You can pick your friends, and even your bank, but you’re stuck with the reckless credit bureaus

You can pick your friends and even your bank (vote with your feet!) but you are stuck with the credit bureaus. Over the last twenty years the power of the big three credit bureaus to act as gatekeepers controlling your potential success has grown immensely. Credit reports and credit scores generated from the reports are used to decide whether consumers can get a job, get car insurance, qualify to open a bank account, rent an apartment, use a debit card and, of course, whether they can obtain and how much they will pay for credit.

U.S. PIRG has done a series of reports on credit reporting errors since 1990. Our latest report found that up to one-quarter of credit reports contained serious errors that would cause you to pay more for or be denied credit or insurance or be denied a job. Reporters at the Columbus (OH) Dispatch led by Jill Riepenhoff and Mike Wagner have an excellent new four-part series “Credit Scars” explaining that the credit bureaus make mistakes, lots of them, and ruin peoples’ lives.

Excerpt from the Dispatch:

“The federal law that governs credit reporting is fraught with loopholes and obstacles that make correcting mistakes difficult, if not impossible, the newspaper found. During a yearlong investigation, The Dispatch collected and analyzed nearly 30,000 consumer complaints filed with the Federal Trade Commission and attorneys general in 24 states that alleged violations of the Fair Credit Reporting Act by the three largest credit-reporting agencies in the United States — Equifax, Experian and TransUnion. Industry observers say it is among the most comprehensive reviews ever conducted of complaints against credit-reporting agencies. The complaints document the inability of consumers to correct errors that range from minor to financially devastating. Consumers said the agencies can’t even correct the most obvious mistakes: That’s not my birth date. That’s not my name. I’m not dead.”

Our first report, in 1990, found similar results. So did all the rest of the reports we’ve written. And over the years, in 1996 and again in 2003, Congress made efforts to strengthen the law. Consumers now have the right to a free annual credit report on request by federal law. But many other provisions designed to require improved accuracy have been largely ignored by the bureaus and by the banks, creditors and debt collectors that “furnish” information to the bureaus. Unfortunately, Congress never gave the Federal Trade Commission big enough guns to enforce the laws. The bureaus have long known and taken advantage of this. They know that can laugh in the faces of angry, frustrated consumers and that the FTC can’t do much. There is hope, however, since the new Consumer Financial Protection Bureau has been given much bigger guns to protect consumers from credit bureau mistakes.

The FTC has never had rulemaking authority over the Fair Credit Reporting Act (except a few very teeny parts of it). And the FTC was never given authority to examine or supervise the bureaus, so its enforcement wasn’t based on looking inside their mysterious black box operations, only on consumer complaints. The new CFPB has been given bigger guns than the FTC. It can write rules, and after completing a larger participants rule, it can examine or supervise the largest and most important bureaus. What does this mean? Simply, that the CFPB will soon be able to show up at the door of any larger credit bureau at any time and say, “open the black box and show us what’s inside.” Then, it can base its enforcement on much better information than the FTC has ever had.

Just a few weeks ago, the CFPB completed the comment period on its “larger participants” rulemaking (read comments here) on both debt collectors and credit bureaus. When it completes the rule, by law, it gains authority to supervise and examine defined larger participants. While it is unclear how many debt collectors and how many “specialty” credit bureaus will be included in the definition, the big three credit bureau (also known as “consumer reporting agencies”) gatekeepers — Experian, Equifax and TransUnion — will certainly make the cut.  This joint comment filed last summer from National Consumer Law Center, U.S. PIRG and other leading groups during the “Advance” portion of the rulemaking explains the importance of the credit bureaus as gatekeepers in society, in particular. It is also our hope that the FTC will recognize that Fair Isaac and Company, which generates the dominant FICO credit score from credit reports, will also be defined as a gatekeeper and larger participant subject to examination.

This weekend, reporter Tara Siegel Barnard in the New York Times explains that medical debt collectors also wreak havoc on consumer credit reports. Often, hospitals and doctors frustrated with slow-pay insurance companies send bills to collection, leaving consumers and their credit reports in the lurch. Other consumers who previously had never really had debt, but lost jobs and then incurred medical bills, are finding that entries from medical debt collectors are lowering their credit scores, so that they might be denied jobs or credit simply because they’d been sick but uninsured. U.S. PIRG supports federal reforms that would limit the credit reporting of paid medical debts. As noted in Tara’s story, the Senate version of the Medical Debt Responsibility Act is stronger than the House proposal, but the House proposal gained a lot of bi-partisan and even some industry support by capping its protections only to debts under $2500. We prefer the stronger bill.

The House’s version of the bill would erase only debts up to $2,500. Supporters of the bill said they thought that amount would help a wide swath of people because many errors are below that level. Still, the bill would not help everyone, particularly as Americans continue to spend an increasing share of their income on medical expenses. The tens of millions of uninsured and underinsured people are in a particularly hard spot.