Foreword.

• Author: Clemans, Terry
• Position: Symposium: Credit Reporting and Credit Scoring

This line, delivered by Paul Giamatti in his portrayal of Federal Reserve Chairman Ben Bernanke in the HBO Movie, Too Big To Fail, is just as true about the individual American consumer as it is about the total American economy. A lack of credit or the inability to build a credit history has the ability to destroy an individual's chance at upward financial mobility. Today, a person without good credit gets penalized in almost every aspect of his or her financial existence. The penalties include higher interest rates because these individuals represent an increased risk when borrowing, as well as increased insurance rates, less access to rental housing, and the potential of lost employment opportunities. Worse yet, some will be punished by the inability to even obtain insurance or put a roof over their heads. Without a good credit history, the opportunity to improve one's personal financial standing becomes daunting at best, and sadly, impossible for all too many income-challenged Americans.

Most consumers have brought about their credit problems by their own actions, including nonpayment of their obligations, and it is prudent to document this information for future prospective creditors as a way to protect the system for all Americans. Some consumers, however, are victims of errors in a system seemingly designed to hinder their efforts to make corrections. As you will read in the symposium articles, many consumer advocates believe the system is set up to hold back certain consumers from advancement. These advocates believe the credit scoring system is biased and filled with errors. They believe that the credit reporting system itself is biased by design, promotes disparate impact, and only provides fair representation to those who already have credit. There are certainly elements of the current credit reporting system that prompt debate, especially aspects related to the recent evolution of the system in place today, and we will address these issues.

Conversely, these claims must be balanced in the debate with respect to the rights of all consumers. Access to credit has been essential in building today's economy and is good for all. Disparate impact must be critically weighed, considering that the individual's own actions are documented, and personal responsibility is the key issue. The increased transparency of today's credit system promotes personal responsibility, especially in the credit scoring area. Granted, increased consumer awareness has created some misinformation issues; however, these issues can be corrected and, overall, there has been vast improvement compared to the restrictive policies of a few short years ago.

In this Foreword we will examine the American credit reporting system as it relates to some of the most hotly debated topics of the symposium. We will look at the system from the consumer's perspective and from the view of those within the industry itself, and we will also address the role our government plays in the system. We will look at both the advancements and the failures, more often focusing on the shortcomings, as this writer believes that improvement of the system can only be obtained by better efforts from each group. Because honesty is necessary for improvement, we will need to address where the consumer is at fault as well as the faults of the credit industry. We will also address government's necessary role in mediation, because this system is too crucial to our nation's economic well-being to be left completely reliant upon market forces. All three entities are partners in the system, dependent upon each other for success and inseparable in their existence. Open debate regarding each entity's role, combined with the materials presented in this symposium, will hopefully help develop a better understanding of the credit system and, in turn, its improvement; a healthy credit system is fundamental to a stronger economic tomorrow for both the consumer and the industry, and in turn the nation.

The impact of the credit industry on the daily life of the American consumer is as large as the massive industry itself. One of the unique aspects of the credit system is that unlike most other industries, individuals have no choice but to participate or face significant financial hardship. The "opt out" feature causes perilous ramifications. To provide a mental picture regarding size: in December 2012, the Consumer Financial Protection Bureau (CFPB) released some initial findings on its new oversight of the credit reporting industry. Some of the findings highlighted the enormity of the databases at the three national credit repositories: TransUnion, Equifax, and Experian. Each of these companies maintains files on more than 200 million American adults. (2) These files contain information from approximately ten thousand creditors or data furnishers and provide monthly updates on more than 1.3 billion individual consumer-credit accounts called "trade lines." (3)

The vast majority of this data comes from a few sources, both by institution and by lending product. The ten largest financial institutions in the United States furnish more than half of all of the information used in credit reporting systems. (4) After the top ten, the field does not get much wider: "the top 50 furnishers provide 72% of the trade lines, and the top 100 furnishers provide 76% of the trade lines in their databases." (5) As for the type of data, "revolving credit cards account for nearly 60% of all trade lines." (6) The CFPB found that consumers contacted the repositories approximately eight million times in 2011 to initiate disputes regarding the accuracy of one or more items in their credit files. (7) This represented between 32 million and 38 million disputed items on consumers' credit files in a single year. (8) Disputes ranged widely based upon the type of data furnished, with information reported by collection agencies constituting the highest dispute rates. While collection accounts only made up 1.1% of all trade lines in consumer reports, they represented nearly 40% of disputes. (9)

The accuracy of these massive databases and the efficiency of the dispute process are frequently questioned, vigorously debated aspects of the credit reporting industry. I was honored to serve as the discussant at the National Consumer Law Center/Suffolk University Law School symposium segment on accuracy and disputes in June 2012. Accuracy is a topic of interest that I have pursued extensively for more than a decade, since designing the concepts for the Consumer Federation of America/National Credit Reporting Association accuracy study in 2002, to be discussed later.

Processing disputes is a fundamental component of accuracy, to which the CFPB's investigation of the industry's highly automated dispute processing system called e-OSCAR could provide great consumer benefits. This system is operated by the repositories' trade association, the Consumer Data Industry Association, and its use is unavoidable for anyone who reports data to the system. The e-OSCAR process converts disputes into a code indicating the nature of the consumer's dispute, with approximately one quarter of the cases including explanatory text. (10) CFPB reported that approximately 15% of trade line disputes were resolved without involvement by the credit furnisher. (11) The remaining 85% of disputes were referred to data furnishers through eOSCAR. (12) The Fair Credit Reporting Act (FCRA) requires the furnisher of the disputed data to investigate the dispute and report back to the repository within a thirty- to forty-five-day timeline. (13)

Currently, the e-OSCAR system does not allow for supporting documentation provided by the consumer to be routinely forwarded to the data furnisher. This lack of forwarded documentation is a weak link in the dispute process, commonly called into question by consumer advocates and a popular source of complaints about the system. Consumer complaints about credit-reporting processes, either directly or as part of problems encountered in relation to identity theft, are among the top consumer complaints made to the Federal Trade Commission (FTC). Identity theft has led this list as the top complaint received by the FTC for the past thirteen consecutive years, (14) and lingering problems associated with victims' credit reports are one of the most common elements of consumer complaints about identity theft. Because it is directly tied to accuracy, the CFPB will most likely conduct an in-depth review of the consumer-dispute process as it delves into examinations of the industry. Alterations to the process--specifically the initiation of a mechanism for consumers to forward supporting documents when filing disputes--seems like a logical step when considering consumer complaints and addressing the accuracy of the data.

The debate surrounding data accuracy is one of the most hotly contested credit reporting issues. The symposium segment at which I was discussant in June 2012, titled "Report Accuracy & Disputes," brought enticing presentations by Beth Freeborn of the FTC, Persis Yu of the National Consumer Law Center, Jonathan Fox of The Financial Clinic, and Joanne McNabb of the California Office of Privacy Protection. Each of the participants offered thought provoking research and documentation, in order to show that the data-accuracy debate must continue. The FTC's research speaks volumes on its own, and it received an added voice from the network news in CBS's 60 Minutes segment titled "40 Million Mistakes." (15) This episode was aired on February 10, 2013, the day before the FTC released an eight-year, congressionally mandated accuracy study. (16)

This symposium uses two key points from a 2010 FTC report that warrant additional discussion. These points address the errors that "help" people and errors of omission. (17) It is important to discuss the errors that "help" people because while these errors may have an...