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Introduction

Credit Score Basics

Credit Scores - Advanced

Re-Scoring

Obtaining Your Credit Report

Reading Your Credit Report

Disputing Errors

Identity Theft Basics

Making & Mixing Credit Reports

Reinvestigations (or not)

History

The Color of Credit Scores

The 2003 FACTA Battle

Missing Credit Limits

Conclusion

Credit Scores and Credit Reports, by Evan Hendricks

Chapter 10

History

Those who cannot remember the past are
condemned to repeat it.

- George Santayana, "Life of Reason, Reason in
Common Sense," Scribner's, 1905, page 284

Credit bureaus had humble beginnings. Local credit bureaus started taking shape in the late 1800s, when merchants who increasingly offered credit needed to keep track of those who failed to repay. One of the first credit bureaus was established in Brooklyn in 1860.¹³¹

Equifax was founded as the Retail Credit Co. in Atlanta in 1899 by brothers Cator and Guy Woolford, who compiled credit records of the city's citizens in a "Merchants Guide" that they sold to local grocers for $25 a year.¹³²

Also in the 1890s, J.E.R. Chilton started to collect information on customers in Dallas, Texas.

In 1906, the first national organization of credit bureaus was founded — the National Association of Retail Credit Agencies. It later became the Associated Credit Bureaus (ACB); it is now known as the Consumer Data Industry Association (CDIA).

¹³¹ Cole, R.H. (1992), Consumer and Commercial Credit Management (Irwin, Homewood)
¹³² Serwer, Andy, "Street Life: Credit Bureaus Exposed," Fortune.com, April 14, 2003

This original organization was set up as a network of six small credit bureaus. The number of credit bureaus increased remarkably in the 1920s as well as the 1950s with the introduction of credit cards and installment credit. During that period, the credit reporting market was homegrown: information was collected from local lenders and distributed locally.¹³³

Automation & Consolidation

In the 1970s, however, the industry started to automate on a larger scale. Database concentration led to industry consolidation. The larger market-players began to bring smaller bureaus into their computer systems to benefit from their information collection. Smaller agencies used the computer processing power and network of the larger companies. Local credit bureaus either became affiliates of one of the bigger players, or remained independent as resellers of credit reports.

In the 1970s, there were 2,250 credit bureaus in the market. This number has been reduced to 1,833 bureaus in 1997. Currently, it is estimated there are only 220 independent resellers.

In the 1980s, there were five national credit reporting agencies: Trans Union, TRW, Equifax, Chilton Corporation and Pinger Systems. The Chilton Corporation eventually merged with TRW, whereas Pinger was sold to the Computer Science Corporation (CSC). CSC is a separate company, but for credit-reporting and operational purposes, it is now an affiliate of Equifax.

Credit reporting was only one division of TRW. Other divisions were devoted to aerospace and automotive parts. TRW later purchased Chilton. In the mid-1990s, TRW sold its credit reporting division, renamed Experian, to an intermediary. Experian was later bought by Grand Universal Stores, a United Kingdom company that continues as owner.

¹³³ Jentzsch, Nicola, The Regulation of Financial Privacy: U.S. vs. Europe, European Credit Research Institute (ECRI Report No. 5 - June 2003)

The Marmon Group is a Chicago-based company, privately owned by the Pritzkers of Chicago, one of America's wealthiest families. The Pritzkers also own the Hyatt Hotel chain. In 1981, the Marmon Group bought a large, failing amalgamation of businesses called Trans Union, which was into railcar and equipment leasing, water treatment, and international trade. It also had a credit bureau, a business that grew from a company called the Credit Bureau of Cook County.

So, by the end of the 1980s there were three national consumer credit reporting agencies (CRAs) - Equifax, TRW (Experian) and Trans Union.

Congress, Consumers 'Discover' Credit Reporting

The growth and consolidation in the credit reporting system was felt by the public and by Congress. By the late 1960s, Congress increasingly was concerned with a broad range of consumer protection issues. It was during this period that Congress enacted the Truth in Lending Act, requiring disclosure of credit terms.

There was also growing concern about privacy. For the first time, the specter of huge computerized databanks containing personal information on millions of Americans spurred debate over the need to protect citizens from "Big Brother." In 1967, Prof. Alan Westin of Columbia University published Privacy and Freedom, one of the first books to explore the need for a code of "fair information practices" to ensure Americans' privacy in the computer age.¹³⁴

The Fair Credit Reporting Act has a rather odd sort of history.

¹³⁴ Westin, Alan, Privacy and Freedom (New York: Atheneum, 1967)

While the legislation was supposed to protect consumers, initial support for the bill among consumer groups turned to opposition, while the credit reporting industry came to embrace it. While the House held most of the public hearings and debate, the bill was drafted largely in secret by Senate Banking Committee members and representatives of the credit reporting industry.¹³⁵

In 1969, the proposal's leading proponent was Sen. William Proxmire (D-WI). Proxmire believed that inaccuracy and misleading data were the most serious of several problems plaguing the credit reporting system. The other problems were maintaining confidentiality, and the volume of untimely or irrelevant data.

"Although a number of Congressional committees have recently begun to investigate the activities of credit reporting agencies, most Americans still do not realize the vast size and scope of today's credit reporting industry or the tremendous amount of information which these agencies maintain and distribute," Proxmire said on the Senate Floor.¹³⁶

A Legislative Coup

Unfortunately for Proxmire, he was outnumbered by pro-industry Senators. They undertook their own negotiations with the credit-granting and credit-reporting industries and produced a bill that was quietly attached to a separate Senate bill. The legislative maneuvering allowed the pro-industry Senators to get their version into a final House-Senate conference even before the House could start moving a more pro-consumer bill. Proxmire was forced to compromise.

¹³⁵ This history is largely from the leading manual used by FCRA practitioners: The Fair Credit Reporting Act (Fourth Edition) National Consumer Law Center. Historically authored by Willard P. Ogburn, Joanne S. Faulkner and Jonathan Sheldon, and most recently, by Anthony Rodriguez, the FCRA Manual is a "must-read" for anyone who is serious about FCRA law and litigation. www.nclc.org
¹³⁶ 115 Cong. Rec. 2410 (January 31, 1969)

"It is an industry bill," crowed John L. Spafford, President of the Associated Credit Bureaus, the industry trade group and forerunner of the CDIA.¹³⁷

Anthony Roisman, of the Consumer Federation of America, said, "If the choice is the Senate Bill or no bill, then I think it has to be no bill."¹³⁸

Prof. Arthur Miller, then at Univ. of Michigan, added, "I have the feeling about S. 823 that it really is an Act to protect and immunize the credit bureaus rather than an act to protect the individual who has been abused by credit information flow created by the bureaus."

Miller put his finger on a central attraction to industry. The Act granted CRAs and furnishers substantial immunity from liability under many state defamation and other tort laws. This was contrary to Proxmire's original intent, which was to create new federal liability while preserving state liability.

Another striking aspect about the original statute was its vagueness. For starters, it did not even give consumers the right to obtain a copy of their credit report. Instead, it only gave them the right to know the substance of what was in the report. It said credit bureaus must complete reinvestigations within a "reasonable" period of time, but it did not set any firm deadlines. It put no duty on credit grantors, the main source of data in credit reports, to report accurate information or to reinvestigate upon receiving a dispute.

Proxmire sought to strengthen the FCRA in the next Congress in 1973. He proposed direct consumer access to their files, and disclosure to consumers by creditors of reports that were the basis for an adverse action. He also proposed repealing the industry's immunity under various state defamation and tort laws. The bill never made it out of committee.

¹³⁷ Hearings Before Subcommittee on Consumer Affairs of House Committee on Banking and Currency on HR 16340, 91st Cong., 2d Sess. 108 (1970)
¹³⁸ Id.

The FTC's First Enforcement Effort

In the mid-1970s, the FTC launched what would become a multi-year enforcement action against Retail Credit (later to be named Equifax). The investigation and hearings opened a window into previously unknown practices. These included its policy of ranking various offices according to which one collected the greatest amount of negative information, and the use of production quotas that encouraged employees to cut corners. In 1980, the FTC found that these and a host of other practices were illegal.¹³⁹ But in 1982, the findings were set aside by the U.S. Court of Appeals for the 11th Circuit.¹⁴⁰

The Privacy Protection Study Commission

In 1975, the FCRA became a major focus of the Privacy Protection Study Commission (PPSC), which was created by the Privacy Act of 1974.¹⁴¹ The Commission's charge was to study private sector information practices and recommend to Congress whether new privacy laws were needed, or whether existing privacy laws, like the FCRA, needed to be improved.¹⁴²

¹³⁹ 96 FTC 1045 (1980)
¹⁴⁰ Equifax Inc. v. FTC, 678 F.2d 1047 (11th Cir. 1982)
¹⁴¹ 5 U.S.C. 552a
¹⁴² The charge of the PPSC was to make a "study of the data banks, automatic data processing programs, and information systems of governmental, regional, and private organizations, In order to determine the standards and procedures in force for the protection of personal information." The President and Congress also asked the PPSC to recommend to "the extent, if any, to which the principles and requirements of the Privacy Act of 1974 should be applied to organizations other than agencies of the Federal Executive branch and to make such other legislative recommendations as the Commission deems necessary to protect the privacy of individuals while meeting the legitimate needs of government and society for information."

The Commission's members were appointed by the President and Congress.¹⁴³ The report, released in July 1977, was entitled Personal Privacy In The Information Age.¹⁴⁴

The report's introduction articulated three objectives ¹⁴⁵ that endorsed Fair Information Act Principles. "These three objectives both subsume and conceptually augment the principles¹⁴⁶ of the Privacy Act of 1974 and the five fair information practices principles set forth in the 1973 report of the [HEW] Secretary's Advisory Committee On Automated Personal Data Systems."¹⁴⁷

¹⁴³ The members were: David F. Linowes, Boeschenstein Professor of Political Economy and Public Policy, Univ of Illinois (Chairman); Dr. Willis H. Ware, The Rand Corp. (Vice Chairman); William O. Bailey, President, Aetna Life & Casualty Co.; William B. Dickinson, Retired Managing Editor, Philadelphia Evening Bulletin; Congressman Barry M. Goldwater, Jr. of California; Congressman Edward I. Koch of New York; State Senator Robert J. Tennessen, of Minnesota. The PPSC had over 50 full-time staffers or consultants.
¹⁴⁴ Personal Privacy In The Information Age: The Report of the Privacy Protection Study Commission, (July 1977; GPO Stock No. 052-003-00395) Herein referred to as the PPSC Report.
¹⁴⁵ The three general principles were: (1) minimize intrusiveness; (2) open up record-keeping operations in ways that will minimize the extent to which recorded information about an individual is itself a source of unfairness in any decision about him made on the basis of it (maximize fairness); and (3) create legitimate enforceable expectations of confidentiality.
¹⁴⁶ The five FIP principles of the HEW task force were: (1) there must be no personal data recordkeeping systems whose very existence is secret; (2) there must be a way for an individual to find out what information about him is in a record and how it is used; (3) there must be a way for an individual to prevent information about him obtained for one purpose from being used or made available for other purposes without his consent; (4) there must be a way for an individual to correct or amend a record of identifiable information about him; and (5) any organization creating, maintaining, using, or disseminating records of identifiable personal data must assure the reliability of the data for their intended use and must take reasonable precautions to prevent misuse of the data.
¹⁴⁷ PPSC Report, Pg. 15.

After the introduction, the first substantive chapter, Chapter 2, "The Consumer-Credit Relationship," focused on the FCRA. "Although their scope and particular require-ments differ, the FCRA and the Privacy Act of 1974 share a common aim: that the policies and practices of record-keeping institutions minimize unfairness to individuals in the collection, maintenance, use and disclosure of records about them," the report stated.¹⁴⁸ In that chapter, the commission recommended 18 changes to strengthen the FCRA so it would more effectively realize these goals.¹⁴⁹ Some of the recommendations became law with the enactment of the 1996 FCRA amendments. Other recommendations became "industry best practices."¹⁵⁰

The PPSC report set the foundation for analyzing and evaluating law, policy and organizational practices relating to the collection, use and disclosure of personal data. Its methodology was to identity the principles of Fair Information Practice and then apply them to the issue at hand, whether it be a standard industry practice or the statute governing that industry.

Despite the PPSC's extensive hearings and recommendations regarding the FCRA, Congress made no serious effort to improve the FCRA throughout the 1970s and most of the 1980s.

By the mid-1980s, the national credit reporting agencies had to be feeling nearly untouchable.

¹⁴⁸ Ibid, Pg. 67
¹⁴⁹ Ibid, "Chapter 2: The Consumer-Credit Relationship," pgs. 41-100
¹⁵⁰ The remaining 14 chapters address personal data held by banks, insurers, employers, health care providers, direct marketers, government agencies, the Privacy Act, and Social Security numbers. In nearly all the chapters, the PPSC made extensive recommendations to enact new privacy laws or strengthen existing ones. From a policy point of view, the commission defined "information privacy" in terms of Fair Information Practices, and explained that the FCRA was based on FIPs and therefore was an "information privacy" law.

They had overtaken the legislative process in 1970 and re-wrote what was supposed to be a consumer protection law so it instead provided them with valuable tort immunity and other benefits. Proxmire's bid to strengthen the law in favor of consumers went nowhere. Similarly, the recommendations of the Privacy Protection Study Commission just gathered dust on a shelf. And the FTC's first major enforcement effort was set aside by a federal appeals court.

Meanwhile, mergers and acquisition had allowed the national CRAs to consolidate their control over the market. Fast-improving information technology enabled them to gather, store and sell more personal data — "faster, better, cheaper." Yes, for the CRAs in the 1980s, life was good.

The Complaints Just Kept On Coming

By the late 1980s, complaints were rising about credit report inaccuracies. The first person to attempt to assess the extent of the inaccuracy was a mortgage broker, reflecting the fact that error-prone credit reports were hampering the home-buying process. On August 7, 1989, James Williams of Consolidated Information Service, a New York-area mortgage reporting firm, released a report analyzing 1,500 reports from TRW, Equifax, and Trans Union, and found a serious error rate of 42% to 47%.¹⁵¹

The Williams study and subsequent legislative proposals set off a debate over credit report accuracy that continued for 14 years and proved a dominant theme in the 2003 legislative proceedings in Congress.

In the October 3, 1989 issue of Privacy Times, this author co-wrote an article on consumer complaints to the FTC about their credit reports. (The complaints were obtained through a Freedom of Information Act request, with the names redacted.) The story found that several consumers complained about inaccuracies, and a common cause of inaccuracy was the mixing of files of two consumers with similar names or SSNs. Another theme was the credit bureaus' callous attitude toward consumers.

¹⁵¹ James Williams, Consolidated Information Services, Credit File Errors, A Report, August 1989

One consumer, in reference to his credit report, wrote to the credit agency, "How is it possible to get files so mixed up? It contained five different Social Security numbers other than my own!" Another consumer said, "TRW had corrected the original errors, but now they have added someone else's credit profile to mine." When the consumer complained to a TRW agent about the cost of all the long distance phone calls to correct the mistakes, the agent told her to "speak to an attorney."¹⁵²

On June 12, 1990, as the FCRA legislative debate picked up steam, the U.S. Public Interest Research Group (US PIRG) released its first study on the issue, entitled "Nightmare On Credit Street, Or, How The Credit Bureau Ruined My Life." U.S. PIRG was a fierce advocate for consumer rights, with independent PIRGs in several key states. "Nightmare On Credit Street" was a series of case studies. The first case study was entitled "Paul Rosenzweig: Credit Bureaus Commonly Include Credit Information Mixed With Someone Else's Information." It quoted Mr. Rosenzweig's letter to CALPIRG:

"To sum up the situation, there is another Paul Rosenzweig in L.A., he has a different Social Security number and birth date so it is beyond me that his bad credit keeps ruining mine. . . I have spent every moment of my free time trying to fix this mistake which I did not make and it has made my life a living hell. I really feel sorry for the Bob Smiths out there."

Another case study in the 1990 US PIRG report focused on the failure to correct inaccuracies. The New Jersey Dept. of the Public Advocate found similar problems in an April 1990 report, "Credit Reporting Complaints," by Pat Donahue.

¹⁵² Privacy Times, October 3, 1989

In April 29, 1991, Consumers Union released its first report, "What Are They Saying About Me? The Results of A Review of 161 Credit Reports From The Three Major Credit Bureaus." The rather unscientific survey found that 48% of the credit reports examined contained "serious errors," defined as those that could, or did, cause the denial of credit, employment or insurance.

In 1991, U.S. PIRG released its second study, "Don't Write, Don't Call, We Don't Care." It highlighted several examples of credit bureaus failing to respond to consumers seeking correction of errors.

In October 1993, U.S. PIRG released its third report, "Credit Bureaus: Public Enemy #1 At The FTC." Based upon a Freedom of Information Act (FOIA) request, U.S. PIRG found that between 1990-93, problems with credit bureaus were the leading cause of complaints to the FTC. The 1993 PIRG report found that 44% of complaints concerned mixed files, and that among those, 64% involved the mixing of data with total strangers. The study found that 94% of consumers complaining did so because of uncorrected errors in their reports and that 83% specifically named at least one of the three major CRAs — Equifax, Trans Union or TRW (now Experian).

FTC, State AGs Investigate

Officials at the FTC and the Offices of State Attorneys General (AGs) were keenly aware of these emerging patterns. In their view, the problems typically related to three inter-related areas: (1) inaccuracy and/or mixed files, (2) failure on the part of CRAs to reinvestigate disputed information in an adequate or timely manner, (3) failure to correct inaccurate information or to prevent its reinsertion after it was corrected. Both the FTC and State AG officials concluded that complaints about CRAs and consumer reports were indicative of a larger problem, and launched investigations.

These investigations resulted in a series of settlements in which each of the three major repositories, although not admitting any wrongdoing, agreed to abide by more rigorous standards designed to improve accuracy, responsiveness and reinvestigations, and to better prevent the reinsertion of previously deleted data. The consent agreements set forth very detailed requirements and particularly focused on the problem of mixed files. They set specific 30-day reinvestigation deadlines.

The Consent Orders underscored the belief of the State Attorneys General and the FTC that the CRAs were exploiting the vagaries of the FCRA to the disadvantage of consumers, and that given widespread consumer complaints, it was necessary to articulate a higher and more specific standard of care.

The first two settlements were simultaneously reached December 10, 1991, between TRW and the FTC,¹⁵³ and 18 State AGs.¹⁵⁴

Equifax came to a similar settlement with the State AGs in June 1992, and with the FTC in 1994.

In October 1992, Trans Union reached a similar settlement with 18 States.

Next Stop: Congress

These agreements provided the foundation for the first set of legislative amendments to the FCRA. But the proposal still faced major hurdles. In 1992, pro-industry forces won a narrow vote on the House Floor to make the FCRA preempt all State law. Rather than let that happen, the bill's sponsors, including the Rep. Henry Gonzalez (D- TX) and Esteban Torres (D-CA), pulled the measure and let it die.

¹⁵³ FTC v. TRW Inc., USDC-N.D. Texas - C.A. No. 3-91CV2661-H; Dec. 10, 1991
¹⁵⁴ TRW v. Dan Morales, et al., USDC-N.D. Texas - C.A. No. 3-91-1340-H; Dec. 10, 1991

Never Give Up

In 1994, a compromise was reached on preemption of state law. But with just a few days left in the session, Sen. Phil Gramm (R-TX), exercised his privilege to put a "hold" on the measure, effectively killing it. Two years later, on September 30, 1996, Congress capped six years of public hearings and intense media coverage and enacted the Consumer Credit Reporting Reform Act of 1996.

The amendments included provisions to strengthen consumers' rights to prompt and effective reinvestigations, and to put an even stronger duty on CRAs to avoid mixed files, and to prevent reinsertion of previously deleted material. Many of the provisions in the 1996 Amendments paralleled the approaches taken by the State Attorneys General and the FTC in their consent agreements with CRAs.

The April 1994 House Banking Committee Report on the proposed amendments explained why, despite the consent agreements and subsequent industry guidelines, legislation was necessary: "Because the industry guidelines are simply voluntary, they are unenforceable and may be changed or revoked at any time. Many of the provisions in the consent agreements expire after a short period of time, are not enforceable by consumers, and do not apply in every state. Additionally, these agreements do not impose any reinvestigation obligations on furnishers of information or on credit bureaus other than the three largest. Because of these limitations, federal legislation is necessary to improve accuracy-related protections for consumers. Consequently, the bill contains new reinvestigation procedures which are intended to cut down on the number of errors in consumer reports and to reduce the delay in correcting those errors."

Inaccuracy Persists

Despite all of these efforts, these problems did not go away. In March 1998, U.S. PIRG conducted a study in which 88 consumers obtained 133 consumer reports, from either Equifax, Trans Union or Experian. The report found:

29% of the consumer reports contained serious errors — false delinquencies or accounts that did not belong to the consumer — that could result in the denial of credit;

41% contained personal demographic identifying information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect;

20% of the credit reports were missing major credit, loan, mortgage or other consumer accounts that demonstrated the creditworthiness of the consumer; altogether, 70% contained either serious errors or other mistakes of some kind.

The 1998 PIRG study found that non-responsiveness on the part of CRAs remained a problem:

Of the consumers that did obtain their credit reports, at least 14% of them were forced to call back three or more times after receiving busy signals or had to write a letter in order to receive their report;

Overall, 15% of consumers who attempted to participate in the survey either made at least three phone calls and never got through or requested their reports but never received them.

A 2000 survey by Consumers Union found that more than 50% of credit reports contained inaccuracies with the potential to result in a denial, or a higher cost of credit. The errors included mistaken identities, misapplied charges, uncorrected errors, misleading information, and variation between information reported by the various credit repositories. These results reflect the review of 63 reports by 25 consumers.¹⁵⁵

Consumer Federation of America/National Credit Reporting Assoc. Study (2002)

Perhaps the most comprehensive study on consumer reports and credit scores was released in December 2002. It was conducted jointly by the Consumer Federation of America and the National Credit Reporting Association, which represents independent credit bureaus. The study covered a sample of 502,623 credit files combined from the three major repositories — by far the largest independent statistical investigation of its type undertaken in the United States. Identifiers were stripped from all credit reports and the study was conducted without input from the consumers who were subjects of the reports. (We discussed the credit scoring aspects of this study in Chapter 2.)¹⁵⁶

The study found that mixed files and multiple files continued to cause inaccuracies. For example, when researchers requested a "merged" report, consisting of a consumer report and credit score from each of the three major repositories, in 155 files out of 1,545-file sample (10%), "[I]t was very common for the additional report to contain a mixture of credit information, some of which belonged to the applicant and some of which clearly did not. In some cases, applicants had split files that appeared to be the result of applying for credit under variations of their name. Common reasons for returning additional repository reports included:

¹⁵⁵ "Credit Reports: How Do Potential Lenders See You?" Consumer Reports. July 2000. P. 52-3.
¹⁵⁶ CFA and NCRA, Credit Score Accuracy and Implications for Consumers, December 2002

Confusion between generations with the same name (Jr., Sr., II, III, etc.).

Mixed files with similar names, but different SSNs, and files with matching SSNs, but different names.

Mixed files that listed accounts recorded under the applicant's name, but with the SSN of the co-applicant.

Name variations that appeared to contain transposed first and middle names.

Files that appeared to be tracking credit under an applicant's nickname.

Spelling errors in the name.

Transposing digits in the SSN.

An account reporting the consumer as deceased.

The CFA-NCRA found that errors of "omission" and "commission" were rampant. Credit bureaus were particularly prone to not include positive credit history. Nearly 80% of all files examined were missing "a revolving account in good standing." One-third were missing a mortgage account that had never been late, and two-thirds were missing installment accounts that had been paid on time.

Since researchers did not communicate directly with the subjects of credit reports, they could only analyze conflicting data between each of the three major repositories. Even then, the results were troubling. In 43.1% of the files sampled, there was conflicting data regarding 30-day late payments. In 29.4% cases, data conflicted on 60-day late payments, and in 23.5%, they conflicted on 90-day late payments. NCRA said it lacked data to estimate the potential impact on credit scores.

The Federal Reserve Board Study (2003)

In February 2003, the Federal Reserve Board (Fed) released a study concluding that changes were needed to improve the accuracy and completeness of the consumer data it contains.¹⁵⁷

What was noteworthy about this study was that the Fed did not set out to examine credit report accuracy. Instead, it originally sought to determine whether examining credit bureau data on consumers would increase the Fed's understanding of the nation's economic health. The Fed study was based upon a random sample of nearly 250,000 (de-identified) consumer credit histories provided by an unnamed credit bureau.

Noting the long string of studies on credit report inaccuracy, the Fed said the issue was related to the potential usefulness of the data for measuring economic health.

"Despite the benefits that the credit reporting system offers, analysis reveals several areas of the current system that could be improved. A close examination of credit reporting company data reveals that the information is not complete, may contain duplications, and at times contains ambiguities about the credit histories of at least some consumers," the study found.

"The following are four particular areas of concern: (1) credit limits are sometimes not reported; (2) the current status of accounts that show positive balances but are not currently reported is ambiguous; (3) some creditors fail to report non-derogatory accounts or minor delinquencies; and (4) the reporting of data on collection agency and public record accounts is possibly inconsistent and inquiry data is incomplete."

In some instances, these deficiencies could harm a consumer's credit score; in others, they could help, the study continued. For instance, the failure to report credit limits could make it appear that consumers were "maxed out" on their credit cards when they weren't.

¹⁵⁷ "An Overview of Consumer Data and Credit Reporting," was written by Robert Avery, Paul Calem, and Glenn Canner, of the Fed's Div. of Research and Statistics, and Raphael Bostic, of the Univ. of Southern California. www.federalreserve.gov/pubs/bulletin/2003/0203lead.pdf

Duplications in mortgages, court judgments or collection accounts, could significantly drive down a credit score. On the other hand, the failure to report minor delinquencies could make consumers appear more creditworthy than they were. Like the CFA study, the Fed concluded that inaccurate data would reduce the reliability of credit scores.

Needed: Consumer Vigilance

The Fed listed consumer "vigilance" in the form of access to his or her own credit report as its first remedy. "Both growing consumer awareness of the importance of credit reports and easier consumer access to credit reports and credit scores serve to increase consumer vigilance," it said. It acknowledged that access by itself was not a panacea. "The credit granting system has moved toward risk-based pricing in which applicants are less likely to be denied credit (and thus given the reasons for denial) than to receive credit at prices that reflect the perceived risk."

"Consumers may not always be aware that they are paying higher prices for the credit. Similarly, an increasing share of consumer revolving credit is obtained through pre-approved solicitations as opposed to consumer initiated requests for credit," the Fed study continued.

"The credit reporting companies also could address some of the issues identified above," it said, recommending a system for coding collection accounts and public records, and for identifying out-of-date accounts. "Most of the problems cited above result from the failure of creditors, collection agencies, or public entities to report or update items-areas that are beyond the direct control of the credit reporting companies. Thus, fully resolving these problems requires a more comprehensive and consistent reporting system, particularly with regard to major derogatories, collection agency accounts, and public records," it said.

In the heat of the 2003 legislative debate over the Fair Credit Reporting Act, Congress asked its research arm, General Accounting Office (GAO) to assess credit report accuracy. The GAO, a timid outfit to begin with, probably dreaded the assignment, as it knew that the opposing players in the legislative debate — the powerful financial services lobby and consumer-privacy advocates — would aggressively assail any conclusion that they did not like.

Not surprisingly, the GAO "punted." Rather than conduct its own study, the GAO surveyed previous studies (cited above) and other existing data. It reached the not-so-startling conclusion that the perfect study on accuracy had not yet been made.

"The lack of comprehensive information regarding the accuracy of consumer credit reports inhibits any meaningful discussion of what more could or should be done to improve credit report accuracy. Available studies suggest that accuracy could be a problem, but no study has been performed that is representative of the universe of credit reports," the GAO wrote.¹⁵⁸

Shortcomings in the PIRG and CU studies included the lack of a statistically representative methodology and the absence of cooperation from the credit bureaus, GAO said. While the CFA study was based upon a review of actual credit reports, it lacked input from the consumers who the reports were about. The Federal Reserve study relied on only one credit bureau, GAO said.

None of the three major credit reporting agencies (Experian, Equifax and Trans Union), or its trade group, CDIA, kept statistics of credit report accuracy, GAO reported. A 1992 study by Arthur Anderson finding a miniscule level of inaccuracy was not seen by GAO as reliable.

¹⁵⁸ www.gao.gov/new.items/d031036t.pdf

The GAO came up with some useful findings. It noted that creditors who furnished inaccurate data to the CRAs were a major cause of errors. But it also noted that errors could occur at other points in the process. CRA officials told GAO that five categories account for 90% of disputes. The most frequently received dispute was "not my account," CDIA said. (Remember, the 1993 U.S. PIRG study found that "mixed files" was the leading cause of inaccuracy.)

The other categories were: "account has been closed;" "account status, payment history, or payment rating;" "current balance;" and "account included in or excluded from a bankruptcy."

Industry Statistics

Although declining to provide a total number of disputes for 2002, CDIA provided the following percentages: 46% of disputes were verified as reported; 27% were modified/updated per furnisher's instructions; 10.5% had data deleted per furnisher's instructions; 16% had data deleted due to statutory time limit.

Critics of the credit bureaus questioned whether 46% of the disputes were actually "verified," given the bureaus' reliance on an automated message-exchange system that has been shown to cause creditors to "verify" information that in fact is inaccurate. Experts also said the CDIA statistics confirmed criticisms that the bureaus overly rely on the word of creditors and too often disregard the word of consumers.

The GAO also reported that consumer complaints to the FTC increased from 1,300 in 1997 to almost 12,000 in 2002. The most common complaints cited against CRAs in 2002 were: Provided inaccurate information (5,956); failed to reinvestigate disputed information (2,300); provided inadequate phone help (1,291); disclosed incomplete or improper credit file to customer (1,033); and improperly conducted reinvestigation of disputed item (771).

In the 2003 Amendments, Congress added several provisions to improve accuracy, including the right to one free credit report per year. In addition, Congress ordered the FTC to conduct a study about credit report accuracy, and directed U.S. banking regulatory agencies, in conjunction with the FTC, to assess creditors' role in improving accuracy. The studies are to be completed no later than 2005.

The CRAs sharply disagree that there are major accuracy problems. For instance, on its Web site, Experian points out that its credit files contain records on approximately 205 million credit-active consumers and 15 million U.S. businesses.

"Each month, there are more than 4.5 billion updates to credit report information throughout the U.S.," it stated. "The American credit databases are the most accurate and secure in the world. Experian has a long, distinguished record of responsible stewardship of the data in our care."¹⁵⁹

Parallel History: Identity Theft & Credit Reports

In 1992, Trans Union started collecting a new statistic: the number of consumer "inquiries" to its fraud desk related to "true name fraud," otherwise known as identity theft.

It made sense that a major credit bureau like Trans Union would take an early interest, as identity theft usually leaves the innocent consumer with the debris of a polluted consumer report.

In that sense, identity theft is a sub-category of the more general category of mixed files, as the typical result of identity theft is that the imposter-generated fraudulent activity is mixed into the consumer report of the innocent victim. Moreover, a key moment occurs when the credit bureau actually helps the identity thief obtain credit by disclosing the innocent victim's report to the credit grantor holding the thief's application.

¹⁵⁹ http://www.experian.com

In 1992, the first year Trans Union began keeping track, it received 35,235 inquiries about identity theft. By 1997, the annual number of inquires had mushroomed to 522,922. Trans Union estimated that two-thirds of those inquiring were actual victims of identity theft.

Thus, in the years that credit report inaccuracy emerged as one of the key issues confronting American consumers, identity theft was born and quickly began escalating. By definition, this new problem would further denigrate credit report inaccuracy, as the victim's credit report would be polluted by the data generated by the fraudster.

GAO ID Theft Study (1998)

In 1998, the GAO released one of the first reports on identity theft. Using Trans Union's statistics, it concluded that the phenomenon was prevalent, growing, and damaging:

On an individual level, the "human" costs of identity fraud should be acknowledged. Emotional costs are associated with identity-fraud incidents as well as the time and effort required to repair a compromised credit-history. One Secret Service field agent told us that victims of identity fraud feel they have been violated. Although not easily quantified, the financial and/or opportunity costs to victims can also be substantial. For example, the victims may be unable to obtain a job, purchase a car, or qualify for a mortgage.¹⁶⁰

¹⁶⁰ (GAO/GGD-98-100BR, "Identity Fraud: Information On Prevalence, Cost and Internet Is Limited"

The next year, Congress enacted the Identity Theft Deterrence Act, specifically making it a federal crime to steal someone's identity. But the law did not place duties on credit grantors or credit bureaus to be more vigilant about stopping identity theft.

Identity theft did not stop; it got worse. And for good reason. First, for the thieves, it was a relatively low-risk crime, with a potentially big payoff. The most skillful identity thieves were able to run up bills of $100,000, loading up on jewelry, electronic equipment, even cars and homes. Criminalizing the activity had only minimal impact because many of the thieves probably thought they were breaking several laws to begin with.

Damages Similar To Mixed Files

The damages arising from identity theft, as they pertain to the interaction between consumers and the major credit bureaus, are similar to the damages arising from mixed files. In July 12, 2000, testimony before the Senate Judiciary Subcommittee on Technology, Terrorism and Government Information, Jodie Bernstein, then head of the FTC's Bureau of Consumer Protection, testified:

The leading complaints by identity theft victims against the consumer reporting agencies are that they provide inadequate assistance over the phone, or that they will not reinvestigate or correct an inaccurate entry in the consumer's credit report. In one fairly typical case, a consumer reported that two years after initially notifying the consumer reporting agencies of the identity theft, following up with them numerous times by phone, and sending several copies of documents that they requested, the suspect's address and other inaccurate information continues to appear on her credit report. In another case, although the consumer has sent documents requested by the consumer reporting agency three separate times, the consumer reporting agency involved still claims that it has not received the information.¹⁶¹

In her March 7, 2000 testimony before the Subcommittee, Bernstein elaborated:

A consumer's credit history is frequently scarred, and he or she typically must spend numerous hours sometimes over the course of months or even years contesting bills and straightening out credit reporting errors. In the interim, the consumer victim may be denied loans, mortgages, a driver's license, and employment; a bad credit report may even prevent him or her from something as simple as opening up a new bank account at a time when other accounts are tainted and a new account is essential. Moreover, even after the initial fraudulent bills are resolved, new fraudulent charges may continue to appear, requiring ongoing vigilance and effort by the victimized consumer."

Identity theft victims continue to face numerous obstacles to resolving the credit problems that frequently result from identity theft. For example, many consumers must contact and re-contact creditors, credit bureaus, and debt collectors, often with frustrating results."¹⁶²

ID Theft Becomes Number One Complaint To FTC

The parallel between identity theft and overall credit report inaccuracy was even reflected in FTC complaint statistics.

¹⁶¹ http://www.ftc.gov/os/2000/07/idtheft.htm
¹⁶² http://www.ftc.gov/os/2000/03/identitytheft.htm

As U.S. PIRG reported in its 1993 study, complaints about credit bureaus topped the list. Here's how the complaints broke down:

Credit bureaus (30,901);

Misc. Credit (22, 729);

Investment Fraud (12,809);

Equal Credit Opportunity (11,634);

Automobiles (6,901);

Truth-In-Lending (6,303);

Household Supplies (5,835);

Recreational Goods (5,747);

Mail Order (4,687)

Food/Beverage (2,738).

On January 23, 2002, the FTC announced that Identity Theft headed the FTC's Top 10 Consumer Fraud Complaints of 2001¹⁶³, again, well ahead of other categories that involved out-of-pocket loses. The breakdown was:

Identity Theft (42%);

Internet Auctions (10%)

Internet Services and Computer Complaints (7%)

Shop-at-Home and Catalog Offers (6%)

Advance Fee Loans and Credit Protection (5%)

Prizes/Sweepstakes/Gifts (4%)

Business Opports./Work at Home Plans (4%)

Foreign Money Offers (4%)

Magazines and Buyers Clubs (3%)

Telephone Pay-Per-Call/Info Services (2%)

¹⁶³ http://www.ftc.gov/opa/2002/01/idtheft.htm

GAO 2002 ID Theft Study

In 2002, the General Accounting Office, although stating that hard statistics were not available, concluded that the problem continued to escalate, as did the costs to businesses. Importantly, the GAO noted the toll on victims.

"Identity theft can cause substantial harm to the lives of individual citizens — potentially severe emotional or other non-monetary harm, as well as economic harm. Even though financial institutions may not hold victims liable for fraudulent debts, victims nonetheless often feel 'personally violated' and have reported spending significant amounts of time trying to resolve the problems caused by identity theft — problems such as bounced checks, loan denials, credit card application rejections, and debt collection harassment."¹⁶⁴

FTC Study (2003)

The studies kept coming. In September 2003, a major FTC survey, the first of its kind, left little doubt that identity theft had reached epidemic proportions and had escalated over the past year. Nearly 10 million people in the United States were victims in the past year, costing them $5 billion plus a total of 300 million hours to correct, the FTC found. The five-year totals were 27.3 million victimized by some form of identity theft, at $4,800 per victim, costing businesses $47.6 billion.¹⁶⁵

Based on a random telephone survey of 4,057 adults, the survey found that 4.6% of the respondents said they were identity theft victims in the past year. That percentage translated into 9.9 million victims. The survey estimated 6.9 million victims two years ago and 3.4 million victims the year before that. The FTC said the most common form of ID theft - unauthorized charges on credit cards or telephone bills - was experienced by 3.1%.

¹⁶⁴ General Accounting Office, Identity Theft: Available Data Indicate Growth in Prevalence & Cost GAO-02-424T, www.gao.gov/new.items/d0242t.pdf
¹⁶⁵ Federal Trade Commission - Identity Theft Survey (Sept. 2003) www.ftc.gov/os/2003/09/synovatereport.pdf

Another 1.5% reported that new accounts were created in their name.¹⁶⁶ FTC Consumer Protection Chief Howard Beales called this latter form the most damaging type of identity theft because of the time it takes to correct and the toll it takes on consumers.¹⁶⁷

The FTC survey was supported by separate studies by the Gartner Group, and by Privacy & American Business,¹⁶⁸ a New Jersey-based organization headed by Alan F. Westin, a consultant to several corporations and former Columbia Univ. professor.

Identity Theft Resource Center Study (2003)

Also in September 2003, the Identity Theft Resource Center (ITRC) published its survey of 173 victims, showing that the damage suffered by identity theft victims was escalating on all fronts. It found that fraudulent charges averaged more than $90,000 per name used, and that the average time spent by victims is about 600 hours, an increase of more than 247% over previous studies. It found that it was taking far longer than before to eliminate negative information from credit reports.¹⁶⁹

Roughly half of the victims found it hard to understand their credit reports (particularly the "inquiries" section), the study said.

"Consistently all three bureaus did a very poor job of educating the public about fraud alerts and in helping people who called in for assistance. On average, only one in five people found it easy to speak with or reach a person after receiving a report. Once they did reach a fraud/customer service person, only 16% found the person "helpful and answered most, if not all, of my questions."

¹⁶⁶ Id.
¹⁶⁷ Privacy Times, September 12, 2003, pgs. 4-5
¹⁶⁸ www.pandab.org
¹⁶⁹ "Identity Theft: The Aftermath 2003," Identity Theft Resource Center (Sept. 2003); http://www.idtheftcenter.org/idaftermath.pdf

The study concluded that the most severe damages might be the emotional distress that victims endure. Paul Colins, a credit industry analyst and consultant who worked with the ITRC, commented, "The range of emotions is wide and rather painful to read. Three-fourths of victims were left with a feeling of financial insecurity, 88% experienced anger, and 75% expressed a feeling of helplessness. While these feelings do appear to subside a little over time, the survey clearly shows for many victims the feelings linger on. While most surveys have focused on the financial costs to victims, these psychological impacts are generally unreported. They may, however, have far worse consequences for victims."

Dr. Charles Nelson, a licensed psychologist, and director of both the Crime and Trauma Recovery Program at the Family Treatment Institute, also reviewed the study:

Identity theft has been classified in many realms as a victimless crime," Nelson wrote. "This survey was designed to test the emotional impact of identity theft and to discover if sufferers of this crime exhibit similar responses as those of more commonly recognized victims including rape, repeated abuse, and violent assault victims. Many of the listed symptoms are classic examples of Post Traumatic Stress Disorder and secondary PTSD (from secondary wounding)."

In the years leading up to these studies, some states, particularly California, were very active in passing state laws to increase protections for victims of identity theft. Some of the California laws:

¹⁷⁰ California Civil Code Sections 1785.11.2-1785.11.6; for the California Credit Reporting Act, go to www.privacy.ca.gov/code/ccra.htm

Allowed victims to put a "security freeze" on their credit report, barring the credit bureaus from disclosing the report to anyone unless the consumer explicitly consented.

Required that credit bureaus remove fraud-generated accounts once the victim presented the credit bureau with a police report.¹⁷¹

Allowed victims to request one free copy of their credit report every month for 12 months after becoming a victim.¹⁷²

Prohibited credit bureaus from disclosing a credit report unless three identifiers on the application matched the credit report.

When they take effect (mainly in December 2004), the 2003 Amendments to the FCRA will create additional protections against identity theft. These include:

Allowing consumers to block, and requiring CRAs to block, fraud-generated accounts from appearing on their credit reports.

Requiring CRAs to notify furnishers that blocked account is fraudulent.

Allowing consumers with a "good faith suspicion" they are fraud victims to place an "initial fraud alert" for (90 days).

Permitting consumers who provide an official identity theft report (either the FTC report or local police) to place an extended fraud alert (up to 7 years).

Requiring the CRA that received the alert to pass it on to the other CRAs.

Permitting those on active military duty to place "active duty" alerts.

When a report contains an alert, requiring CRAs to notify users of discrepancies in addresses.

Prohibit sale or collection of debts resulting from identity theft.

Preventing fraud-related data from "re-polluting" a victim's credit report.

Requiring the U.S. banking regulatory agencies to develop "Red Flag" guidelines, so financial institutions can spot patterns and practices related to identity theft.

¹⁷¹ California Civil Code Sections 1785.16(k)
¹⁷² California Civil Code Sections 1785.15.3

In addition, the 2003 Amendments required rule-making and studies in a host of areas related to credit report accuracy, credit scoring and identity theft by the FTC and the U.S. banking regulatory agencies.

These are all welcome and constructive additions to the FCRA. But upon their enactment, consumer advocates and privacy experts were quick to point out that they still did not go far enough. Worse, the federal law preempted state activity in too many areas.

More work lies ahead. Consequently, the history of the FCRA, or credit report inaccuracy, or identity theft, is far from over.

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