Credit Scores and Credit Reports, by Evan Hendricks

Chapter 23

Conclusion

Live in such a way that you would not be           
ashamed to sell your parrot to the town gossip.           

— Will Rogers  

A goal of this book was to describe the credit scoring and credit reporting system. Given the enormity of the system, the task of describing it took precedence over the task of analyzing it more thoroughly.⁴⁰⁵ The purpose of this conclusion is to offer a few thoughts about the system.

Here To Stay

For the foreseeable future, it's safe to say that the credit reporting and credit scoring systems are here to stay. Although there has not been a final tally, it is clear that in 2003 the financial services industry invested millions of dollars in the FCRA-FACTA legislative debate to preserve the existing system, and to prevent states from interfering with it through enactment of new consumer protections.

⁴⁰⁵ The author is hopeful that more analysis can be provided in future editions of the book.

And for good reason. On the front end, the credit scoring system increases profitability on a number of fronts:

better segregation of consumers and credit risk, lower cost through automation and faster decision-making. But one fundamental dilemma has not been adequately addressed, and it relates to the "general rule" set forth on Page 1 of this book: If lenders can charge more to those with lower credit scores, then will the system have a bias towards lowering scores? Perhaps we can begin to find answers to this by examining financial conglomerates that have significant and direct impact on a consumer's credit score, like a major mortgage lender that also operates its own credit bureau and re-scoring shop. Or we can look at Capital One, which reportedly had the effect of lowering some of its customers' credit scores by not reporting credit limits, making customers look more "maxed out" on their cards than they actually are. Many believe that the advantage to Capital One is that this practice makes its customers look less attractive to other credit card companies who might want to "cherry pick" them through pre-approved credit card offers.

On the back end, the credit reporting system provides great leverage to lenders. If consumers don't pay their bills on time, they will be reported to the credit bureaus. The entry of recent derogatory data has a very detrimental impact on credit scores. An educated consumer will avoid this scenario, as the damage to creditworthiness is potentially more costly than the debt in question. Further, it is not improper for creditors to inform customers that late payments should be avoided for precisely this reason. As we have seen, however, some lenders and debt collectors cross the line, and improperly attempt to invoke credit reporting as a tactic to force consumers to pay debts that they do not really owe. Many consumers have been abused because of the manner in which some lenders and collectors view credit reporting as an arm of debt collection. The current system, and the law governing it, generally puts the burden on the individual if he or she wants to ensure that all is right. Accordingly, the first plank of protection under our national policy is knowing what is in one's credit report. This requires consumers to be vigilant in exercising their right of access to their credit reports. A wide range of commentators, including the Federal Reserve Board, regularly advise consumers to get their credit reports. Congress has sought to encourage this by entitling all Americans to one free credit report per year.

Taking advantage of modern technology, access can address important problems, like accuracy and identity theft. Before Congress, Treasury Assistant Secretary Wayne Abernathy spoke of the advantages of having "150 million Americans auditing" their own credit reports. If consumers were "plugged into" their own reports, enjoying the same kind of ongoing, online access to their reports that creditors currently have, then they quickly could spot errors, or better yet, detect signs of identity theft. Imagine that you live in Ohio, and that your monitoring service alerts you via e-mail that a car dealership in Arizona has pulled your credit report. You would know that immediate action was in order. Research shows that the longer it takes a victim to learn that his or her identity was stolen, the worse the damage.

How Much?

Equifax, Experian and Trans Union all offer some form of online subscription and fraud alert monitoring services. The services appear profitable, possibly grossing $1 billion annually. But at $89 to $119 per year, the prices of these services are exorbitant. Moreover, in an age of escalating identity theft, shouldn't at least some of these services be required of the Big Three consumer reporting agencies (CRAs) simply to assure "maximum possible accuracy" under the Fair Credit Reporting Act?

To no avail, this author strongly recommended to Congress that it cap the price of the Big Three's monitoring services, just as the 1996 Amendments capped the price of credit reports. Hopefully, this recommendation someday will be seen as being ahead of its time.

The debate will continue to rage over the apparent gap between industry practices and the FCRA's requirements that (1) disputes are investigated, or that (2) previously deleted information not be reinserted, or (3) that CRAs forward to the creditor all relevant information provided by the consumer. Several recent pro-consumer court decisions, including the Fourth Circuit's landmark opinion in Johnson v. MBNA (see Chapter 9), indicate that the law might actually be closing in on questionable industry practices. After more than 30 years, one would certainly hope so.

But what will industry do? Will it continue to cling to unpopular and discredited practices? Will the industry only change these practices if it is hit with tobacco-styled litigation and tobacco-like verdicts? That appears to be what the industry is inviting.

Not Self-Enforcing

Considering the FCRA's age and what's at stake for consumers, enforcement of the FCRA, with a few exceptions, has been abysmal. The Federal Trade Commission took the most enforcement actions in the early 1990s, resulting in landmark consent decrees, and setting the table for the 1996 Amendments. To be fair, the FTC must oversee a wide array of consumer issues at a time when the privacy agenda, which includes FCRA, is more than enough to keep it overworked. All developed countries, except the United States, have a national "Office of Privacy Commissioner" to handle the load.

Enforcement is most glaringly absent when it comes to inaccurate reporting by creditors. On this issue, Congress did not give individuals the ability to enforce accuracy, that is, the right to sue. Instead, the 1996 Amendments generally permit creditors to report inaccurate data without liability.⁴⁰⁶ Enforcement was left to the Office of the Comptroller of the Currency (OCC), and other U.S. banking agencies. It is not clear whether the OCC has ever enforced this section of the law. We shouldn't be surprised. The OCC is a bank regulator, not a consumer protection agency.

Thus, if Americans want better compliance with the FCRA, they themselves will also need to become more vigilant about enforcement. In a recent law review article, St. Johns University Law Professor Jeff Sovern said this goal would be greatly enhanced if we moved toward a legal standard of "strict liability," particularly in the area of identity theft. The FCRA's current standard of "reasonable procedures" is too convoluted, Sovern wrote. What is needed, he said, was to make CRAs strictly liable for attributing the transactions of identity thieves to innocent consumers, and to make creditors liable for reporting the transactions of imposters as transactions of others. Sovern argued that this would create a simpler system of "loss allocation rules" that would "spread the consumer losses caused by identity theft more equitably."⁴⁰⁷

Sovern's straightforward proposal deserves serious attention. But in the short run, it will have a difficult time getting any in Congress, given the strength of the financial services lobby.

Still, the FCRA, as much as any other federal statute, gives consumers important enforcement tools, which in very recent years, have begun to demonstrate their effectiveness.

⁴⁰⁶ Exceptions include when reporting is done with "malice" or is egregious in some other way.
⁴⁰⁷ Sovern, Jeff, "The Jewel of Their Souls: Preventing Identity Theft Through Loss Allocation Rules," University of Pittsburgh Law Review (Winter 2003)

Looking Ahead

Should we be so accepting of the system? Is there a danger that a credit score, with so much riding on it, will become an "internal passport" for American consumers? What about people who handle their money responsibly, but prefer to avoid the consumer credit system, and all the fees and surveillance that go along with it? Has the easy availability of our personal data in turn made too much credit too easily available, to the detriment of too many consumers?

These questions ultimately go to the fundamental importance of credit reports and personal information in 21st Century America. Throughout the latter half of the 20th Century to the present, governmental and corporate entities, along with our system of law, largely viewed personal information as a commodity. Sure, it might be your name, or information about you, but if a company collected or otherwise obtained it, that company owned it. In short, when held by a large organization, you did not even "own" your own name, or your personal data.⁴⁰⁸ The FCRA, the Privacy Act and other statutes were created to give individuals procedural rights in relation to their personal information that was controlled by large organizations.

Is this traditional approach adequate in an age where our personal information is the "lifeblood" of our consumer-based economy? Is there too much at stake to leave so much discretion to large entities, and only provide procedural rights to individuals? If so, then what are the alternatives?

Some observers have suggested that many of these problems could be cured by giving individuals a property right or interest in their personal data. On a theoretical level, such a right or interest would give individuals much greater standing to exert control over their information.

⁴⁰⁸ U.S. v. Miller 425 U.S 435 (1976)

But in situations where individuals found themselves in a weak bargaining position, they very likely would succumb to "coerced consent." In other words, to get the job, or the mortgage, or insurance, you must "consent" to revealing details you normally would not consent to revealing. This all too common scenario is contrary to the Fair Information Principle of "collection limitation." More broadly, should society and its system of laws allow a fundamental human right such as privacy be bartered away so easily?

Personal Data — A Natural Resource

Most would agree that the intimate details about our private lives are more than just a commodity. This book should help make clear that in the context of the United States' information-age economy, our personal information is a new type of natural or public resource. Defining it as such would seem to have dramatic implications for public policy. At earlier times in history, the conclusion that electricity, or water, or the airwaves were public resources resulted in the development of new infrastructures for administration and enforcement. Those infrastructures in no way ended the debate over how the resources were distributed and used, as new controversies have arisen through the years.

In theory, while it might be true that collectively, our personal information is a natural resource, it can never be overlooked that each piece of it is linked directly to a given individual. Accordingly, there can be no disputing that the collection, use and disclosure of our personal information are ultimately human rights issues.

These issues, in turn, cannot be separated from the consumerism dominating our society. If consumers use credit to buy things they cannot afford, then there is a stronger chance that they are heading for credit problems.<sup>409

409</sup> For sound, common-sense advice, see Michelle Singletary's two books, "Spend Well, Live Rich: How to Get What You Want with the Money You Have," and "7 Money Mantras for a Richer Life"

Some have learned the hard way that the "miracle of instant credit" is a curse. Of course, Fair Isaac says this is precisely the type of problem that its scoring model successfully predicts.

So be careful what you buy, or what you buy into. There is a system out there waiting for you. By understanding how it works, you improve your control over how it portrays you. If the system treats you unfairly, or even abuses you, the law gives you rights. How you exercise them is up to you.

About The Author

Since 1981, Evan Hendricks has been Editor/Publisher and founder of Privacy Times, a newsletter based in the Washington, D.C. area. Through the newsletter alone, he has published nearly 3,000 pages covering a wide range of privacy and information law subjects, including the Fair Credit Reporting Act.

Mr. Hendricks regularly testifies before Congress, with four appearances in 2003.⁴¹⁰ He is a regular presenter at Federal Trade Commission workshops.⁴¹¹ He has been qualified by the courts as an expert witness in FCRA and identity theft cases. Mr. Hendricks has served as a consultant on privacy issues to federal and state governmental organizations, and businesses. He has been a featured American presenter at events in Paris, France, Venice, Italy, Cardiff Wales, London, England and Ottawa, Ontario. He is regularly quoted in the mainstream media and trade press.

Mr. Hendricks has a Bachelor of Arts from Columbia College, Columbia University. He attended there after transferring from University of Oregon.<sup>412

410</sup> http://banking.senate.gov/03_07hrg/071003/index.htm http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=229 http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=202 http://judiciary.senate.gov/testimony.cfm?id=983&wit_id=2790
⁴¹¹ http://www.ftc.gov/bcp/workshops/infoflows/030618agenda.html
⁴¹² Go Ducks!

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© 2005 Evan Hendricks and Privacy Times, Inc. All rights reserved.