Consumers Suffer from Errors of Omission in Credit Reports

WASHINGTON – As good a tool as Automated Underwriting systems are for the mortgage approval process, using AU and a credit-scoring matrix that depends on inconsistent data from the major credit reporting repositories, hurts consumers and jeopardizes their chances of being approved for credit, insurance, or utilities. The National Credit Reporting Association said the findings of a just-released study NCRA conducted with the Consumer Federation of America, “Credit Score Accuracy and Implications for Consumers” confirm what the NCRA has long contended: “As efficient as the AU systems are, they are far from perfect because the data used to drive the matrices is not perfect.mistakes are unavoidable.There is no substitute for `human verifications’ in rectifying inaccuracies that an automated system cannot possibly accommodate.” CFA’s and NCRA’s study was based on their analysis of the credit scores of more than 500,000 consumers and the review of the files of more than 1,700 consumers maintained by the three leading credit repositories – Equifax, Experian, and Trans Union. According to the study’s findings, the analysis of the scores in 502,623 merged credit files shows that 29% of these consumers had scores with a range of at least 50 points, and 4% of them had score ranges of at least 100 points. The average range of the three scores was 41 points, and the median range was 35 points. Credit scores ranged from about 400-800. J. Robert Hunter, CFA’s director of insurance said creditors should be required to provide to consumers a copy of their credit reports at no charge, and then have to reconsider their decision based on any corrections. Instead, when dealing with systems such as AU systems that rely on limited or no human intervention for reviewing and reverifying questionable credit reports, “there will be a certain segment of the population who will be adversely affected through no fault of their own,” said the NCRA. A detailed analysis of 51 of the selected files turned up reasons for the differences in consumers’ credit scores reported by the three credit repositories. Among the explanations offered by the CFA and NCRA for the errors of omission were: * failure to report a negative event, such as a delinquency or charge-off, or a positive event such as payments on an account. Seventy-eight percent of files were missing a revolving account in good standing, and one-third were missing a mortgage account that had never been late. * in 43% of the files, reports on the same accounts conflicted in regards to how often consumers had been late by 30 days. In 29% of the files, there was conflicting information about how many times the consumer had been 60 days late. In 24% of the files, there were conflicts in 90-day delinquency information. The CFA and NCRA said consumers applying for mortgage loans are particularly at risk from the inconsistencies in credit reporting: The study showed that for first or second mortgage loan purchasers, a score of 620 is necessary to qualify for a prime loan at conventional rates. Consumers with lower scores are likely to be charged subprime rates or be denied loans altogether. Looking at so-called risk consumers – those with scores between 575 and 630 where there was at least a 30-point range between low and high credit scores, or whose high and low scores were above and below 620 – one-fifth of all the 1,704 files studied met these criteria and were designated as at-risk. Based on these findings, CFA and NCRA concluded that for these consumers, at least one-fifth would be harmed, and one-fifth would benefit from score inaccuracy if they tried to purchase mortgage loans. “The allocation of consumer credit should not be a lottery where one has to be lucky to receive fairly priced products,” said CFA Executive Director Stephen Brobeck. Not only are consumers’ mortgage applications being evaluated based on inaccurate information, the CFA and NCRA contend that consumers studied weren’t provided with information about which specific accounts were responsible for their low scores. In addition, “in many cases, it is not even clear – from our inspection of the files – whether a delinquency, public record, or collection was responsible for the score,” they wrote. Because of the extent of inaccuracy in credit files and scores revealed by CFA’s and NCRA’s study, they offer that policy changes are necessary. The changes they propose would: * require creditors to immediately provide consumers who experience adverse actions as a result of credit reports or scores, to provide a free copy of the credit reports that serve as the basis for their decision and a fast reconsideration of the decision if inaccuracies are found. * require creditors who base decision with adverse actions on the credit report or score from a single repository to reevaluate their decision using information from all three repositories. * strengthen requirements for complete and accurate reporting of account information to credit repositories and the maintenance of consumer data by the repositories, with adequate oversight and penalties for non-compliance. * government agencies such as HUD and the Federal Trade Commission should conduct regular, comprehensive evaluations of the validity and fairness of all credit reporting systems and report their findings to Congress. The CFA and NCRA also recommend steps consumers can take to reduce their chances of adverse actions. Among their suggestions are: * maintain consistency in credit applications by using their full legal name; * review their credit record regularly by purchasing a credit report and score from each major credit repository once a year; * dispute any errors that appear on their credit report by contacting the relevant repository; * ask a lender for specifics if they tell them that they have bad credit; * contact the FTC with complaints about their credit report if they can’t resolve them with the credit repository. -