Credit Reports and Scores: Practices, Policies and Outcomes Chi Chi - - PDF document
11/16/2012 Credit Reports and Scores: Practices, Policies and Outcomes Chi Chi Wu cwu@nclc.org Financial Education in Oklahoma November 7, 2012 National Consumer Law Center Legal resource center on consumer law issues focusing on
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Chi Chi Wu cwu@nclc.org Financial Education in Oklahoma November 7, 2012
Legal resource center on consumer law
Resource materials, policy and advocacy Impact litigation
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– Home (mortgage) – Car (affordable auto loan) – Education, small business – Increasing Non-Credit Use
Credit sometimes also serves to mask stagnant wages and gap with rising costs “No advertisements trumpet, ‘When your husband leaves you, there’s MasterCard.’ Nor do we hear: ‘American Express: Don’t lose your job without it.” But those slogans would be closer to the truth about how credit is used today”
From “The Cement Life Raft” in Elizabeth Warren and Amelia Warren Tyagi, The Two-Income Trap.
11/16/2012 3 “But over the past 30 years, as income growth slowed and the cost of critical necessities like health care climbed, Americans took on debt just to make ends
time are not earning enough money to meet their family’s basic economic needs…. families without assets to fall back on borrowed against the value of their homes and relied on credit cards as a privatized “plastic safety net” to get through hard times” Demos, The Plastic Safety Net, May 2012
– 3 major CRAs or “credit bureaus” (Equifax, Experian, Trans Union)
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– Name – Current and former addresses – Birth date – SSN – Can include telephone numbers; spouse; Past and present Employers.
– Mortgages; auto loans – Revolving accounts (credit cards) – Collection agency entries
– Bankruptcies – Foreclosures, tax liens – Court judgment and filings
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7 Winthrop Sq., 4th Fl. Boston, MA 02110 Phone: (617) 542-8010 Fax: (617) 542-8028
– “Pay your bills on time. Delinquent payments and collections can have a major negative impact on a credit score.” – “Keep balances low on credit cards and other "revolving credit." – “Apply for and open new credit accounts only as needed. “ – “Pay off debt rather than moving it around.”
– Like the “Rational Man” of classical economics
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OR
– 50% of all debt collection accounts on credit reports are for medical bills
“They are all deadbeats”
a thousand)
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Unemployment Rate, U.S.A.
January, 1995-2010 0.0 2.0 4.0 6.0 8.0 10.0 12.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(P e rc e n t) Source: Bureau of Labor Statistics http://www.bls.gov/data/
Source: FRB Statistical Releases http://www.federalreserve.gov/datadownload/
Bank Credit Card Chargeoffs
2 4 6 8 10 12 1 9 8 5 Q 1 1 9 8 6 Q 1 1 9 8 7 Q 1 1 9 8 8 Q 1 1 9 8 9 Q 1 1 9 9 Q 1 1 9 9 1 Q 1 1 9 9 2 Q 1 1 9 9 3 Q 1 1 9 9 4 Q 1 1 9 9 5 Q 1 1 9 9 6 Q 1 1 9 9 7 Q 1 1 9 9 8 Q 1 1 9 9 9 Q 1 2 Q 1 2 1 Q 1 2 2 Q 1 2 3 Q 1 2 4 Q 1 2 5 Q 1 2 6 Q 1 2 7 Q 1 2 8 Q 1 2 9 Q 1 P e rc e n t
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– What is the level of errors? – Even 1% means 2 million consumers
– Matching data by use 7 of 9 digits of SSN – causes mixed files – Metro 1 versus Metro 2 – Re-aging, duplicate tradelines,
– Publicly traded – Keep this critical file full of sensitive personal information – Essentially a public utility
– Customers of Big Three are mainly the subscribers – Consumers cannot “walk with their feet”
– In some countries, government or central bank function – Privacy laws prohibit private companies from doing this
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BUT
– so need a home and mortgage
– The “haves”- student loans, authorized users, college credit cards – The “have nots” – the “on-ramps” can be fraught with danger
– Scores correlate with race, income, home ownership. – Gaps might be widening over time – “path dependent”
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– Right to free annual credit report and to buy credit score (15 U.S.C. 1681g) – Notices when used for adverse action or risk-based pricing (15 U.S.C. 1681m)
– Restrictions on who can view report (15 U.S.C. 1681b)
– “Reasonable procedures to assure maximum possible accuracy” (15 U.S.C. 1681e(b)) – Furnisher accuracy standards (15 U.S.C. 1681-2(a)) – Prohibition against negative information over 7 years (10 years for bankruptcy) and certain medical information (15 U.S.C. 1681c(a)) – Dispute rights (15 U.S.C. 1681i and 1681s-2(b))
– Alerts, blocking – Red Flag guidelines, disposal
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– Any specific procedures that the bureaus must follow – What kind of information must be provided – What kind of information (besides old info and certain medical info) cannot be provided
– Social benefit
– Many provisions are not privately enforceable – Preempts better state laws and common law claims
products or services, i.e., the Big Three and others
student lenders (furnishers)
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Study after study finds certain minority communities have lower scores as a group
– Median FICO score for majority minority areas was 34 - vs. 52 for low minority areas
– Mean score of African Americans was half that of whites (54.0 out of 100 for whites versus 25.6 for African Americans) with Hispanics mean of 38.2.
– African Americans and Hispanics strongly over-represented in the lowest scoring categories.
– African-Americans were three times as likely to have FICO scores below 620 as whites. – Hispanics are twice as likely as whites to have FICO scores under 620.
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– Scores correlate with income, home ownership, better loan terms. – Gap widened over time
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score have to do with how well they drive or upkeep
– Undermines the goal of universal coverage – Undermines the loss mitigation role of insurance by placing emphasis on a rating factor which has no ability to promote loss mitigation by policyholder
Consumers
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(source: Society of Human Resource Management)
– Create a fundamental “Catch-22” for unemployed applicants. – Prevent economic recovery for millions of Americans. – Discriminates against African American and Latino job applicants. – Does not predict job performance. – Inaccuracies in credit reporting