Why is an entire town in Vermont having trouble borrowing money? Apparently TRW accidentally gave everyone in the town of Norwich, Vermont, a bad credit report. An anomaly, says TRW. The problem began with Margaret Herr, a Vermont housewife who works part-time for a Georgia company that gathers information for TRW on delinquent property taxes, among other things. In the course of her duties, Ms. Herr came to Norwich to acquire a list of delinquent taxpayers. Rather than looking up delinquencies, she simply obtained a list of taxpayer receipts and reported them to TRW. "No huge number," said a TRW spokesman when confronted by the Wall Street Journal with the error. Probably less than 3,000 people. In a town with 3,100 residents. TRW refers to the Norwich predicament as "a very isolated incident," but the credit bureau files at all of the "Big Three" agencies are riddled with errors, inaccuracies, and outright lies. Although the deficiencies of the credit reporting industry have only recently been in the healines, credit bureaus have been criticized almost from their inception.
Dun and Bradstreet pioneered the credit reporting business around the turn of the century by establishing a system to record how businesses repaid their debts. This information was obtained manually from individual creditors and was soon sold to parties interested in doing business with a particular company. Only records of debt repayment were contained in Dun and Bradstreet's reports, and they were available only to other businesses. However, the boom in home ownership in the 1940s and the discovery of automobile financing soon created a need for consumer credit bureaus, as Americans became more transient and more eager to borrow. Most credit bureaus were local agencies, and unfavorable credit could easily be erased simply by moving out of state sometimes even to another county. Credit bureaus often kept records in paper files or in ledger books, which were updated manually. The steady advance of computer technology allowed bureaus to become increasing sophisticated and to create more complete files.
Like J. Edgar Hoover, they soon found it profitable to glean as much information as possible on everyone it kept a file on. Soon more sophisticated computers allowed this information to be available nationwide, and the modern consumer credit reporting bureau was born. As the consumer credit reporting business grew more profitable, bigger bureaus swallowed smaller ones until soon five major bureaus, Equifax, Trans Union, Chilton, CBI, and TRW held a virtual monopoly on the credit reporting industry. Congress, troubled by the exponential growth of a totally unregulated industry with Orwellian tendencies, passed the Fair Credit Reporting Act along the way to protect consumers. Passed in 1970 when many credit bureaus kept files in manila folders, the industry soon found loopholes and vagaries in the law to continue unharassed toward the goal of a complete file on every living American. Before 1970, bureaus were not required to disclose the contents of a consumer's file to the person in question. When the Fair Credit Reporting Act ended this practice, bureaus simply added a fee-often ten times what they charged commercial customers. Required to investigate errors, they simply refused, or reconfirmed incorrect information. Limited by law to giving credit reports only to those "with a substantial business interest," they interpreted this to mean anyone willing to pay their fee. To this day, in spite of recent publicity, the bureaus and the credit providers, including banks and retail stores, continue to shirk their responsibility to credit consumers.
While credit reporting bureaus claim an error ratio of only one half of one percent, recent consumer polls seem to show a much higher percentage of inaccuracies. A Consumer Union poll places the error rate as high as 49 percent of all credit reports. Almost half of all credit files. An informal Consumer's Report magazine poll places the percentage of inaccurate reports at 48 percent. Yet credit bureaus continue to deny that there is a problem. 'We have a vested interest in ensuring that our files are accurate," said John A. Ford of Equifax to the Wall Street Journal. "If our reports are unreliable as some say, credit grantors would be the first to complain." Or would they? Credit grantors, such as banks, mortgage companies, and other lenders, might well prefer having a lot of inaccuracies appear in a credit report to missing any correctly reported negative information. After all, one bad loan can erase the profits of several good loans. It is better, from the lender's standpoint, to deny credit to some who really do qualify than to have one "bad apple" slip through the process. "If your report has more bad stuff than the other guy's, I think I like that," says Ralph Spurgin, a top credit executive at the Limited clothing store chain, in a recent newspaper interview. According to this line of thinking, a credit report purchaser would rather deal with the credit bureau that can dig up the most dirt on its potential customer. The issue of cost has also caused foot-dragging within the credit industry, already engaged in a price war.
More accurate reports would drastically raise the cost of consumer credit reports. No large credit bureau, retailer, or bank: wants to see these costs rise, and so they continue to resist tighter controls on credit Even as credit bureaus grow sloppier, the demand for information is exploding. Employers use credit reports to screen potential employees. Landlords use the bureaus when renting. Insurance companies run checks before issuing life insurance. The demand for information has drawn the traditional credit bureau into areas far removed from credit relationships. Most credit reports, for example, will list, in addition to your credit accounts, where you work, what your business is, and often what your salary is. A more in-depth investigative report will include interviews with your neighbors, employer, and relatives regarding your "personal character." Although for most of us this information would not be damning, it is often gathered is such a haphazard way that errors are the rule rather than the exception. "Interviews" with neighbors are often nothing more than a couple of questions along the lines of "What kind of people are they?" According to a recent lawsuit filed against Equifax, these interviews often never even take place: negative information is simply fabricated to produce a juicier report Muckraking analysts are often rewarded for digging up more dirt than the other bureau because of the increased value such reports have with the credit report users. The consumer credit report has become the National Enquirer of the personal information business. As credit bureaus seem to touch almost every area of our lives, the consumer credit bureaus' cavalier attitude is having increasing devastating consequences on the lives of many consumers. Take the example of James Russell Wiggins.
After finding a good job as a cable television salesman, he was unexpectedly fired after his firm ran a credit check and discovered that the credit bureau had reported him as pleading guilty to a felony cocaine possession charge. After discovering his report had been confused with that of a James Ray Wiggins, Wiggins received an apology and a corrected credit report but never regained his job. According to current law, the credit bureau is in no way liable. Neither is the employer. Mr. Wiggins, as the consumer, bears the brunt of the credit bureau's sloppiness.
As technology improves, the traditional credit bureau is slowly evolving into an information warehouse. Already credit reporting agencies sell lists to marketers who profile individual households by income and spending habits. Pre-approved credit is regularly proffered to those who are deemed credit-worthy. But perhaps the most troubling trend of all in the credit information industry is the increasing integration of government information banks and the private credit reporting industry.
Robert Smith, publisher of the Privacy Journal, gives several examples in a recent article in the Business and Society Review.
- The Office of Budget and Management completed agreements that permit any federal bureau to obtain information within twenty-four hours from all major credit bureaus, information that can then be used by agencies like the IRS and in conjunction with federal loans, grants, or contracts.
- The IRS is renting lists, most probably from credit bureaus, containing lifestyle information to cross-reference with tax returns in order to pinpoint potential tax evaders.
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- The Treasury department routinely monitors information in private credit card accounts to enforce restricted travel to countries such as Cuba.
- Equifax is considering including state motor vehicle information in its portfolio of personal information.
Each subsequent advance in information technology seems to strike a blow against privacy.
Bowing to public pressure, the federal government is slowly beginning to take measures against credit bureaus. Six states have begun legal action against 1RW, one of the largest of the credit bureaus. The state attorney general of New York, Robert Abrams, claims ''TRW is masquerading as a mere library of credit histories when in fact it is secretly rating the credit worthiness of consumers." According to Reuters News Services, Abrams accuses 1RW of issuing one difficult-to-read credit report to consumers and another simplified version to credit grantors. 1RW is also accused, in the lawsuit filed, of offering a credit scoring system to subscribers that is not disclosed on consumer reports.
Many members of Congress are less than pleased with the growing number of complaints against credit bureaus. Rep. Charles Schumer (DN.Y.) recently called for legislation rewriting the Fair Credit Reporting Act because "the credit industry is out of control." Hearings of the Consumer Affairs Subcommittee of the House Banking Committee spotlighted many consumers who had been devastated by credit bureau incompetence. Although most witnesses were victims of mistaken identity, in itself an innocent mistake, the arrogant and uncooperative attitude of credit bureaus in correcting mistakes clearly showed the need for new, more consumer-friendly credit reporting laws.
Several measures being considered include free credit reports once a year (TRW has recently begun offering this service voluntarily in hopes of staving off legislation), automatic reports of new negative information, and substantial penalties against incorrectly reported information.
The credit reporting industry and credit grantors are both lobbying vigorously against such measures, but the die appears to be cast. A good credit reporting bill will include the following:
- A free credit report once a year.
- Civil penalties for incorrect information (both the credit bureau and the reporting business to be liable).
- Information to be disclosed only with written authorization.
- Consumers to be notified whenever negative information is reported.
Take the time to write your congressman or senator. The credit lobby is strong, and only a massive outpouring of support will force a bill to be passed.
Although the credit reporting industry is under-regulated, and consumers do not have the rights they should in a free society like ours, credit bureaus are not invincible. As the oriental martial arts teach, an opponent's size and strength can often be used against him.
