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February 22, 2013

FTC FACTA Report: Credit Where Credit's Due?

Consumer Advertising Law Blog,

How often do you check the data underlying your credit score, as opposed to the score itself? Probably not very often -- if at all. At least that appears likely based on a report released by the Federal Trade Commission (FTC) on February 11, which was previewed by 60 Minutes on February 10. Based on that report, it seems the three national credit reporting agencies (CRAs) -- Experian, Trans Union, and Equifax -- need to pay closer attention as well. As the report documents, the data supporting the credit rating decisions of the CRAs frequently produced material errors in credit reports that consumers find difficult to correct. This may color the accuracy of a consumer's actual credit risk and creditworthiness.

The FTC's report was issued pursuant to the Fairand Accurate Credit Transactions (FACT) Act of 2003, which requires the FTC to conduct a study of consumer credit rating accuracy and to report to Congress on its findings every two years, which the FTC has done since 2004. The most recent report (the fifth in the series) focuses on the ability of consumers to locate and correct errors in their credit reports. Each credit report provides a summary of a consumer's credit history, including an overall "score" assigned based on that history. The most widely used score is the "FICO" score created by the Fair Isaac Corporation, which is used by all three of the major CRAs. The FICO score, which measures the degree of credit risk a consumer poses based on the likelihood that the consumer will meet his or her credit obligations, runs from 300 to 850; the higher the score, the lower the risk.

The FICO score takes into account current and past credit card usage and payment history, loans, and mortgages, public records of bankruptcy, foreclosures and similar proceedings, and unpaid debts. Each time a consumer requests access to credit, such as applying for a credit card, that is registered in the score. The length of credit history is incorporated as well. The approximately 30,000 sources of this information include financial institutions, insurance companies, government agencies, creditors, and collection agencies (collectively known as "data furnishers"). The FTC engaged data furnishers in producing the February 11 study, along with consumers, the CRAs, and the Fair Isaac Corporation.

To conduct its study, the FTC randomly selected 1,001 participants from consumers with credit histories generated by the three national CRAs. The participants were asked to review their credit reports for accuracy and, to help them spot errors, a trained study associate was provided. When errors were found, the participant was urged to challenge any material errors – i.e., errors sufficiently serious to affect the consumer's credit score – under the dispute resolution mechanism established by the Fair Credit Reporting Act (FCRA). Participants received a provisional FICO score when initiating the challenge and, when the dispute resolution process was complete, they were provided new credit reports and new credit scores. The FTC then used the provisional score, the new report, and the new score for each participant to measure the influence of the errors (actual and potential) on the participant's credit.

The FTC found that 1 in 4 of consumers (262 participants) discovered a material error in at least one of their three credit reports. (Errors in the "header information" (e.g., addresses, age, employment) are not considered material because this information is not used in determining a consumer's credit score.) All of these consumers challenged these errors, but only 1 in 5 of them (206 participants) received some kind of credit report change. Of these 206 consumers, the CRAs corrected all the material errors in the reports of 97 consumers. For 109 of them, the CRAs corrected only a portion of the identified errors, and for 56 participants, the CRAs did not correct any errors. When the CRAs did not correct the identified errors, the CRAs informed the 56 participants that the party that had furnished the data denied the existence of any inaccuracy.

As revealed by the study, the most common types of material errors relate to consumer accounts or collections. Other kinds of material errors include duplicate entries, inquiries, and "derogatory public records" (e.g., foreclosures, bankruptcies, judgments/tax liens), all of which, as factored into a credit score, can affect a consumer's access to credit and to insurance.

After the CRAs corrected the verified material errors and produced revised credit scores, more than 1 in 10 of the participants received a changed credit score. Among those receiving a changed score, the majority saw a change of less than 25 points; however, 1 in 20 had a change of more than 25 points. A small minority – just 1 in 250 – saw their score change by more than 100 points. When the FTC applied the changed score data to auto loan tiers, they found that 16.4% of reports contained changes sufficiently great to change the consumer's loan tier, suggesting that some consumers would have obtained more favorable loan terms (including loan approval where a loan had been denied) if their credit reports had been free of the inaccuracies that the report uncovered.

Although not highlighted in the FTC report, it is certainly possibly that there are errors in credit reports favorable to consumers that are also going uncorrected. Heighted consumer awareness may not necessarily lead to correction of those errors, as individual consumers have an understandable incentive to keep quiet about errors in their favor.

While this report was focused on the CRA-consumer relationship, the FTC did briefly address data furnishers as well. Not all errors are attributable to data furnishers, as furnishers may provide correct data that is then improperly processed by the CRA. The FTC, however, has recognized that some errors are present in the data collected and provided by furnishers, and the FACT Act was designed in part to provide mechanisms to ensure that furnishers investigate any disputed data and correct any errors they identify. Data sources must perform this duty whether the request to correct an error comes from the CRA or from the consumer directly.

The FTC's report is the final interim report in the series required by the FACT Act. The next report, due in 2014, will be the FTC's final report.

For the full text of the recently released report, please click here.

© Arnold & Porter Kaye Scholer LLP 2013 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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