The Need for Objective Reporting of Consumer Credit

By Tracy Schwotzer, Attorney

Consumer credit is an indispensible part of our society.  The average consumer relies on credit each day, not only for the financing of a business, house or car, but also for everyday purchases like gas and groceries.  In this country, these transactions would be difficult, if not impossible without the extension of credit to consumers, and the consumer report is a fundamental safeguard for businesses that extend credit.[1]  

Creditworthiness is used to determine whether a consumer qualifies for a loan, it determines the costs of insurance, and is often reviewed by potential employers.  Moreover, consumer reports are an important tool businesses use to make sure they extend credit only to consumers likely to repay the debt.  With the role that credit plays in our daily lives, the importance of a credit rating, either high or low, cannot be minimized.  The flip side, the decision to lend credit, receives less public attention but is equally important to maintain our current system of lending.

The credit rating system was developed to investigate and evaluate the creditworthiness, credit standing, credit capacity, character and general reputation of consumers.[2]   This consumer credit information is acquired, maintained, and distributed by Consumer Reporting Agencies[3]  and is governed by the Fair Credit Reporting Act (FCRA).[4]   The FCRA was adopted as part of the Consumer Credit Protection Act and has the purpose to “ensure fair and accurate credit reporting, promote efficiency in the banking system, and protect consumer privacy.”[5]   However, the needs for consumer protection must be balanced with the needs of the credit industry to manage its risk.
 
Banks, credit unions and other credit lenders depend upon complete and accurate credit reporting in their lending decisions.  “Inaccurate reports directly impair the efficiency of the banking system, and unfair credit reporting methods undermine the public confidence which is essential to the continued functioning of the banking system.”[6]  

Despite this importance, consumer reports are only a compilation of data and are not without errors, sometimes including inaccurate or outdated information.  To protect consumers, the FCRA establishes procedures for correcting those errors.  The most common route of challenging an item on a credit bureau is to dispute a specific item on the report.  Disputed information that cannot be verified must be deleted from a file.  However, a consumer reporting agency spokesman estimates that “at least a fifth” of the alleged “inaccuracies” being disputed are actually consumers attempting to have negative but accurate information removed from their report.[7]

Manipulation of consumer reports has also become an important bargaining tool in negotiations with the creditor.  A consumer may seek to have an account reported more favorably in exchange for repayment, or may request that the account be deleted upon settlement. 

Removing negative information on an account, or deletion of the account as a condition for resolving pending litigation is not a settlement term to be taken lightly.  The deletion of the negative information will obviously boost a consumer’s credit rating and make them more eligible for credit.  While deletion of negative information may be a necessary tool in negotiating settlement of a dispute, the long-term cost to the industry as a whole is potentially devastating.  Without accurate information, a consumer may receive an undeserved credit limit, the interest rate may not accurately reflect the credit risk involved, and the terms of lending may be more favorable than the terms that would be otherwise justified by the consumer’s actual credit history.  By agreeing to deletion of negative information without a verifiable dispute, the lender has accomplished the short-term goal of resolving the dispute, but put the industry at an increased risk for flawed loans.

Finally, consumer reporting agencies are required to “follow reasonable procedures to assure maximum possible accuracy” of information on a report,[8]  and failure to do so is actionable.[9]   Thus, if more favorable reporting or routine deletion of otherwise negative information becomes commonplace in the industry, the consumer reporting agencies will be more wary of the information provided to them for fear of the liability for an inaccurate report.

Credit reports have recently been featured in the news and lenders will undoubtedly find themselves subject to increased regulations on how debts are reported.  For more information, see J. Riepenhoff and M. Wagner’s series in The Columbus Dispatch.

Tracy Schwotzer is an associate of Consumer Collections located in the Cleveland office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 216.685.1122 and tschwotzer@weltman.com.
Footnotes:
[1]Comment: The Fair Credit Reporting Act: Fair for Consumers, Fair for Credit Reporting Agencies, 39 Sw. L. Rev. 395, 398, citing N.M. Stat. Sec 50-18-1 through -18-6 (1953).
[2] 15 U.S.C. 1681(a).
[3] Id.
[4] Id.
[5] 39 Sw. L. Rev. supra, 412, citing Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 52 (2007).
[6] 15 U.S.C. 1681(a)(1).
[7] Ripenhoff, J and Wagner, M. (2012, May 7) Credit Scars: Credit-reporting agencies’ failure to address damaging errors plaguing thousands of Americans prompts call for swift action.  The Columbus Dispatch, p.1.
[8] 15 U.S.C. 1681e(b).

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