Accuracy in credit reporting

The accuracy of consumer credit reports was among the most prominent issues in the congressional debate over amending the Fair Credit Reporting Act (FCRA) during the summer of 2003. This came as no surprise to observers of the credit reporting industry and its evolution since the original FCRA was passed in 1970.1 One of the primary impetuses for passage of the FCRA was to enhance accuracy in credit report content. The act explicitly requires credit bureaus to follow "reasonable procedures to assure maximum possible accuracy" of the information in their credit reports.2 This language reflects the fact that a hallmark of the U.S. reporting system is its reliance on voluntary reporting from thousands of furnishers of credit-related information. The voluntary nature of the reporting process makes it particularly sensitive to the costs imposed by regulatory and legislative mandates. The legislative balancing act undertaken in crafting the original FCRA was intended to foster accurate reports without discouraging reporting. Consequently, since implementation of the act in 1971, accuracy in credit reporting has been a perennial issue, but Congress has been notably cautious about imposing new requirements on either credit bureaus or data furnishers without a clear indication of a problem that required legislative intervention.3 During the summer of 2003, testimony before Congress juxtaposed contrasting views of how well the U.S. credit reporting system is performing. Consumer advocacy groups cited credit report inaccuracies in calling for legislation that would impose new procedures and legal liability on both credit bureaus and furnishers of credit report information. In making their case, these groups correctly pointed out that an inaccurate depiction of a consumer's credit history not only can trigger a rejection of a loan application, but with advent of risk-based pricing can also lead to overpricing loans for which the borrower is approved. Moreover, borrowers may not realize that the interest rate or fees they pay may be inflated due to inaccurate information from the borrower's credit report. One advocacy group asserted that inaccuracies in credit reports could cause at least 8 million Americans to be miscategorized as subprime risks, and pay tens of thousands of dollars in excess interest payments over the term of a thirty-year mortgage loan (Brobeck, 2003). In contrast to assertions of widespread problems in credit files, congressional testimony also documented that the United States has become the world leader in competitive consumer and mortgage credit markets. In 2001, 75 percent of U.S. households participated in the consumer credit markets and held some type of debt. Sixty-eight percent of all U.S. households owned their homes, and nearly two-thirds of these homeowners has some type of mortgage loan. About 72 percent of all households owned at least one general-purpose credit card (for example, Visa, MasterCard, Discover, American Express) (Durkin, 2002, p. 202). The average U.S. consumer-borrower had 10.4 credit accounts (Avery and others, 2003, p. 51). By comparison, European consumers have access to onethird less credit, as a percentage of gross domestic product, than do American consumers (Cate and others, 2003, p. 12). Compared to the vast majority of other countries, U.S. creditors have managed to extend substantially more credit per capita much further down the income spectrum, at the same time maintaining relatively low delinquency rates. In the second quarter of 2000, only 2.8 percent of all mortgage holders in the United States were delinquent more than thirty days.4 Only 4.6 percent of all credit card borrowers were more than thirty days delinquent on their accounts.5 In short, Americans enjoy the remarkable combination of: 1) widespread access to credit across the age and income spectrum, 2) relatively low interest rates on secured loans (for example, home mortgages, home equity lines of credit, automobile loans), 3) exceptionally broad access to open-end, unsecured credit card products, and 4) relatively low default rates across all types of loans. It seems highly improbable that all of this could be accomplished if the underlying credit reporting system were fraught with serious errors. To help resolve the conflicting information concerning accuracy, Congress directed the U.S. General Accounting Office (GAO) to undertake a review during 2003 of available studies and databases to determine the frequency, type, and cause of credit report errors. The GAO concluded that "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" (GAO, 2003, p. 17). In the Fair and Accurate Credit Transactions Act of 2003 Congress continued its cautious approach to new credit reporting requirements. But at the same time, Congress signaled its growing interest in measuring and ensuring the accuracy of credit reports. Specifically, Congress directed the Federal Trade Commission (FTC) to undertake a long-term study of credit reporting accuracy.6 In this chapter we survey the available evidence on credit file quality and attempt to assess the strengths and weaknesses of the system as it functions today, as well as identify any changes over time. We conclude by addressing the challenges to the regulatory framework presented by recent credit market developments such as risk-based pricing, and offer some observations about proposed solutions.