Consumer and Credit Reporting, Scoring, and Related Policy Issues

Summary

The consumer data industry collects and subsequently provides information to firms about the behavior of consumers when they participate in various financial transactions. Firms use consumer information to screen for the risk that consumers will engage in behaviors that are costly for businesses. For example, lenders rely upon credit reports and scores to determine the likelihood that prospective borrowers will repay their loans. Insured depository institutions (i.e., banks and credit unions) rely on consumer data service providers to determine whether to make available checking accounts or loans to individuals. Some insurance companies use consumer data to determine what insurance products to make available and to set policy premiums. Some payday lenders use data regarding the management of checking accounts and payment of telecommunications and utility bills to determine the likelihood of failure to repay small-dollar cash advances. Merchants rely on the consumer data industry to determine whether to approve payment by check or electronic payment card. Employers may use consumer data information to screen prospective employees to determine the likelihood of fraudulent behavior. In short, numerous firms rely upon consumer data to identify and evaluate potential loss risks before entering into financial relationships with new consumers.

Congress has shown concern about consumer protection and consumer credit access in light of some challenges facing the credit reporting industry. First, reporting inaccuracies may result in the rejection of consumer credit requests. Second, negative or derogatory information, such as multiple overdrafts, involuntary account closures, loan defaults, and fraud incidents, may stay on consumer reports for several years. Likewise, the exclusion of more positive or updated information, such as the timely repayment of non-credit obligations, may also limit credit access. Differences in billing and collection practices can also adversely affect the consumer reports, an issue of particular concern with medical billing practices. Having a non-existent, insufficient, or a stale credit history may also prevent credit access. The use of alternative or newer versions credit scores, which have been developed in response to these concerns, arguably may increase credit access. It takes time, however, to implement alternative scoring algorithms, and credit scores are only one factor among many that are used in lender underwriting decisions. These issues are discussed in this report after some background information on the consumer data industry as well as a general overview of the current regulatory framework has been provided.

Greater reliance by firms on consumer data greatly affects consumer access to financial products or opportunities, prompting congressional concerns about consumer protection. The Facilitating Access to Credit Act of 2015 (H.R. 347) would enhance the ability of consumer reporting firms to correct inaccuracies by clarifying the applicability of existing consumer legal protections. The Medical Debt Relief Act of 2015 (H.R. 2362) would exclude from consumer credit reports certain medical debt that is less than 180 days delinquent or that has been in collections and has been fully paid or settled. The Federal Adjustment in Reporting (FAIR) Student Credit Act of 2015 (H.R. 2363) would allow a consumer to request the removal of a reported default on a qualified education loan if the consumer voluntarily and successfully meets the requirements of a private loan rehabilitation program.