Credit Bureau Influence Rising
For many years, credit rating agencies like Moody’s and Standard & Poor’s played a large but mostly hidden role in the financial system, giving marks of approval to mortgages that were packaged and sold to investors. It wasn’t until many of those high-rated mortgages began to melt down that the question of just how the agencies did their jobs began to be scrutinized.
It wasn’t a pretty picture: The agencies took fees from the bond issuers they rated. Those cozy relationships are currently under investigation.
Illustration by: Matt Mahurin
All this mess has led to what one analyst calls a “credit recession” — probably at least two years of tight credit ahead. Stung by losses, banks and lenders are tightening standards and cutting back on credit to consumers. Gone are the days of excessively easy lending, when anyone with a pulse could get a mortgage, credit card or any other kind of loan. With credit harder to get, the focus will turn from corporate ratings controversies to the consumer side — the credit bureaus.
To some consumer advocates and credit experts, this attention is long overdue. The bureaus consistently fail to comply with the 2003 law requiring them to improve the accuracy of their records and quickly fix mistakes, consumer advocates say. Despite years of congressional hearings, news stories and consumer complaints, the problem has only gotten worse. In the last five years, the credit bureaus have responded not by fixing more errors, but by marketing expensive credit monitoring services — essentially asking consumers to pay for something they already should have, free of charge.
Beyond that, the same conflicts of interest that exist on the corporate side also plague consumer credit bureaus, consumer advocates and credit experts contend. Creditors supply information to the bureaus — and use data from it. Bureau clients are both consumers and creditors, with demands that can be contradictory, especially when it comes to disputes over the accuracy of information in credit reports.
The industry regularly pushes a perception of itself as a highly-regulated, quasi-governmental entity that serves a public purpose. But the bureaus, in reality, are competitive, for-profit $4-billion a year businesses, funded mostly by revenues from creditors. And there’s little financial incentive for them to go after errors aggressively.
“It’s a structural problem,” said Travis Plunkett, lobbyist for the Consumer Federation of America, which, with other consumer groups, attorneys and regulators, has been battling the credit bureaus for 20 years. “The credit bureaus don’t view the public as their clients, they view creditors as their clients. The vast bulk of their profits comes from people and organizations whose interests diverge from those of consumers.”
Consumer credit scores are now used for the pricing of homeowners’ and auto insurance, and by landlords, employers and even medical providers and hospitals. That expanded purpose prompts a renewed urgency for enforcing credit reporting rules, Plunkett and others say. And the credit crunch means that people finding it difficult to get loans will have questions about the accuracy of their reports and how their credit scores were determined — prompting calls to examine more closely the ways the bureaus work.
“They’re very much a black box, in how they do things,” said Adam Levitin, a Georgetown University credit expert. “They’re the back offices of the credit industry.”
Ed Mierzwinksi, consumer program director for U.S. PIRG, agreed: “The relationship between the credit bureaus, the credit-scoring companies and the creditors is something people don’t understand,” he said. “And their business model seems to be designed more to pay off only the tiny number of consumers who are smart enough to get a lawyer and sue them over mistakes than to improve the accuracy of the reports.”
The bureaus not only dispute all this, they oppose any attempts to further regulate their businesses. Criticisms of the industry have no real basis, but are part of the continuing search for suspects in the subprime mortgage meltdown, said Norm Magnuson, spokesman for the Consumer Data Industry Assn., which represents Experian, Equifax and TransUnion, the three big credit bureaus.
In particular, mortgage brokers and lenders who doled out liar’s loans using stated incomes would like to shift blame to the credit bureaus, he said. While it’s true that people with high credit scores quickly defaulted on loans, mortgages never should have been made on the basis of credit scores alone, he said. That decision was made by underwriters, not by the credit bureaus.
“Everybody’s sort of looking for a reason, ‘What caused all this?,’” Magnuson said. “So they think it must have been the scores the bureaus provided. This is just part of that search for causes.”
He also defended most reports as generally accurate, and added that credit monitoring systems are a needed product, considering that identity theft is on the rise.
Probably the only thing the bureaus and consumer advocates agree on is that more battles are ahead.
A consumer, for example, can currently be turned down for a low-rated credit card and offered a higher-rated one, while never being told that he or she was denied the lower rate, or that the denial was based on problems in a credit report. Five years after Congress ordered more disclosure, regulators only last month issued a proposal to require that consumers at least be told they were denied the lower rate, and offered their credit score.
But Plunkett and others say the proposal falls short. If someone applies for a credit card at 15 percent interest, and instead gets offered one at 19 percent, that consumer should not only be told that he was denied a lower rate, but also given the specific reasons why — not just a credit score. In this way, the consumer can figure out exactly how to improve his credit, Plunkett said. Once again, he said, laws to make the bureaus more transparent and consumer friendly aren’t being enforced.
Magnuson said the bureaus are still analyzing the proposal and trying to figure out what it actually requires.
To advocates, there’s a good deal more to be done. When consumers are turned down for credit, they don’t see the same detailed report used by the creditor to make the decision. They get a truncated version. The Federal Trade Commission allows this, but consumer groups continue to oppose it as unfair.
Then there’s the movie “Maxed Out,” a documentary about lending and debt, in which Louisiana lawyer David Szwak says that bureaus keep a special VIP database of judges, politicians, celebrities and other important people, treating their files with special care and making sure they are 100 percent accurate. A clip from the 2006 movie with Szwak’s comments still circulates on the Internet.
…the bureaus also offer the special treatment to consumers who agree not to sue them
In an interview, Szwak said his information came from the the industry’s own manuals and from an ex-employee. Her deposition describing the databases is posted at myfaircredit.com, a website for consumer attorneys. Szwak said the bureaus also offer the special treatment to consumers who agree not to sue them.
“It’s set up to benefit the few,” he said.
Magnuson, however, denied the existence of any VIP database. The idea that one exists has been used to hype movies and books, “but I do not know of any such thing,” he said. “Everyone who goes through the system is treated in the same way.”
In response, Szwak said Magnuson simply is not telling the truth.
Separate from that dispute, some advocates say the most pressing problem facing consumers is that credit bureaus are continually outsourcing to low-wage countries the duties for investigating complaints about errors. That’s a business decision, they say, not to take consumer complaints about errors all that seriously, despite Congress’ demands. So as credit becomes even more crucial, correcting errors will become yet more difficult and time-consuming.
“The law is not bad in terms of regulating these guys,” said Ira Rheingold, executive director of the National Assn. of Consumer Advocates. “But the financial incentives work for them in such a way that they violate it as a cost of doing business. Their automated systems in place to handle complaints are too cheap, and it’s too expensive to them to maintain systems with reports that are more accurate. They’re screwing up credit reports for a lot of people, way too many people, because most people don’t notice, complain or have a lawyer to sue them.”
With the continuing credit squeeze likely to draw renewed attention to the way bureaus operate, more people may begin to take notice. That, say advocates, may finally force bureaus to reconsider how they determine the cost of doing business.