Enter The Consumer Finance Protection Bureau

In 2010, the Consumer Finance Protection Bureau (or CFPB) was created, primarily in response to the failures of the financial industry in the several years prior. The CFPB exists for consumer protection. It is a government agency that now holds most of the consumer protection authority in the financial markets.

The CFPB—according to their website—will write rules, clarify regulations, “curb” unfair and abusive practices, promote financial education, enforce laws, and conduct research related to their tasks.

A report released by the CFPB in December of 2012 focused on the credit bureaus and their operations in the credit system, and highlighted many failings that myself and others have been pointing out for years. Here are a few highlights from the 2012 CFPB Report on the credit bureaus:

  • The CFPB noted that Social Security Numbers are not included (or required) for the majority of credit reporting activities. In one example provided, it was estimated that only 3% of public records submitted to the credit bureaus through LexisNexis contain Social Security Numbers. The CFPB acknowledges that the variations in data requirements and the data collected and submitted by furnishers are factors that complicate credit reporting and therefore contribute to some of the problems experienced in the industry.
  • According to the CFPB report, the quality control performed on incoming data is limited mainly to logical comparisons and algorithms to detect when the incoming data doesn’t make any sense at all. There is no effort made to verify the actual accuracy of the data itself.
  • The credit bureaus do not immediately accept all data submitted. A lot of data is initially rejected due to not passing their automated quality control checks. An interesting note is that submissions from collection agencies have higher rejection rates than submissions for credit card trade lines.
  • The credit bureaus get most or all of their public record data through LexisNexis Risk Data Retrieval Services LLC (“LexisNexis” for short). All bankruptcy records originate from Pacer, along with 30% of the records on judgments. Most of the other data is obtained through a network of contractors who visit the courthouses and physically input the data into LexisNexis databases.
  • The over 50% of furnisher-submitted data comes from the top 1% of furnishers. In other words, a few big furnishers supply the credit bureaus with most of their payment and account data.
  • The highest dispute rates relative to the number of accounts submitted occur for the smallest furnishers. The smaller the furnisher is, the more dispute-prone the accounts are.
  • The CFPB states correctly that a key part of the credit reporting process—and therefore an area of concern—is the data matching process used by the credit bureaus. The task of matching the right data to the right consumer is of great importance to the accuracy of credit reports.
  • Factors cited that complicate the matching process included the inconsistencies among furnishers in reporting practices and the information collected, furnisher data quality practices, the fact that many consumers have similar names and change names in their lifetime (such as when a person gets married), and the lack of “key identifiers” such as Social Security Numbers.
  • The CFPB also talked about the “partial matches” that the credit bureau matching algorithms do, stating that:  “In some cases, matching algorithms will assign the trade line to a file that, according to the algorithm, represents the best match even when all of the identifiers do not match up perfectly, or when only a limited number of identifiers are contained within the trade line.”
  • The CFPB discussed e-OSCAR, and the lack of a mechanism to forward documentation (i.e. “all relevant information”) through the e-OSCAR System.

This report is hopefully the first of much discussion the CFTPB will be having regarding the issues with credit reporting and scoring.

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