to consumers who are the victims of some predatory activities, such as deceptive lender acts or fraud. 48 H.R. 5332 would require social security number matches before information could be included in a consumer’s credit report.49 It would also create a CFPB credit reporting ombudsperson to help resolve persistent errors.50
Length of Time to Retain Negative Information Policymakers have also considered the appropriate length of time negative information should be allowed to remain on a credit report. Negative information generally refers to delinquencies or defaults, which typically remain on credit reports for seven years. Negative information in a credit report often results in a consumer appearing to pose a greater risk of default or other negative behavior. This may lead a consumer to either pay more for financial services or, in some cases, be denied access to credit entirely. Limiting a consumer’s access to certain financial services, such as depository checking accounts or lower cost loans, may disproportionately affect the consumer’s cost of engaging in financial transactions. Similarly, the use of consumer data reports by potential employers, discussed below, may limit job opportunities that could arguably help applicants overcome financial challenges and thereby improve their credit histories. 51 Retaining negative information on credit reports for an extended period of time may pose benefits and detriments. On the one hand, under circumstances in which the underlying information in a consumer data report is inaccurate or out of date, consumers may improperly be considered to pose a greater risk to a firm. In that case, the consumer may be offered costlier credit options (or even face denials of credit) that do not accurately reflect the consumer’s actual risk of default. In other cases, consumers also may unfairly be considered to pose a greater risk now due to circumstances in the past that they have since overcome. On the other hand, the longer information remains on the credit report arguably allows lenders to see long-term trends that may be helpful for distinguishing between a rare occurrence and a consistent pattern in a consumer’s behavior. Shorter or insufficient periods of time in which negative tradelines appear on consumer reports may also compromise the ability to compute reliable scores. If lenders view credit reports and scores as unreliable due to premature removal of negative information, they could increase downpayment requirements across the board for all credit applicants or reduce loan amounts. In short, lenders who are uncertain about data reliability might adopt stricter underwriting and lending policies. In addition to restricting credit access generally, this could reduce competition by allowing lenders with an established relationship and more information on a consumer to provide more favorable terms to that consumer than other companies. In addition, the Association of Certified Fraud Examiners (ACFE) found that poor credit can signal criminal activity, and earlier removal of negative information may make it more difficult for an organization to detect fraud, which may be particularly costly for small businesses and nonprofit organizations.52 Many preparers and users of credit scores have adopted weighting schemes that place less weight on older information in a consumer data report. Maintaining longer (rather than shorter) durations of negative tradelines on reports allows preparers to make greater use of variable-weighted algorithms to calculate scores, which may be useful when the importance of a weight needs to be modified over time. In addressing this policy issue, H.R. 3621 would shorten the time period that adverse information could remain on a person’s credit report by three years (such that it remains on the report for a total of four years), among other things.53
Inconsistent Billing and Reporting Practices: Medical Tradelines Another policy issue that often arises in connection with credit reporting is that different holders of consumer debt bill differently and report to the CRAs differently. Inconsistent reporting practices result in variation of the timing with which unpaid debts appear on consumer reports. For example, medical providers may assign unpaid bills to debt collectors or sell outstanding debts to debt buyers. Some medical providers may assign or sell the debt after 60 days, but some may do so after 30 days (by comparison, most bank credit card delinquencies are assigned or sold after 180 days). Some firms may turn obligations over to collections as a tool to encourage consumers to settle unpaid balances, blurring the distinction between billing and collecting policies.63 Debt collectors or buyers subsequently furnish negative information to CRAs, causing tradeline accounts to sometimes appear on consumer reports. The CFPB used a random sample of approximately 5 million consumers as of December 2012 to determine what types of tradeline accounts were reported most frequently and the amounts.64 The CFPB found that approximately 33% of credit reports surveyed had collection tradelines, and approximately 52% of those collection tradelines were related to medical collections. After medical obligations, the CFPB found that the remaining collection tradelines of significant relevance were associated with unclassified debts (17.3%), cable or cellular bills (8.2%), utilities (7.3%), and retail stores (7.2%). All other categories of collectible tradelines were approximately 2% or less of the survey. For 85% of the respondents, the amounts owed for medical debt were for less than $1,000. In short, more than half of collection tradelines were associated with medical debt, and they were for relatively small amounts. Specifically, the median amount owed for the medical collection tradelines was $207, and 75% of all medical collection tradelines were under $490. One form of consumer debt—medical debt—is most often disputed by consumers and raises specific policy issues related to inconsistent billing and reporting practices. According to the CFPB study, consumers are unlikely to know when and how much various medical services cost in advance, particularly those associated with accidents and emergencies. People often have difficulty understanding co-pays and health insurance deductibles.65 Consequently, consumers may delay paying medical obligations as they either assume their insurance companies will pay or attempt to figure out why they have been billed, which often results in medical debt appearing unpaid on credit reports. Regulators and industry have taken actions that may reduce medical tradelines and their associated negative effects on consumer credit data. On December 31, 2014, the Internal Revenue Service (IRS) announced a final rule requiring the separation of billing and collection policies of nonprofit hospitals.66 Under the rule, hospitals that have or are pursuing tax-exempt status are required to make reasonable efforts to determine whether their patients are eligible for financial assistance before engaging in “extraordinary collection actions,” which may include turning a debt over to a collection agency (thus creating a medical tradeline) or garnishing wages. In short, tax-exempt hospitals must allow patients 120 days from the date of the first billing statement to pay the obligation before initiating collection procedures.67 The IRS rule only impacts nonprofit hospitals, but, on September 15, 2017, the three major credit reporting agencies—Experian, Equifax, and TransUnion—established a 180-day (6 month) waiting period before posting a medical collection of any type on a consumer credit report.68 In addition, P.L. 115-174, Section 302, amended the FCRA to provide credit reporting protections for veterans as follows: CRAs must exclude certain medical debt incurred by a veteran from his or her credit report if the hospital care or medical services relating to the debt predates the credit report by less than one year. CRAs must remove from the credit report a veteran’s fully paid or settled medical debt previously characterized as delinquent, charged off, or in collection. CRAs must establish a dispute process and verification procedures for veterans’ medical debt. Active duty military personnel receive free credit monitoring. H.R. 3621 and H.R. 5330 would impose restrictions on the appearance of medical collections on consumer credit reports, extending the CRA’s 2017 rule to 365 days and excluding all debts related to medically necessary care. 69 H.R. 3621 would also require expedited removal of all fully repaid or settled medical debts. 70
Consumer Rights in the Credit Reporting System Consumers sometimes find it difficult to advocate for themselves when credit reporting issues arise because they are not aware of their rights and how to exercise them. According to a CFPB report, some consumers are confused about what credit reports and scores are, find it challenging to obtain credit reports and scores, and struggle to understand the contents of their credit reports.71 The CFPB receives more credit reporting complaints than complaints in any other industry it regulates.72 Currently, the CFPB provides financial education resources on its website to help educate consumers about their rights regarding consumer reporting. The credit bureaus’ websites also provide information about how to dispute inaccurate information, and consumers can contact them by phone or mail. H.R. 3621 and H.R. 5332 would require that CRAs provide free credit scores in their annual free credit report. 73 H.R. 3621 would allow consumers to be entitled to free credit reports at other times, for example, whenever they apply for a new mortgage, auto loan, or student loan, or if a consumer’s identity is stolen. The report and score used to make underwriting decisions in connection with these events would be provided to the consumer. H.R. 3621 would also direct the credit bureaus to give consumers more information on dispute rights, and it would require hard inquiries to be limited for a longer 120-day shopping window for certain consumer credit products74 (as described in the box “Some Factors Frequently Used to Calculate Credit Scores” above). H.R. 5332 would require an online consumer portal landing page for consumers to access their credit report and initiate disputes and credit freezes.75 It also would allow consumers to opt out of having their credit report sold to third parties.76
Appropriate Purposes for Using Credit Bureau Data: Employment Decisions Policy questions exist regarding the appropriate uses of credit bureau data, particularly for uses outside of extending credit to consumers.77 For example, credit information can be used for employment decisions. According to the Society for Human Resource Management (a human resources professional society), in 2012, almost half of surveyed organizations in their membership used credit background checks on some of their job applications.78 Employers report that they use this information to reduce the likelihood of employee theft or embezzlement and to reduce legal liability for negligent hiring. 79 To comply with the FCRA, employers must inform an applicant that his or her credit report is a part of a hiring decision, and acquire the applicant’s written permission to obtain the report. If an applicant is denied a job, or if the employer takes another adverse action due to information on a credit report, then the applicant must be given a copy of the report and a summary of their FCRA rights.80 Whether the use of credit information in employment decisions unnecessarily harms prospective job applicants is debatable. For some occupations, past financial difficulties may increase the likelihood, for example, that the employee could be bribed or compromised in some way; however, this information may not be essential for success in all occupations. Currently, many states limit employers’ use of credit information for employment decisions.81 H.R. 3621 would ban the use of credit information for employment decisions, unless required by law or for a national security investigation.82
Consumers with Limited Credit Histories and Use of Alternative Scoring Methods The CFPB estimates that credit scores cannot be generated for approximately 20% of the U.S. population due to their limited credit histories.83 The CFPB distinguishes between different types of consumers with limited credit histories.84 One category of consumers, referred to as credit invisibles, have no credit record at the three largest credit bureaus and, thus, do not exist for the purposes of credit reporting. According to the CFPB, this group represents 11.0% of the U.S. adult population, or 26 million consumers. Another category of consumers do exist (have a credit record), but they still cannot be scored or are considered nonscorable. Nonscorable consumers either have insufficient (short) histories or outdated (stale) histories. The insufficient and stale unscored groups, each containing more than 9 million individuals, collectively represent 8.3% of the U.S. adult population, or approximately 19 million consumers according to the CFPB. Younger adults may be part of the credit invisible or nonscorable population because they lack a sufficient credit history. As consumers get older, however, the problem of being credit invisible or belonging to the insufficient part of the nonscorable group typically declines, but may begin to reoccur after the age of 60. Older adults, who may have considerably reduced their credit usage, perhaps as they prepare to enter retirement years, may encounter the problem of having stale credit records.85 Because credit scoring models vary by firms, consumers that cannot be scored by some models might still have the ability to be scored by other models; thus, the state of being nonscorable may depend upon the credit reporting data records and scoring models used. Borrowers with missing or impaired credit histories may be able to improve their ability to get reliable credit scores by using credit building loans, such as secured credit cards that require either security deposits as collateral for the amount of the line of credit or links to checking or savings accounts, thereby allowing lenders to recover funds if payments are missed.86 The security deposit is refunded if borrowers do not miss payments. Secured credit card lending can help borrowers build or repair their credit histories, assuming that the more favorable customer payment activity is reported to credit bureaus. In addition, the use of alternative credit scores may also help the credit invisibles because other types of consumer payment activity (discussed below) may be predictive in regard to how borrowers would manage credit. In short, options that increase the ability to calculate scores for the invisible or currently nonscoreable consumer groups could allow lenders to better determine the quantity and scope of financial relationships they can establish with such groups. Alternative credit scoring models could potentially increase accuracy by including additional information beyond that which is traditionally included in a credit report. For example, some credit score models do not distinguish between unpaid and paid (resolved) tradelines.87 Most credit scores are calculated without utility and rent payments information. Arguably, including this information would benefit the credit scores for some individuals with limited or no credit histories, potentially increasing their access to—and lowering their costs of—credit.88 Conversely, information about medical debts has often been included in credit scores, but the unevenness in medical reporting, as previously discussed, and possibly the consumers’ lack of choice in incurring medical debt raises questions about whether medical debt tradelines should be considered reliable predictors of creditworthiness or credit performance.89 For this reason, some newer versions of credit scoring apply less weight to medical debt.90 In short, developing credit scores with new information might allow lenders to find new creditworthy consumers. Regulators and Congress have considered the potential for alternative credit scoring. In 2014, the Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs) that purchase mortgages in the secondary market—to consider using more updated credit scoring models in their mortgage underwriting.91 Under P.L. 115-174, FHFA is required to define, through rulemaking, the standards and criteria the GSEs will use for validating credit score models used when evaluating whether to purchase a residential mortgage.92 If enacted, H.R. 3621 would direct the CFPB to report to Congress on the impact of using nontraditional data on credit scoring.93 Full implementation of newer versions of credit scoring models, however, may not occur quickly.94 In the mortgage market, upgrading automated underwriting systems is costly for the GSEs, FHA, and loan originators. Not all originators will choose to update their automated underwriting systems.95 Even if alternative credit scoring models were widely adopted, the credit score is not the only variable considered during the underwriting process. Just as several factors are included in the development of a credit score, a credit score is only one of several factors included in an automated underwriting model (also referred to as an underwriting scorecard).96 The debt-to-income ratio, for example, may still be an important variable for mortgage underwriting. Higher levels of medical and student loan debts may still affect mortgage underwriting decisions.97 Hence, the use of alternative credit scores may help some borrowers close to a threshold or borderline, yet still not translate into significant changes in credit access across the board.
Data Protection and Security Issues Congressional interest in data protection and security in the consumer data industry has increased following the announcement, on September 7, 2017, of the Equifax cybersecurity breach that potentially revealed sensitive consumer data information for 143 million U.S. consumers.98 CRAs are subject to the data protection requirements of Section 501(b) of the Gramm-Leach-Bliley Act (GLBA).99 Section 501(b) requires the federal financial institution regulators to “establish appropriate standards for the financial institutions subject to their jurisdiction relating to administrative, technical, and physical safeguard—(1) to insure the security and confidentiality of consumer records and information; (2) to protect against any anticipated threats or hazards to the security or integrity of such records; and (3) to protect against unauthorized access or use of such records or information which could result in substantial harm or inconvenience to any customer.” 100 The CFPB does not have the authority to prescribe regulations with regard to safeguarding the security and confidentiality of customer records.101 Instead, the FTC has the authority to enforce Section 501(b) as the federal functional regulator of nonbank financial institutions, including CRAs.102 The FTC has promulgated rules implementing the GLBA requirement.103 Because the FTC has little upfront supervisory or enforcement authority, the agency typically must rely upon its enforcement authority after an incident has occurred. In addition, in March 2019, the Government Accountability Office released a report that recommended actions for the FTC, the CFPB, and Congress to strengthen oversight of credit bureaus’ data security.104 If enacted, H.R. 3621 would allow the CFPB to supervise and enforce cybersecurity standards for credit reporting agencies. 105 If enacted, H.R. 5332 would allow the CFPB to write rules for credit reporting agencies under the safeguards rule.106 Meanwhile, P.L. 115-174, Section 301, requires credit bureaus to provide fraud alerts for consumer files for at least a year under certain circumstances. In addition, credit bureaus must provide consumers with one free freeze alert and one free unfreeze alert per year. The law also established further requirements to protect minors. Currently, many credit bureaus provide consumers services such as credit monitoring for identity theft victims. In general, credit bureaus charge fees for these services, paid for by either a consumer or private company after a data breach incident. H.R. 3621 would expand protections for identity theft victims, including the right to free credit monitoring and identity theft services. 107 It would require the CFPB to create new regulations to define the parameters for these new consumer benefits, including how long they should be provided and what services should be included. 108
Appendix. Natural Disasters, Government Shutdowns, and the COVID-19 (Coronavirus Disease 19) Pandemic Many consumers may experience disruptions in their income following unexpected events, such as natural disasters, government shutdowns, or a pandemic and, therefore, are likely to be delinquent or default on loans and other regularly scheduled payments. For example, from December 22, 2018, to January 25, 2019, the federal government shut down for five weeks, raising concerns that federal employees may experience difficulties meeting their scheduled payment obligations that might subsequently affect their credit records and future credit scores. Likewise, a growing number of cases of Coronavirus Disease 2019 (COVID-19) were identified in the United States during the early spring of 2020, significantly impacting many communities.109 As this situation rapidly evolves, the economic impact is likely to be large due to illnesses, quarantines, and other business disruptions.110 Consequently, many Americans may lose income and face financial hardship.111 Lenders have various options to mitigate the impact on consumers’ credit scores and future credit access following disasters or catastrophic events. For example, furnishers may use special codes to report delinquencies due to special circumstances.112 Financial institutions also may agree to limit late or other fees. Lenders offer forbearance plans, which are agreements that allow extended time for consumers to become current on their payments. However, some of these efforts may be more difficult for some institutions if they require changes in credit contracts. If lenders and consumers enter into loan forbearance agreements, then furnishers have the option to report to the credit bureaus that these consumers are current on their credit obligations. Congress has also responded to mitigate the financial consequences of an adverse event on consumers. For example, various bills were introduced during the federal shutdown to allow credit restoration for some affected consumers. 113 In addition, on March 27, 2020, in response to the COVID-19 pandemic, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136).114 Section 4021 of this bill requires furnishers during the COVID-19 pandemic covered period to report to the credit bureaus that consumers are current on their credit obligations if they enter into an agreement to defer, forbear, modify, make partial payments, or get any other assistance on their loan payments from a financial institution and fulfil those requirements, provided they were current before this period.115 The covered period starts on January 31, 2020, and extends to the later of 120 days after enactment or 120 days after the national emergency declared by the President on March 13, 2020, terminates. In other words, prior to the CARES Act lenders could choose whether to report loans in forbearance as paid on time. Under the CARES Act, lenders must report such obligations as paid on time. However, some affected consumers may still experience harm to their credit record because lenders generally can still choose whether to enter into an assistance agreement with an individual consumer. The CARES Act grants all consumers a right to request forbearance for many types of mortgages116 and for federal student loans.117 In addition, financial regulators have encouraged lenders to work with consumers affected by the outbreak,118 and many financial institutions have announced efforts to provide assistance to affected consumers.119 However, for many types of consumer loans, such as auto loans and credit cards, different financial institutions may be subject to different laws and incentives to handle consumer relief requests. 120 Therefore, a consumer’s ability to access loan forbearance may vary, and some consumers may still experience harm to their credit records. CARES Act protections related to the credit reporting system may impact consumers’ ability to access credit in the future, possibly in positive and negative ways. Although these CARES Act protections allow consumers with loan forbearance agreements to protect their on-time credit histories, these provisions may also lead to some unintended consequences.121 Financial institutions may find credit scores less predictive of whether a consumer is currently creditworthy, in part due to deferrals being treated the same as on-time payments. 122 This situation could make it more difficult for consumers to access new credit, particularly those currently meeting their loan obligations.123 On May 15, 2020, the House passed the Heroes Act (H.R. 6800), and on October 1, 2020, the House passed an updated version of the bill (H.R. 925). H.R. 6800, Division K, Title IV, Section 110401 and H.R. 925, Division O, Title IV, Section 401 would create a moratorium on furnishing adverse information to credit bureaus during the COVID-19 pandemic and for 120 days afterward, as well as for other future major natural disasters.124 Consumers could request to remove adverse information during the covered period and for 270 days afterward if experiencing economic hardship. Medical debt related to treatments arising from COVID-19 or another major disaster would not be furnished or included in the credit report. New credit scoring models could not be implemented during a major natural disaster period if they would identify a significant percentage of consumers as being less creditworthy than the previous model. Although these provisions would protect consumers from lower credit scores during the COVID-19 pandemic, the removal of information may also reduce credit scores’ predictability in the future, which could harm some consumers in the long term.125