Credit Bureaus, You Are Officially Under the Microscope

Credit bureaus, credit bureaus, what ya gonna do?  What ya gonna do when they come for you?  With apologies to Inner Circle (and even Will Smith and Martin Lawrence too), we had to alter your theme song a bit to better describe the latest development in personal finance law and order.  The Consumer Financial Protection Bureau announced last month that it will begin supervising the nation’s largest credit bureaus on September 30 – a development that’s been a long time coming and further establishes the CFPB as a regulatory enforcer not to be messed with.

The CFPB will oversee any credit reporting agency that has at least $7 million in annual revenue.  Currently, that includes 30 companies who together account for a 94% share of the $4 billion credit reporting market.  This marks the first time the industry has been put under the federal microscope, and the CFPB’s general agenda is to monitor the bureaus’ compliance with consumer protection laws and assess other areas for consumer risk.

“Credit reporting is at the heart of our lending systems and enables many of us to get credit, afford a home, or get an education,” said CFPB Director Richard Cordray in a statement announcing the development. “Supervising this market will help ensure that it works properly for consumers, lenders, and the wider economy. There is much at stake in making sure it is both fair and effective.”

Thus far, much of the news coverage and consumer input surrounding the CFPB’s decision to supervise the bureaus has fixated on solving the problem of credit score inaccuracies and making sure the bureaus live up to their obligation to investigate and remove such information.  This is certainly a concern, especially in the light of the myriad ways credit reports are used these days, the significance of mistakes to consumers’ lives, and the fact that certain reports have pegged the portion of credit reports with inaccuracies at 25%.  But we’re all entitled to a free copy of our major credit reports once every 12 months, and there’s nothing stopping us from parsing them for issues and sounding the alarm by filing a dispute or letting the CFPB know if any are found.

It’s therefore important that Cordray and the CFPB do not become singularly focused on cracking down on inaccurate information.  After all, it’s perhaps equally important that they also work to eliminate credit bureau conflicts of interest.

Credit information is basically a utility these days, as Cordray himself alluded, and is used for everything from credit card and loan underwriting to tenant selection and the job application process.  Yet credit reporting companies are still able to use it as a bargaining chip, a means to the end of business success.  In holding this information hostage they are preventing true progress and innovation in the credit reporting and scoring field.  In turn, they’re standing in the way of more predictive credit scores, better product terms (thanks to fewer unexpected defaults), and a host of new products and services that could conceivably be developed based on our credit information.  Adding competition to the industry would even help cut down on mistakes in consumer credit files since the companies that provide the most accurate support will naturally rise to dominance.

The question therefore is whether Cordray and the CFPB have more planned for the credit bureaus than they’re letting on.  Will they tackle the competition deficit or limit involvement to just one issue?  How valuable their supervision will ultimately be depends on how that question is answered.

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