11/16/2012
Credit Reports and Scores:
Practices, Policies and Outcomes
Chi Chi Wu
[email protected]
Financial Education in Oklahoma
November 7, 2012
National Consumer Law Center



Legal resource center on consumer law
issues focusing on low-income
consumers
Resource materials, policy and advocacy
Impact litigation
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11/16/2012
Importance of Credit Scoring and
Reporting in the U.S.
• Financial “report card” for most Americans
• Gateway to credit and other essentials
–
–
–
–
Home (mortgage)
Car (affordable auto loan)
Education, small business
Increasing Non-Credit Use
• Insurance
• Employers
• Landlords
• Serves beneficial purposes
BUT
Credit sometimes also serves to mask stagnant wages and
gap with rising costs
“No advertisements trumpet, ‘When your husband leaves
you, there’s MasterCard.’ Nor do we hear: ‘American
Express: Don’t lose your job without it.” But those slogans
would be closer to the truth about how credit is used today”
From “The Cement Life Raft” in Elizabeth Warren and Amelia Warren Tyagi, The
Two-Income Trap.
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11/16/2012
“But over the past 30 years, as income growth slowed
and the cost of critical necessities like health care
climbed, Americans took on debt just to make ends
meet. Today, a quarter of adults who are working fulltime are not earning enough money to meet their
family’s basic economic needs…. families without
assets to fall back on borrowed against the value of their
homes and relied on credit cards as a privatized “plastic
safety net” to get through hard times”
Demos, The Plastic Safety Net, May 2012
The Players in Credit Reporting
• Consumer reporting agencies (CRAs) or Credit
Bureaus
– 3 major CRAs or “credit bureaus” (Equifax,
Experian, Trans Union)
• Furnishers of information
• Subscribers or users of information
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11/16/2012
Types of Information in a Credit Report
• Basic info (Header)
–
–
–
–
–
Name
Current and former addresses
Birth date
SSN
Can include telephone numbers; spouse; Past and
present Employers.
Types of Information in a Credit Report
(cont.)
• Payment History on Credit Accounts
– Mortgages; auto loans
– Revolving accounts (credit cards)
– Collection agency entries
• Inquiries
• Public record information
– Bankruptcies
– Foreclosures, tax liens
– Court judgment and filings
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11/16/2012
Sample Report
7 Winthrop Sq., 4th Fl. Boston,
MA 02110 Phone: (617) 542-8010
Fax: (617) 542-8028
How We Grant Credit
• Based on Credit Scores and Credit Reports
• Advice for a High Credit Score From Experian.com
– “Pay your bills on time. Delinquent payments and collections
can have a major negative impact on a credit score.”
– “Keep balances low on credit cards and other "revolving
credit."
– “Apply for and open new credit accounts only as needed. “
– “Pay off debt rather than moving it around.”
• Based on the “Rational Borrower”
– Like the “Rational Man” of classical economics
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11/16/2012
The Assumption Behind Credit Scores
and Reports
The Reality
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11/16/2012
Reasons for a Bad Credit Score
• Irresponsible Borrower?
OR
• Medical Debt
– 50% of all debt collection accounts on credit reports are for medical
bills
•
•
•
•
•
Illness
Job Loss
Divorce
Victim of Predatory Lending or Other Consumer Abuse
ID Theft; wrong consumer
Myths and Realities
• The myth about consumers behind on their bills:
“They are all deadbeats”
• 1974 Study: Can pay but won’t is about .1% (one in
a thousand)
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11/16/2012
Unemployment Rate, U.S.A.
January, 1995-2010
12.0
10.0
(Percent)
8.0
6.0
4.0
2.0
0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Bureau of Labor Statistics
http://www.bls.gov/data/
Bank Credit Card Chargeoffs
12
10
6
4
2
0
19
85
Q
19 1
86
Q
19 1
87
Q
19 1
88
Q
19 1
89
Q
19 1
90
Q
19 1
91
Q
19 1
92
Q
19 1
93
Q
19 1
94
Q
19 1
95
Q
19 1
96
Q
19 1
97
Q
19 1
98
Q
19 1
99
Q
20 1
00
Q
20 1
01
Q
20 1
02
Q
20 1
03
Q
20 1
04
Q
20 1
05
Q
20 1
06
Q
20 1
07
Q
20 1
08
Q
20 1
09
Q
1
Percent
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Source: FRB Statistical Releases
http://www.federalreserve.gov/datadownload/
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11/16/2012
From 30,000 feet to the Nitty Gritty
• Errors
– What is the level of errors?
– Even 1% means 2 million consumers
• Problematic procedures
– Matching data by use 7 of 9 digits of SSN – causes
mixed files
– Metro 1 versus Metro 2
– Re-aging, duplicate tradelines,
• A travesty of a dispute system
Back up to 30,000 feet
• Oligopology of Three
• Completely Private Corporations
– Publicly traded
– Keep this critical file full of sensitive personal information
– Essentially a public utility
• Normal Market Forces Do Not Work Here
– Customers of Big Three are mainly the subscribers
– Consumers cannot “walk with their feet”
• “American style” credit reporting is a given
– In some countries, government or central bank function
– Privacy laws prohibit private companies from doing this
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11/16/2012
Does the Current Scoring System
Make Sense?
• 35% is payment history
BUT
• 30% is ratio of credit used to credit available
• 10% is “mix” of credit
– so need a home and mortgage
• To even get a score
– The “haves”- student loans, authorized users, college credit
cards
– The “have nots” – the “on-ramps” can be fraught with
danger
• Subprime cards, store cards, secured cards
• Alternative data can be risky
Policy Implications of Credit
Reporting
• Makes credit more available
• Historical unlevel playing field
– Scores correlate with race, income, home ownership.
– Gaps might be widening over time – “path dependent”
• Does scoring make inequality worse?
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11/16/2012
Regulatory Scheme – Fair Credit
Reporting Act
• Procedural Protections
– Right to free annual credit report and to buy credit score
(15 U.S.C. 1681g)
– Notices when used for adverse action or risk-based
pricing (15 U.S.C. 1681m)
• Privacy Protections
– Restrictions on who can view report (15 U.S.C. 1681b)
• Creditors, insurers, employers, debt collectors, landlords
• “Legitimate business need”
Regulatory Scheme – Fair Credit
Reporting Act
• Accuracy and Obsolescence Protections
– “Reasonable procedures to assure maximum possible
accuracy” (15 U.S.C. 1681e(b))
– Furnisher accuracy standards (15 U.S.C. 1681-2(a))
– Prohibition against negative information over 7 years
(10 years for bankruptcy) and certain medical
information (15 U.S.C. 1681c(a))
– Dispute rights (15 U.S.C. 1681i and 1681s-2(b))
• ID Theft Protections
– Alerts, blocking
– Red Flag guidelines, disposal
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Gaps and Holes
• FCRA does NOT require
– Any specific procedures that the bureaus must follow
– What kind of information must be provided
– What kind of information (besides old info and certain
medical info) cannot be provided
• Could credit reports include astrological signs?
– Social benefit
• Other Gaps and Problems
– Many provisions are not privately enforceable
– Preempts better state laws and common law claims
• Mechanics versus utility
The CFPB and Credit Reporting
• New Regulatory Regime for the FCRA
• Rulemaking – CFPB has broad rulemaking
authority
• Supervision – CFPB supervises
- Larger participants in a market for consumer financial
products or services, i.e., the Big Three and others
- Big banks, mortgage industry, payday lenders, private
student lenders (furnishers)
• Enforcement
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11/16/2012
Racial Disparities
Study after study finds certain minority communities
have lower scores as a group
• 2012 CFPB Report
– Median FICO score for majority minority areas was 34 - vs. 52 for low
minority areas
• 2009 Woodstock Institute report
• 2007 Federal Reserve Board report to Congress.
– Mean score of African Americans was half that of whites (54.0 out of
100 for whites versus 25.6 for African Americans) with Hispanics
mean of 38.2.
• 2007 Federal Trade Commission study
– African Americans and Hispanics strongly over-represented in the
lowest scoring categories.
Racial Disparities (cont.)
•
•
•
•
•
•
2006 Brookings study
2004 Study by Federal Reserve researchers
2004 Harvard Joint Center for Housing Studies study
2004 Texas Department of Insurance study
1997 Fair Isaac analysis
1996 Freddie Mac study
– African-Americans were three times as likely to have FICO scores
below 620 as whites.
– Hispanics are twice as likely as whites to have FICO scores under
620.
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11/16/2012
The $67 Billion Question
WHY?
• Historical unlevel playing field
– Scores correlate with income, home ownership, better
loan terms.
– Gap widened over time
• Fewer resources and more demands
• Lower credit limits by zip code
Non-Credit Uses of Credit Reports
• Insurance
• Employment screening
• Other: tenant screening, hospitals
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11/16/2012
Insurance Scoring
• Used by insurers for the vast majority of personal
auto and residential property insurance markets.
• Permitted in many states (including Oklahoma),
prohibited in a handful (Mass., Hawaii, Maryland,
California)
• Cost consumers billion in excess premiums –
estimate of $67 billion from 2003 to 2006.
Criticisms of Insurance Scoring
• Seen as unfair - What does a consumer’s credit
score have to do with how well they drive or upkeep
of home?
• Undermines the core public policy goals of insurance
– Undermines the goal of universal coverage
– Undermines the loss mitigation role of insurance by
placing emphasis on a rating factor which has no ability
to promote loss mitigation by policyholder
• Disparate Impact on Low-Income and Minority
Consumers
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11/16/2012
Employment Use of Credit Reports
• Growing practice – 60% of employers use for
some of their positions, up from 19% in 1996
(source: Society of Human Resource Management)
• Problems
– Create a fundamental “Catch-22” for unemployed
applicants.
– Prevent economic recovery for millions of Americans.
– Discriminates against African American and Latino job
applicants.
– Does not predict job performance.
– Inaccuracies in credit reporting
The Definitive Treatise on the
Fair Credit
Reporting Act
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