Consumer Credit: Limited Information Exists on Extent of Credit
Report Errors and Their Implications for Consumers (31-JUL-03,
GAO-03-1036T).
Accurate credit reports are critical to the credit process--for
consumers attempting to obtain credit and to lending institutions
making decisions about extending credit. In today's sophisticated
and highly calibrated credit markets, credit report errors can
have significant monetary implications to consumers and credit
granters. In recognition of the importance of this issue, the
Senate Committee on Banking, Housing, and Urban Affairs asked GAO
to (1) provide information on the frequency, type, and cause of
credit report errors, and (2) describe the impact of the 1996
amendments to the Fair Credit Reporting Act (FCRA) on credit
report accuracy and potential implications of reporting errors
for consumers.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-1036T
ACCNO: A07804
TITLE: Consumer Credit: Limited Information Exists on Extent of
Credit Report Errors and Their Implications for Consumers
DATE: 07/31/2003
SUBJECT: Credit
Credit bureaus
Data collection
Data integrity
Errors
Federal regulations
Credit reports
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GAO-03-1036T
Statement for the Record Before the Committee on Banking, Housing, and
Urban Affairs, U. S. Senate
United States General Accounting Office
GAO For Release on Delivery Expected at 10: 00 a. m. EDT Thursday, July
31, 2003 CONSUMER CREDIT
Limited Information Exists On Extent of Credit Report Errors and Their
Implications for Consumers
Statement of Richard J. Hillman Director, Financial Markets and Community
Investment
GAO- 03- 1036T
Information on the frequency, type, and cause of credit report errors is
limited to the point that a comprehensive assessment of overall credit
report accuracy using currently available information is not possible.
Moreover, available literature and the credit reporting industry strongly
disagree about the frequency of errors in consumer credit reports, and
lack a common definition for *inaccuracy.* The literature and industry do
identify similar types of errors and similar causes of errors.
Specifically, several officials and reports cited collection agencies and
governmental agencies that provide information on bankruptcies, liens,
collections, and other actions noted in public records as major sources of
errors. Because credit report accuracy is essential to the business
activities of consumer reporting agencies and credit granters, the credit
industry has developed and implemented procedures to
help ensure accuracy. However, no study has measured the extent to which
these procedures have improved accuracy. While the Federal Trade
Commission (FTC) tracks consumer complaints on FCRA violations, these data
are not a reliable measure of credit report accuracy. Additionally, FTC
has taken eight formal enforcement actions directly or indirectly related
to
credit report accuracy since Congress enacted the 1996 FCRA amendments.
Neither the impact of the 1996 FCRA amendments on credit report accuracy
nor the potential implications of errors for consumers is known.
Specifically, because comprehensive or statistically valid data on credit
report errors before and after the passage of the 1996 FCRA amendments
have not been collected, GAO could not identify a trend associated with
error rates. Industry officials and studies indicated that credit report
errors could either help or hurt individual consumers depending on the
nature of the error and the consumer*s personal circumstances. To
adequately assess the impact of errors in consumer reports would require
access to the consumer*s credit score and the ability to determine how
changes in the score affected the decision to extend credit or the terms
of the credit granted. Ultimately, a meaningful independent review in
cooperation with the credit industry would be necessary to assess the
frequency of errors and the implications of errors for individual
consumers.
Common Causes of Errors in the Consumer Credit Reporting Process
Accurate credit reports are critical to the credit process* for consumers
attempting to obtain credit and to lending institutions making decisions
about extending credit. In today's sophisticated and
highly calibrated credit markets, credit report errors can have
significant monetary implications
to consumers and credit granters. In recognition of the importance of this
issue, the Senate Committee on Banking, Housing, and Urban Affairs asked
GAO to (1) provide information on the frequency, type, and cause of credit
report errors,
and (2) describe the impact of the 1996 amendments to the Fair Credit
Reporting Act (FCRA) on
credit report accuracy and potential implications of reporting errors for
consumers. The lack of comprehensive information regarding the accuracy of
credit reports inhibits any meaningful discussion of what could or should
be done to improve credit report accuracy. Because of the importance of
accurate credit reports to our national credit system, it would be useful
to perform an independent assessment of the accuracy of credit reports.
Another option for
improving the accuracy of credit reports would be to create more
opportunities for consumers to review credit reports. Such added
reviews would likely help further ensure the overall accuracy of consumer
credit reports.
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 1036T. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Rick Hillman at (202) 512- 8678 or Harry Medina at
(415) 904- 2220. Highlights of GAO- 03- 1036T, a statement
for the record to Senate Committee on Banking, Housing, and Urban Affairs
July 31, 2003
CONSUMER CREDIT
Limited Information Exists on Extent of Credit Report Errors and Their
Implications for Consumers
Page 1 GAO- 03- 1036T Mr. Chairman and Members of the Committee: I
appreciate the opportunity to provide this committee with information
on the accuracy of consumer credit reports. Accurate credit reports are
critical for all consumers attempting to obtain credit and for lending
institutions in making appropriate and timely decisions about extending
credit. Information from credit reports is used to compile credit scores,
which in turn are used as the basis for deciding whether to extend credit,
and for setting rates and terms for mortgages and other consumer loans.
Thus, inaccurate credit report data could have significant monetary
implications for individual consumers and credit granters in today*s
sophisticated and highly calibrated credit markets.
To help promote the accuracy, fairness, and privacy of personal
information assembled by consumer reporting agencies (CRAs), Congress
enacted the Fair Credit Reporting Act (FCRA) in 1970. 1 Under FCRA, CRAs
must *follow reasonable procedures to assure maximum possible accuracy* in
credit reports. In 1996, amendments to FCRA expanded the responsibilities
of data furnishers, prohibiting them from knowingly providing inaccurate
consumer information to a CRA in certain circumstances. 2 Additionally,
FCRA gave the Federal Trade Commission (FTC or Commission) responsibility
for enforcing compliance with the act*s provisions* to the extent that
this authority did not overlap the authority of other financial regulators
for specific institutions.
In a series of hearings this committee has recently held on FCRA issues,
questions concerning the accuracy of credit reports have surfaced. In
recognition of the importance of this issue, you asked us to provide the
committee with information on (1) the frequency, nature, and cause of
consumer credit report errors and (2) the impact of the 1996 FCRA
amendments on credit report accuracy and the potential implications of
credit reporting errors on consumers.
The information that we are providing is based on a review of the limited
literature on the subject, and on interviews and supporting documentation
obtained from the three major CRAs; the Consumer Data Industry Association
(CDIA), a trade association for the consumer reporting agencies; the
National Foundation for Credit Counseling (NFCC), a
1 Pub. L. No. 91- 508, (15 U. S. C. S: 1681 et. seq.). 2 Consumer Credit
Reporting Reform Act of 1996, Pub. L. 104- 208, 110 Stat. 3009- 426.
Page 2 GAO- 03- 1036T national nonprofit credit counseling network; the
Federal Trade Commission (FTC); the Federal Reserve; and five data
furnishers. 3 While
we asked the three major CRAs to provide data on the frequency, type, and
cause of errors in credit reports, they told us that they did not have
data that would specifically respond to our request. The CRAs also told us
that they compete with each other on the basis of the accuracy and
completeness of their credit reports and were reluctant to provide us with
any data they considered proprietary. However, they did agree to provide
available information on consumer disputes to CDIA, their trade
association, which provided that data to us in aggregated form.
Consequently, we were unable to independently verify the accuracy of this
data. Except for this limitation, we conducted our work in accordance
with generally accepted government auditing standards from June through
July 2003.
In summary, we found that information contained in the literature and the
available industry data on the frequency, types, and causes of credit
report errors are limited. Moreover, there is a large variance in the
frequency of errors presented by the literature and industry data.
Unfortunately, we cannot determine a definitive level of credit report
accuracy because of the data limitations inherent to both the literature
and industry data. However, the literature and industry had identified
similar types of errors
in credit reports, including the inclusion of incorrect information and
the exclusion or incomplete reporting of information. Additionally, the
literature and industry consensus was that the causes of errors included
consumers, data furnishers, and CRAs. However, several industry officials
and reports identified collection agencies and organizations providing
public records data* on actions such as bankruptcies, liens, and
collections* as being major sources of errors in credit reports. In an
effort to ensure accuracy of credit report data, the credit industry has
developed and implemented procedures that standardized the manner in which
information was collected and transmitted. The FTC tracks consumer
complaints regarding possible FCRA violations and has taken eight
enforcement actions as of July 24, 2003, directly or indirectly related to
credit report data accuracy since the passage of the 1996 FCRA amendments.
3 The consumer reporting agencies we contacted were Equifax, Experian, and
TransUnion. The data furnishers that we contacted were Bank of America,
Citigroup, Discover, MBNA, and JP Morgan/ Chase.
Page 3 GAO- 03- 1036T We cannot readily determine the impact of the 1996
FCRA amendments on credit report accuracy or the potential implications of
credit report errors
on consumers. This is attributable to the lack of trend data available on
credit report errors. Specifically, no entity collects or maintains the
necessary data for such an assessment. Similarly, we could not determine
the potential implications for consumers of credit reporting errors due to
the lack of quality information on the frequency of errors. However,
industry officials and studies suggested that errors and inaccuracies in
credit reports have the potential to both help and hurt individual
consumers. Minor inaccuracies in a consumer*s credit file may not hurt a
consumer if that individual had a very good credit history. On the other
hand, errors or inaccuracies in the credit report of a consumer with a
less than perfect credit history could result in the denial of credit or
an offer of less favorable credit terms. So, the impact of any particular
error or inaccuracy in a credit report is dependent on the specific
circumstances of the consumer.
The lack of comprehensive information regarding the accuracy of credit
reports inhibits any meaningful discussion of what could or should be done
to improve credit report accuracy. Because of the importance of accurate
credit reports to our national credit system, it would be useful to
perform an independent assessment of the current level of accuracy of
credit reports. The assessment would then form the basis for a more
complete and productive discussion of the costs and benefits of making
changes to the current system of credit reporting to improve credit report
accuracy. Another option for improving the accuracy of credit reports
would be to create more opportunities for consumers to review credit
reports. When consumers see their credit reports, they have a chance to
identify errors and ask for corrections, thus helping to ensure greater
overall accuracy of consumer credit reports.
Page 4 GAO- 03- 1036T Available studies and credit reporting industry data
disagree on the extent of errors in credit reports. The limited literature
on credit report accuracy indicated high rates of errors in credit report
data. In contrast, the major CRAs and CDIA stated that they did not track
errors specifically but that
the data the credit industry maintained suggested much lower rates of
errors. Both the literature and the data provided by the credit industry
had serious limitations that restricted our ability to assess the overall
level credit reporting accuracy. Yet, all of the studies identified
similar types and causes of errors. While data provided by the credit
industry did not address type and cause of errors, representatives from
the three major CRAs and CDIA cited types and causes similar to those
cited in the literature. The credit industry has developed and implemented
procedures to help ensure accuracy of credit report data, although no one
has
assessed the efficacy of these procedures. Moreover, FTC tracks consumer
disputes regarding the accuracy of information in credit reports and has
taken eight enforcement actions directly or indirectly involving credit
report accuracy since 1996.
We identified three studies completed after the 1996 FCRA amendments that
directly addressed credit report accuracy, and one that indirectly
addressed the topic. One of these reports, published in December 2002 by
Consumer Federation of America, presents the frequency and types of
errors drawn from files requested by mortgage lenders on behalf of
consumers actively seeking mortgages. 4 The Consumer Federation of America
initially reviewed 1,704 credit files representing consumers from 22
states and subsequently re- examined a sample of 51 three- agency merged
files. In this sample of merged files, the study found wide variation in
the information maintained by the CRAs, and that errors of omission
were common in credit reports. For example, the report stated that about:
78 percent of credit files omitted a revolving account in good standing;
33 percent of credit files were missing a mortgage account that had
never been late; 67 percent of credit files omitted other types of
installment accounts
that had never been late; 4 Consumer Federation of America and National
Credit Reporting Association, Credit Score Accuracy and Implications for
Consumers, December 2002. Information on
Frequency, Type, and Cause of Credit Report Errors Is Limited; Industry
Data and Available Studies Disagree on Frequency of Errors
Literature Raised Serious Questions Regarding Level of Credit Report
Accuracy
Page 5 GAO- 03- 1036T 82 percent of the credit files had inconsistencies
regarding the balance on revolving accounts or collections; and
96 percent of the credit files had inconsistencies regarding an
account*s credit limit.
A March 1998 U. S. Public Interest Research Group (U. S. PIRG) study found
similar frequencies of errors in 133 credit files representing 88
individual consumers. 5 U. S. PIRG reported that 70 percent of the files
reviewed contained some form of error. The errors ranged in severity from
those unlikely to have negative repercussions to those likely to cause a
denial of credit. For example, the report found: 41 percent of the
credit files contained personal identifying information
that was long- outdated, belonged to someone else, was misspelled, or was
otherwise incorrect; 29 percent of the credit files contained an error*
accounts incorrectly
marked as delinquent, credit accounts that belonged to someone else, or
public records or judgments that belonged to someone else* that U. S. PIRG
stated could possibly result in a denial of credit; and
20 percent of the credit files were missing a major credit card account,
loan, mortgage, or other account that demonstrated the creditworthiness of
the consumer.
Similar to the U. S. PIRG study, a 2000 survey conducted by Consumers
Union and published by Consumer Reports asked 25 Consumers Union staffers
and their family members to apply for their credit reports and then review
them. 6 In all, Consumers Union staff and family members received and
evaluated 63 credit reports and in more than half of the reports, they
found inaccuracies that they reported as having the potential to derail a
loan or deflect an offer for the lowest- interest credit card. The
inaccuracies identified were similar to those reported by the Consumer
Federation of America and U. S. PIRG* inclusion of information belonging
to other consumers, inappropriately attributed debts, inaccurate
demographic information, and inconsistencies between the credit reports
provided by the three major CRAs regarding the same consumer.
5 U. S. PIRG, Mistakes Do Happen: Credit Report Errors Mean Consumers
Lose, March 1998. 6 *Credit Reports: How Do Potential Lenders See You?*
ConsumerReports. org, July 2000.
Page 6 GAO- 03- 1036T While not specifically assessing the accuracy of
credit reports, a Federal Reserve Bulletin article found that credit
reports contained
inconsistencies and cited certain types of data furnishers, including
collection agencies and public entities, as a primary source for some of
the inconsistencies found. 7 Among the study*s findings:
Approximately 70 percent of the consumers in the study*s sample had a
missing credit limit on one or more of their revolving accounts,
Approximately 8 percent of all accounts showed positive balances but
were not up to date,
Between 1 and 2 percent of the files were supplied by creditors that
reported negative information only, and
Public records inconsistently reported actions such as bankruptcies and
collections.
An important aspect of the Federal Reserve study was that it used a
statistically valid and representative sample of credit reports, and
received access to this sample with the cooperation of one of the three
major CRAs.
However, because the sample came from one CRA only, the findings of the
study may not be representative of other CRAs.
Representatives of the three major CRAs and CDIA told us that they do not
maintain data on the frequency of errors in credit reports. However, the
industry does maintain data that suggest errors are infrequent in cases of
an adverse action. 8 CDIA stated that the three major CRAs provided or
disclosed approximately 16 million credit reports, out of approximately 2
billion reports sold annually in the marketplace. According to CDIA data,
84 percent of the disclosures followed an adverse action and only 5
percent of disclosures went to people who requested their reports out of
curiosity. Out of these disclosures, CRA officials stated that an
extremely small percentage of people identified an error.
7 Robert Avery, Paul Calem, Glenn Canner, and Raphael Bostic, *An Overview
of Consumer Data and Credit Reporting,* Federal Reserve Bulletin, February
2003. 8 When a creditor or lender decides not to extend credit to an
individual or not to extend credit on the terms the individual requires
and the individual does not accept a
counteroffer, this is considered an adverse action. After an adverse
action, consumers have the right to a free copy of their credit report.
CRA and CDIA Data Indicate Consumer
Disputes Rarely Identified Errors
Page 7 GAO- 03- 1036T An Arthur Andersen study, conducted in 1992, found a
similar infrequent rate of errors arising from adverse actions. Under
commission by the
Associated Credit Bureaus (now CDIA), the study reportedly found that only
36 consumers* out of a sample of 15,703 people denied credit* disputed
erroneous information that resulted in a reversal of the original negative
credit decision. 9 Similarly, in an attempt to respond to our data
request, CDIA produced data gathered by a reseller over a two- week period
that indicated that out of 189 mortgage consumers, only 2 consumers (1
percent) had a report that contained an inaccuracy. In our conversation
with data furnishers, we discovered that two conduct internal audits on
the accuracy of the information they provide to the CRAs. These data
furnishers indicated that the information they provide and the CRAs
maintain is accurate 99.8 percent of the time.
While consumer disputes do not provide a reliable measure of credit report
accuracy, CRA representatives told us that disputes provide an indicator
of what people perceive as errors when reviewing their credit
files. A CDIA official stated that five types of disputes comprise about
90 percent of all consumer disputes received by the three major CRAs.
These five dispute types are described as:
Claims account has been closed; Dispute present or previous account
status, payment history, or
payment rating; Dispute current balance; Dispute related to
disposition of account included in or excluded from
a bankruptcy; and Not my account. Although CDIA could not provide a
definitive ranking for all five types of disputes, it did state that *not
my account* was the most frequently received dispute. After receiving a
consumer*s dispute, FCRA requires a CRA to conduct a reinvestigation. The
purpose of reinvestigation is to
9 This study found that 1,223 of their sample of 15,703 consumers who were
denied credit had requested their credit reports. Of those that had
requested their credit reports, 304 consumers found and disputed errors.
At the time of the study, 36 of those disputes had resulted in a reversal
of the original negative credit decision.
Page 8 GAO- 03- 1036T either verify the accuracy of the disputed
information, or to confirm and remove an error.
CDIA provided data on the disposition of dispute reinvestigations by
categories of those received by the three major CRAs in 2002. CRA
officials explained that the data represents the first 3 quarters of 2002,
and that each CRA reported data on a different quarter. CDIA declined to
provide the total number of consumer disputes. Table 1 shows the frequency
of these four disposition categories. Specifically, the table indicates
that over half of all disputes required the CRA to modify a credit report
in some way, though not necessarily to remove an error. 10 Table 1:
Disposition of Consumer Disputes
Result of Dispute Percent of Disputes
Information verified as reported 46 Data modified/ updated per furnisher*s
instructions 27 Data deleted per furnisher*s instructions 10.5 Data
deleted due to statutory time limit 16 Source: CDIA. Notes: As provided by
CDIA, percentages do not total to 100.
It is important to emphasize that not every dispute leads to identifying
an error. Indeed, many disputes, as the table indicates, resulted in a
verification of accuracy or an update of existing information.
Additionally, CRA and CDIA representatives stated that many disputes
resulted in the CRA clarifying or explaining why a piece of information
was included in the credit report. For example, if recently married
consumers obtained a copy of their files, they might not see their married
names on file. In such cases, the files still accurately reflected the
most current information provided to the CRA, but the consumer may have
perceived the less- thancurrent information as an error while the CRA
would not. The CRA representative cited another example of a consumer
seeing an account 10 *Information verified as reported* encompasses
disputed information found to be accurate after reinvestigation. *Data
modified/ updated per furnisher*s instructions*
encompasses disputed information that a CRA modified or updated after
reinvestigation. According to CDIA, the information in this category was
not necessarily inaccurate. *Data deleted per furnisher*s instructions*
encompasses information identified as inaccurate through reinvestigation.
*Data deleted due to statutory time limit* encompasses
information that a CRA had to delete because the reinvestigation process
exceeded the time limits set by FCRA.
Page 9 GAO- 03- 1036T listed with a creditor he or she did not recognize.
However, the account in question was with a retailer that subsequently
outsourced its lending to another company. In this case, the information
was correct but the
consumer was not aware of the outsourcing. One CRA representative
indicated that over 50 percent of the calls they received resulted in what
they consider *consumer education.*
We cannot determine the frequency of errors in credit reports based on the
Consumer Federation of America, U. S. PIRG, and Consumers Union studies.
11 Two of the studies did not use a statistically representative
methodology because they examined only the credit files of their employees
who verified the accuracy of the information, and it was not clear if the
sampling methodology in the third study was statistically projectable.
Moreover, all three studies counted any inaccuracy as an error regardless
of the potential impact. Similarly, the studies used varying
definitions in identifying errors, and provided sometimes obscure
explanations of how they carried out their work. Because of this, the
findings may not represent the total population of credit reports
maintained by the CRAs. Moreover, none of these groups developed their
findings in consultation with members of the credit reporting industry,
who, according to a CDIA representative, could have verified or refuted
some of the claimed errors.
Beyond these limitations, a CDIA official stated that these studies
misrepresented the frequency of errors because they assessed missing
information as an error. According to CRA officials errors of omission may
be mitigated in certain instances because certain lenders tend to use
merged credit report files in making lending decisions, such as mortgage
lenders and increasingly credit card lenders. CRA officials explained that
while complete and current data are necessary for a wholly accurate credit
file, both are not always available to them. For instance, credit-
reporting cycles, which dictate when CRAs receive data updates from data
furnishers, may affect the timeliness of data. CRAs rely on these updates,
which may come daily, weekly, or monthly depending on the data furnisher*s
reporting cycle. If a data furnisher provided information on a monthly
basis there would be a lag between a consumer*s payment, for example, and
the change in credit file information. Likewise, if a data
11 The Federal Reserve Bulletin article did not address the frequency of
errors, although it did discuss findings of inconsistencies. Literature
and Industry Data Have Serious
Limitations
Page 10 GAO- 03- 1036T furnisher reported to one CRA but not to another,
the two reports would differ in content and could produce different credit
scores. It is important
to note that reporting information to the CRAs is voluntary on the part of
data furnishers. While the Federal Reserve Bulletin article noted
inconsistencies as an area of concern, it recognized that all credit
reports would not contain identical information.
Along with misrepresenting error frequency by counting omitted
information, industry officials believed that the literature
misrepresented the frequency of errors because the literature defined
errors differently than the credit industry. The CRAs and CDIA stated that
they consider only those errors that could have a meaningful impact on a
person*s credit worthiness as real errors. This distinction is critical to
assessing accuracy, as, according to the CDIA, a mistake in a consumer*s
name might literally be an inaccuracy, but may ultimately have no impact
on the consumer.
The data provided by CDIA and the CRAs have serious limitations as well.
For example, neither CDIA nor CRA officials provided an explanation of the
methodology for the collection of data provided by CDIA and for the
assessments cited by the CRAs. Moreover, because these data related
primarily to those errors that consumers disputed after an adverse action,
they excluded a potentially large population of errors. Specifically,
these data excluded errors that would cause a credit grantor to offer less
favorable terms on a loan rather than deny the loan application. The data
also excluded errors in cases where consumers were not necessarily
seeking a loan and therefore did not have a need to review their credit
reports. Additionally, as stated earlier, only a small percentage of
consumers requested credit reports simply out of curiosity. While the CDIA
representatives felt that these data were useful for assessing a level of
accuracy, they agreed that by focusing on these data only, the industry
did not consider a potentially large set of errors. While both the
literature and credit industry representatives cited similar types and
causes of errors, neither the literature nor the credit industry data
identified one particular type or cause of error as the most common. All
respondents stated that error type could range from wrong names and
incorrect addresses to inaccurate account balances and erroneous
information from public records.
Based on the literature we reviewed and on our discussions with CRA and
data furnisher officials, we could not identify any one cause or source
most responsible for errors. However, the Consumer Federation 2002 Both
Literature and
Industry Identified Similar Types and Causes of Errors
Page 11 GAO- 03- 1036T study, the Federal Reserve Bulletin article, and a
representative from the National Foundation for Credit Counseling stated
they felt data furnishers
often caused more errors than did CRAs or consumers. According to several
respondents, this was particularly true for data furnishers, such as
collection agencies and public entities that did not rely on accurate
credit reports for lending decisions. For example, while a bank needs
accurate
information in assessing lending risk, and thus attempts to report
accurate information, a collection agency does not rely on credit reports
for business decisions, and therefore has less of an incentive to report
fully accurate information. Data furnishers told us that they did not
consider CRAs as a significant cause of errors, but stated that difficulty
in matching consumer identification information might cause some errors.
Data furnishers also stated that the quality control efforts among data
furnishers might vary due to the extent of data integrity procedures in
place. They explained that some smaller data furnishers might not have
sophisticated quality control procedures because implementing such a
system was expensive. On the other hand, errors might occur at any step in
the credit reporting process. Consumers could provide inaccurate names or
addresses to a data furnisher. A data furnisher might introduce
inaccuracies while processing information, performing data entry, or
passing information on to the CRAs. And, CRAs might process data
erroneously. Figure 1 shows some common causes for errors that might occur
during the credit reporting process.
Figure 1: Common Causes of Errors in the Consumer Credit Report Process
Consumers Furnishers Consumer
reporting agency
FormA Consumers can provide inaccurate data to furnishers by mistake or
purposefully provide false information to establish new credit data.
FormA For
mB FormC
Furnishers can input accurate information incorrectly, pass on incomplete
or inaccurate data to consumer reporting agencies, pass on accurate
information in incorrect format, or fail to voluntarily report data on
consumers.
FormA Folder C
Bureaus can input inaccurate information into the correct file, or input
accurate information into the incorrect file.
Source: GAO analysis of credit industry and Federal Reserve interview
data.
Page 12 GAO- 03- 1036T CRAs and data furnishers also cited other causes of
errors. For example, collection agencies and public records on
bankruptcies, tax liens, and
judgments were cited as major sources of errors. CRA officials and data
furnishers said the growing number of fraudulent credit *repair* clinics
that coach consumers to make frivolous reinvestigation requests in an
effort to get accurate, though negative, information off the credit report
also might cause errors, as disputed information a CRA cannot verify
within 30 days is deleted from the consumer*s credit report. File
segregation, a tactic in which a consumer with a negative credit history
tries to create a new credit file by applying for credit using consistent
but inaccurate information, was another reported cause for inaccurate
credit data.
The credit industry has been working on systems to help ensure accuracy
since the *reasonable procedures* standard took effect under FCRA in 1970.
Within the last decade, CDIA has led efforts to implement industry systems
and processes to increase the accuracy of credit reports. In commenting
upon accuracy, representatives from CDIA, the CRAs, the Federal Reserve,
and the data furnishers stated that credit score models were highly
calibrated and accurate and, on the aggregate level, credit reports and
scores were highly predictive of credit risk. 12 During the 1970s, the
Associated Credit Bureaus (now CDIA) attempted to increase report accuracy
by introducing Metro 1, a method of
standardizing report formats. The goals of Metro 1 were to create
consistency in reporting rules and impose a data template on the industry.
In conjunction with the industry, in 1996 CDIA created Metro 2, an
enhancement of the Metro 1 format that enables a finer distinction for
reporting information. For example, Metro 2 allowed CDIA to implement an
*Active Military Code* to protect the credit reports of troops serving
overseas. Since active military personnel are legally entitled to longer
periods to make credit payments without penalty, this new code ensured
that data furnishers did not incorrectly report accounts as delinquent.
While use of the Metro format is voluntary, CRAs currently receive over 99
percent of the volume of credit data* 30,000 furnishers providing a total
of
12 Because many credit grantors are also data furnishers, it is generally
in their best interest to report accurate information to the CRAs, as they
rely on credit reports received from the CRAs in assessing risk. Likewise,
the CRAs depend on ensuring accuracy in their credit reports in order to
provide a quality product to their customers, the credit grantors.
Industry Has Implemented
Procedures to Ensure Data Consistency and Accuracy, but Efficacy of
Procedures Not Known
Page 13 GAO- 03- 1036T 2 billion records per month* in either Metro 1 or
Metro 2 format, with over 50 percent sent in Metro 2. One data furnisher
who recently switched
from Metro 1 to Metro 2 found that data accuracy improved overall as
evidenced by the reduction in the number of data rejections by the CRAs
and dispute data. Those data furnishers that do not use the Metro formats
provide data on compact disc, diskette, tape, or other type of electronic
media. While use of standardized reporting formats ensures more consistent
reporting of information, because the industry has never conducted a study
to set a baseline level of error frequency in credit reports, and does not
currently collect such data, no one knows the extent to which these
systems have improved accuracy in credit reports.
FTC has taken eight formal enforcement actions since the passage of the
1996 FCRA amendments against CRAs, data furnishers, and resellers that
directly or indirectly relate to credit report accuracy. 13 FTC receives
and tracks FCRA complaint data against CRAs by violation type and uses
this data to identify areas that may warrant an enforcement action. While
these data cannot provide the number of violations or frequency of errors
in credit reports, since each complaint does not necessarily correspond to
a violation, they can give a sense of the relative frequency of complaints
surrounding CRAs. We discuss complaint data in more detail in the next
section.
According to FTC staff, accuracy in the context of FCRA means more than
the requirement that CRAs establish *reasonable procedures to assure
maximum possible accuracy of their reports.* They explained that the
statute also seeks to improve accuracy of credit reports by a *self- help*
process in which the different participants comply with duties imposed by
FCRA. First, creditors and others that furnish information are responsible
13 Prior to 1996, FTC carried out actions involving procedures to ensure
the accuracy of credit reports against TransUnion in 1983, TRW (which
would later become Experian) in 1991, and Equifax in 1995. According to
FTC, these *omnibus* actions differed in detail but generally covered a
variety of FCRA issues including accuracy, disclosure, permissible
purposes, and prescreening. While we limited this review to FTC*s
accuracy- related efforts, we are currently conducting additional work as
part of another ongoing engagement looking at FTC and the banking
regulator*s enforcement of FCRA. A number of other federal agencies have
responsibilities under FCRA including the Office of the Comptroller
of the Currency, Federal Reserve Board, Office of Thrift Supervision,
National Credit Union Administration, Federal Deposit Insurance
Corporation, Department of Transportation, and Department of Agriculture.
Each entity can pursue FCRA enforcement actions against their respective
regulated institutions as identified in FCRA. FTC Has Taken
Enforcement Actions Related to the Accuracy of Credit Reports Since 1996
FCRA Amendments
Page 14 GAO- 03- 1036T for accuracy. Second, credit bureaus must take
reasonable steps to ensure accuracy. Finally, users of credit reports must
notify consumers (provide
adverse action notices) about denials of a loan, insurance, job, or other
services because of something in their credit report. FTC staff stated
that it is crucial that consumers receive adverse action notices so that
they can obtain their credit reports and dispute any inaccurate
information. For that reason, the Commission has made enforcement in this
area a priority. FTC staff stated that their primary enforcement mechanism
is to pursue
action against a CRA or data furnisher that showed a pattern of repeated
violations of the law identified through consumer complaints. According to
FTC staff, the Commission has taken eight enforcement actions against
CRAs, furnishers, or lenders, since 1996 that directly or indirectly
addressed credit report accuracy. 14 One case pertained to a furnisher
providing inaccurate information to a CRA, two cases pertained to a
furnisher or CRA failing to investigate a consumer dispute, and two
actions were taken against lenders that did not provide adverse action
notices as required by statute. The remaining three cases were against the
major CRAs for blocking consumer calls and having excessive hold times
for consumers calling to dispute information on their credit reports. 15
In addition to enforcing FCRA, FTC also provides consumer educational
materials and advises consumers on their rights (such as the right to sue
a CRA or data furnisher for damages and recoup legal expenses).
14 The eight cases are First American Real Estate Solutions LLC, Docket
No. C- 3849 (1999); U. S. v. Unicor Funding, Inc., Civ. No. 99- 1228 (C.
D. Cal. 1999); U. S. V. Equifax, No1: 00 CV0087 (C. D. Ga. 2000); U. S. v.
Experian, No. 3- 00CV0056- L (N. D. Tex. 2000); U. S. v. TransUnion, 00C
0235 (N. D. Ill. 2000); U. S. v. Performance Capital Management, Inc., No.
01- 1047 (C. D. Cal. 2001); U. S. v. DC Credit Serv. Inc., Civ. No. 02-
5115 (C. D. Cal. 2002); Quicken Loans Inc. Docket No. 9304 (Apr. 8, 2003).
15 FTC has also investigated landlord*s compliance with their duty to
provide FCRA required notices to consumers who suffered adverse action
based on their consumer reports in connection with apartment rental
applications. The Commission did not bring any formal actions, but
published a consumer alert and a business education brochure for landlords
that resulted from this enforcement effort.
Page 15 GAO- 03- 1036T To date, no comprehensive assessments have
addressed the impact of the 1996 FCRA credit report accuracy amendments or
the potential effects inaccuracies have had on consumers. In addition,
because it has not
conducted surveys, FTC was not able to provide overall trend data on the
frequency of errors in credit reports. Industry officials as well as two
studies we reviewed suggest that errors and inaccuracies in credit reports
have the potential to both help and hurt individual consumers, while in
some instances errors or inaccuracies may have no effect on the consumer*s
credit score. The impact of any particular error or inaccuracy in a
particular credit report will be dependent on the unique and specific
circumstances of the consumer.
Data on the impact of the 1996 FCRA amendments on credit report accuracy
was not available. For instance, we could not identify impact information
from the literature we reviewed and industry officials with whom we spoke
said they did not collect such data. Furthermore, FTC could not provide
overall trend data but did provide FCRA- related consumer complaint data
involving CRAs.
FTC staff could not say what the trend in the frequency of errors in
credit reports has been since the 1996 amendments because that data is not
available. However, FTC officials provided consumer complaint data that
shows from 1997 through 2002, the number of FCRA complaints involving CRAs
received annually by FTC increased from 1,300 to almost 12,000. The most
common complaints cited against CRAs in 2002 pertained to the violations
are listed below:
Provided inaccurate information (5,956 complaints); Failed to
reinvestigate disputed information (2,300 complaints); Provided
inadequate phone help (1,291 complaints); Disclosed incomplete/ improper
credit file to customer (1,033
complaints); and Improperly conducted reinvestigation of disputed item
(771
complaints). Consumer complaint data involving CRAs and FCRA provisions
represent 3.1 percent of the total complaints FTC received directly from
consumers on all matters in 2002. The FTC staff explained that their
knowledge was Impact of 1996 FCRA
Amendments on Credit Report Accuracy and the Potential Effects of Errors
on Consumers Is Not Fully Known
Information on the Impact of FCRA Amendments on Credit Report Accuracy Was
Not Available
Page 16 GAO- 03- 1036T limited to complaints that came into the agency and
that they did not conduct general examinations or evaluations that would
enable them to project trends. FTC staff cautioned that it would not be
appropriate to
conclude that since the complaints against CRAs were on the rise, accuracy
of credit reports was deteriorating. They stated that the increase in the
number of complaints could be due to greater consumer awareness of FTC*s
role with respect to credit reporting, as well as a general trend towards
increased consumer awareness of credit reporting and scoring.
CRAs and the literature suggest that credit- reporting errors could have
both a positive and negative effect on consumers. One CRA stated that
errors occur randomly and may result in either an increase, decrease, or
no change in a credit score. Another CRA stated that information
erroneously omitted from a credit report such as a delinquency, judgment,
or bankruptcy filing would tend to raise a credit score while that same
information erroneously posted to the report would tend to lower the
score. The Consumer Federation of America study cited earlier also
analyzed 258 files to determine whether inconsistencies were likely to
raise or lower credit scores. In approximately half the files reviewed
(146 files, or 57 percent), the study could not clearly identify whether
inconsistencies in credit reports were resulting in a higher or lower
score. The study determined that in the remaining 112 files there was an
even split between files that would result in a higher or lower score. The
Federal Reserve Bulletin article previously mentioned also concluded that
limitations in consumer reporting agency records have the potential to
both help and hurt individual consumers. The article further stated that
consumers who were hurt by ambiguities, duplications, and omissions in
their files had an incentive to correct them, but consumers who were
helped by such problems did not.
Industry officials and the literature we reviewed suggested that the
impact of an error in a consumer*s credit report was dependent on the
specific circumstance of the information contained in a credit file. CRA
and data furnisher officials further pointed out that a variety of factors
such as those identified by Fair Isaac, a private software firm that
produces credit score models, might impact a credit score. 16 According to
the Fair Isaac
16 Fair Isaac Corporation produces software used by many consumer
reporting agencies, including the three main U. S. consumer agencies, to
produce FICO scores, which according to industry sources, is a commonly
used credit score in the United States. Errors May Result in Both
Positive and Negative Impacts on Consumers
Impact of Errors May Be Influenced by Other Factors in a Credit File
Page 17 GAO- 03- 1036T Web site, their credit score model considers five
main categories of information along with their general level of
importance to arrive at a
score. These categories and their respective weights in determining a
credit score include payment history (35 percent), amounts owed (30
percent), length of credit history (15 percent), types of credit in use
(10 percent) and new credit (10 percent). As such, no one piece of
information or factor alone determines a credit score. For one person, a
given factor might be more important than for someone else with a
different credit history. In addition, as the information in a credit
report changes, so does the importance of any factor in determining a
credit score. Fully understanding the impact of errors on consumer*s
credit scores would require access to consumer credit reports, discussions
with consumers to identify errors, and discussions with data furnishers to
determine what impact, if any, correction of errors might have on
decisions made based on the content of a credit report.
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.
Furthermore, any such study would entail the cooperation of the CRAs data
furnishers, and consumers to fully assess the impact of errors on credit
scores and underwriting decisions. Because of the importance of accurate
credit reports to the fairness of our national credit system, it would be
useful to perform an independent assessment of the accuracy of credit
reports. Such an assessment could be conducted by FTC or paid for
by the industry. The assessment would then form the basis for a more
complete and productive discussion of the costs and benefits of making
changes to the current system of credit reporting to improve credit report
accuracy.
Another option for improving the accuracy of credit reports would be to
create the opportunity for more reviews of credit reports by consumers.
One way this could be accomplished would be to expand the definition of
what constitutes an adverse action. Currently, consumers are only entitled
to receive a free copy of their credit reports when they receive adverse
action notices for credit denials or if they believe that they have been
the victim of identity theft. When consumers see their credit reports,
they have a chance to identify errors and ask for corrections to ensure
the accuracy of their credit reports. Expanding the criteria for adverse
actions to
include loan offers with less than the most favorable rates and terms
would likely increase the review of credit files by consumers. Such added
Observations
Page 18 GAO- 03- 1036T review of credit files would in all likelihood help
to further ensure the overall accuracy of consumer credit reports.
However, the associated
costs to the industry would also need to be considered against the
anticipated benefits of increasing consumer access to credit reports.
For further information regarding this testimony, please contact Harry
Medina at (415) 904- 2000. Individuals making key contributions to this
statement include Janet Fong, Jeff R. Pokras, Mitchell B. Rachlis, and
Peter E. Rumble. Contacts and
Acknowledgement
(250153)
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