The Federal Trade Commission and the Board of Governors of the Federal Reserve System have released their joint “Report to Congress on the Fair Credit Reporting Act Dispute Process.” The report makes for some pretty dry reading, even for someone like me who’s really into this stuff. But there are also some fascinating tidbits of information, and if you know anything at all about “credit repair” there is some useful material in the report as well.
When “the FACT Act” (Fair and Accurate Credit Transactions Act of 2003) was passed as an update to the FCRA (Fair Credit Reporting Act), one of the provisions was for this report to be provided by the FTC and Fed to Congress. Largely a paper exercise, the overarching conclusion of the report “…finds that, although the materials that the FTC and the Board reviewed indicated that most disputes seem to be processed within the statutory time frame, there is disagreement as to the adequacy of the CRAs’ and furnishers’ investigations.”
Translation: The credit reporting agencies (CRAs) do a good job of keeping the paperwork moving, so that disputes are responded to in a timely manner, but very little actual “investigating” is taking place in response to the disputes.
Some interesting facts: The three major CRAs (Experian, TransUnion, and Equifax) collectively manage data on 1.5 billion credit accounts spread over 210 million individual credit files, with more than 4 billion information updates hitting the bureaus on a monthly basis from more than 30,000 creditors (called “furnishers” in the report). That’s a mountain of data to keep under control, so it’s no wonder the system is rife with errors.
Ever wondered how public record items (such as bankruptcies, judgments, liens, etc.) get on your credit report? Many people think that the court system reports this information directly to the CRAs. Not so. “Because some public record information is accessible only by visiting courthouses and other government buildings in person, the repositories sometimes hire contractors to gather the information.” This leads to an important question. When you dispute a derogatory item on your credit report that stems from a matter of public record, does the CRA send one of their “contractors” back to the courthouse to verify the entry? This seems highly unlikely, given the cost and time constraints involved, although the report does not directly address this issue. This makes me wonder how the CRAs verify disputes at all when public records are involved.
Since this report was intended to specifically address the dispute process, it goes into great detail on the mechanics of that process:
Step A: Consumer Reviews Consumer Report and Conveys Dispute to CRA
In 2003, 57.4 million consumers were issued their credit reports. Of those 57.4 million reports issued, consumers entered disputes 21.8% of the time. So already we can see that 1 out of 5 reports were perceived by consumers to contain errors in need of correction.
Step B: CRA Processes Dispute
Here’s where it gets interesting. The CRAs have 30 days to investigate the dispute, and they are supposed to consider all relevant information supplied by the consumer. However, in a joint letter by numerous well-known consumer rights organizations, it is “asserted that CRAs fail to conduct meaningful reinvestigations and merely ‘parrot’ information received from furnishers as ‘verified’, without independently investigating the accuracy and completeness of such information.”
Step C: CRA Forwards Dispute to Furnisher
The credit reporting agency then supposedly provides notice of dispute to the company that furnished the credit data within five business days of receipt of the dispute.
Step D: Furnisher Investigates and Sends Response to CRA
This is where the system is truly broken. The law says that the furnisher is supposed to actually conduct an investigation in response to the dispute. So what constitutes an investigation? According to the watch-dog consumer groups, “furnishers are simply not conducting meaningful reinvestigations; they do not train their employees on effective reinvestigation procedures; and they repeatedly default simply to verifying the existence of an account.” In plainer language, when the original creditor gets a dispute notice from a CRA, they have some low-paid clerk verify that an account exists with the consumer. Then they respond to the CRA and say, “Yes, this person owes us money. Verified as reported.” And the CRA leaves it at that. This can be extremely frustrating to the consumer who has a bonafide dispute regarding a negative credit entry.
Step E: CRA Communicates Reinvestigation Results to Consumer
In one government study, of the consumers who filed disputes, 69% reported that the disputed information had been removed from their credit files. That’s pretty good odds in favor of the consumer who takes action to dispute the inaccurate junk on their credit report. Another interesting tidbit is that TransUnion reported that about 5% of disputes were repeats, where the consumer simply repeated the dispute with no new information. If you’ve ever looked at what credit repair companies do, it’s easy to spot their footprints here. (Credit repair outfits simply keep repeating the dispute process over and over again.) How likely is it for a consumer to simply repeat a dispute without providing new information? Not very likely in my view. So although this is a very rough approximation, this points to at least 5% of disputes as coming from credit repair companies. The actual figure is probably much higher, since the 5% only takes into account repeat disputes, and not the ones that succeed in getting the item deleted on the first pass.
Step F: Consumer Disputes Information Directly to Furnisher
This has been another weak link in the chain, but the FACT Act will require credit furnishers to investigate disputes conveyed to them directly by consumers, and it will be illegal for furnishers to report information they have determined to be inaccurate.
Although this report does not break any new ground or even recommend any specific actions, it provides a fascinating look at the tug-of-war going on between consumer protection groups and the financial industry. The bottom line is that the creditors and the CRAs don’t want the burden of having to properly investigate disputes, to the extent of providing supporting documentation. Meanwhile, the consumer groups continue to criticize the flaws in the current process. Both sides look to improvements that will come into force under the FACT Act as it modifies the FCRA, but it remains to be seen whether or not enforcement of the new rules will occur at a sufficient pace to ensure compliance.