Yesterday, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Keeping Score on Credit Scores: An Overview of Credit Scores, Credit Reports and their Impact on Consumers”. Subcommittee Chairman Luis Gutierrez (D-IL) expressed his concerns regarding how credit scores are compiled and used, comparing credit scores to “‘passports’ being issued by thousands of private, for-profit companies that few can identify using opaque formulas that are hidden from the American people and that are hidden from Congress.” The following witnesses testified regarding these concerns:
- Evan Hendricks, Editor/Publisher, Privacy Times
- Stuart K. Pratt, President and CEO, Consumer Data Industry Association
- Tom Quinn, Vice President, Global Scoring Solutions, FICO
- Barrett Burns, President & CEO, VantageScore Solutions, LLC
- Chet D. Wiermanski, Global Chief Scientist, Analytic Decision Services, TransUnion LLC
- Stan Oliai , Senior Vice President, Decision Sciences, Experian Decision Analytics, Experian
- Myra K. Hart, PhD., Senior Vice President, Analytical Services, Equifax Inc.\
- Anne P. Fortney, Partner, Hudson Cook, LLP
- Sandra Braunstein, Director, Division of Consumer and Community Affairs, Federal Reserve Board of Governors
- David Vladeck, Director, Bureau of Consumer Protection, Federal Trade Commission
The first panel largely consisted of representatives from the various major consumer reporting agencies (CRAs), including Experian, Equifax, TransUnion, FICO and VantageScore. These representatives provided testimony regarding: (1) how consumer credit reports are compiled, including what sources of information are collected and the methods employed to collect such sources of information, (2) the different types of consumer credit reports developed and who uses or purchases them, and (3) the efforts undertaken to increase the accuracy and predictability of the reports, especially with respect to consumers with “thin” credit files or no credit histories at all. Each representative noted the predictive strength of the scoring model of its respective CRA, and generally underlined the usefulness of credit scores in determining the financial health of consumers. In response to concerns raised regarding the inability of consumers to access credit score information actually used by lenders, Mr. Olai of Experian noted that because every lender can develop its own custom score or select a scoring model developed by a third party, thereby indicating a lender’s “own level of risk tolerance and control for different risk factors,” it must be understood that “no single dominant score [is] being used by all lenders.”
In contrast to these panelists and in line with Chairman Gutierrez’s concerns, Mr. Hendricks advocated for more transparency in the consumer credit reporting industry, suggesting that the following reforms be made: (1) consumers should be entitled to receive one annual free credit report score that is used by a majority of lenders; (2) companies selling credit scores should disclose prominently whether their score is used by any lenders or a majority of lenders; (3) “resellers” of consumer credit scores should not be contractually prevented from selling or disclosing directly to consumers the credit scores or specialized credit reports they compile; and (4) CRAs should be required to publicly disclose how many credit scores they sell and their gross revenues from such sales.
The second panel consisted of representatives of the regulatory agencies involved with the supervision of consumer credit reporting practices. Ms. Braunstein, Director of the Federal Reserve’s Division of Consumer and Community Affairs, discussed the Division’s examination process for credit scoring systems for fair lending and safety and soundness, outlined the findings of the Federal Reserve’s 2007 report on credit scoring and its effects on the availability and affordability of credit, and described recently adopted rules for creditors engaging in risk-based pricing using credit report information. Ms. Braunstein discussed the rules found under Regulation B, implementing the Equal Credit Opportunity Act, which prohibits discrimination against credit applicants based on factors such as race, national origin, age or sex, and also addresses the use of prohibited factors within credit scoring systems.
Mr. Vladek, Director of the FTC’s Bureau of Consumer Protection, discussed the FTC’s efforts to implement the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) and the Fair Credit Reporting Act (“FCRA”). In July 2009, Federal Reserve and the FTC published final rules and guidelines relating to the furnishers of information to CRAs to ensure the accuracy and integrity of the furnished information and to identify the circumstances under which furnishers of information must investigate a dispute in response to a consumer’s direct request. In December 2009, the two agencies announced final risk-based pricing rules requiring creditors to provide consumers with a risk-based pricing notice when, based on the information in the consumer’s credit report, the creditor provides credit to that individual on less favorable terms than the creditor may provide to others.