Credit Reporting - H.R.3621

Overhaul Credit Reporting System — HR 3621, Comprehensive Credit Reporting Enhancement, Disclosure, Innovation and Transparency (CREDIT) Act . The bill, which combines six separate measures, takes numerous actions to modify the nation's credit reporting system in order to increase transparency and accuracy with respect to the information included on consumer credit reports and provide individuals with greater protections and information. Among its provisions, it reduces the amount of time adverse information may remain on an individual's credit report and expedites the removal of information on paid debts, establishes new protections for consumers who have been the victim of fraud or abuse, and updates the process used by credit bureaus to resolve disputes over adverse information on a credit report. Democrats say the changes are needed to ensure consumers are not being unfairly denied access to loans and other credit, while Republicans say it broadly expands regulation and could ultimately make it more difficult to access credit. The measure is expected to be considered under a structured rule that makes in order only specified amendments.

BACKGROUND: The Financial Services Committee reported the original measure with minority views by a 33-25 vote (H Rept 116-331; reported as the Student Borrower Credit Improvement Act).

    House leadership has decided to incorporate into the measure provisions similar to those in the following five consumer credit reporting bills for House floor action: HR 3614, Restricting Use of Credit Checks for Employment Decisions Act (H Rept 116-305); HR 3618, Free Credit Scores for Consumers Act (H Rept 116-306); HR 3622, Restoring Unfairly Impaired Credit and Protecting Consumers Act (H Rept 116-362); HR 3642, Improving Credit Reporting for All Consumers Act (H Rept 116-363); and HR 3629, Clarity in Credit Score Formation Act (H Rept 116-307). All the above bills were reported with minority views by 32-26 votes, except HR 3629 which was reported by a 33-25 vote.

Consumer Credit Reports

     Consumer credit reports provide information to businesses about the behavior of consumers when they participate in various financial transactions, helping companies determine in advance whether consumers have engaged in behaviors that could be costly or beneficial to the firms, or are likely to pose a financial risk.

    For example, lenders rely upon credit reports (officially known as consumer reports) to determine a prospective borrower's credit history and predict the likeliness they will repay their loans, while banks and credit unions rely on them to determine whether to make available checking accounts or loans to individuals. Some insurance companies use consumer data to set policy premiums, while merchants rely on the consumer data industry to determine whether to approve payment by check or electronic payment card.

    Credit reports are compiled, produced and furnished by Credit Reporting Agencies, more commonly known as credit bureaus. While there are numerous credit bureaus, many of which provide specialized services, the industry is dominated by three large nationwide providers: Equifax, Experian, and TransUnion. Others are smaller and provide more specialized consumer reports, including those used by mortgage or auto loan lenders.

    All credit bureaus are overseen under the 1970 Fair Credit Reporting Act, which regulates the collection of consumers' credit information and access to their credit reports. The law also establishes requirements for furnishers of credit information, or any business that provides consumer financial data to a Credit Reporting Agency. This framework has been updated several times in the past 40 years, most recently by the 2003 Fair and Accurate Credit Transactions Act (PL 108-159).

Credit Scores & Use of Credit Information

    While a credit report is a history of accounts, payments, debts and other financial transactions, a credit score is a numerical rating based on a model that can incorporate multiple credit reports and is used to predict likely financial outcomes and determine a consumer's credit worthiness. The most commonly used credit score is the FICO Score, developed by the Fair-Isaac Corporation in the early 1980s, thought other credit scoring models exist.

    As the financial system has become more complex over the past several decades, credit reports and credit scores have become increasingly relied upon by creditors, employers, insurers and even law enforcement. According to recent estimates from financial regulators, the three nationwide credit bureaus maintain credit files on roughly 200 million American adults, receiving information on financial behavior from more than 10,000 banks, lenders, credit card companies, insurance companies and other businesses.

    The data in these reports can significantly affect a consumer's access to financial products or opportunities, affecting whether a person is able to obtain a credit card or secure a mortgage loan to buy a home, as well as the terms and conditions (such as an interest rate) under which consumer credit products or services are offered to them. For example, negative or derogatory information such as multiple overdrafts, involuntary account closures, loan defaults and fraud incidents may influence a lender to deny credit to a consumer. Such information may stay on a consumer’s credit reports for several years.

    Credit reports are also increasingly being used for many non-credit decisions. These include landlords, who use credit history to determine whether to rent an apartment to a prospective tenant, and some employers, who have used credit scores when screening potential job candidates.

Consumer Protections

    Given the importance of credit reports across the economy, the Fair Credit Reporting Act and subsequent legislation established a number of requirements aimed at regulating how consumer data and credit reports can be collected and used. Federal law establishes permissible uses of credit reports, and imposes certain responsibilities on those who collect, furnish and use the information contained in consumers' credit reports. Under the law, these companies are required to establish and comply with reasonable procedures to ensure information in credit reports adheres "to the maximum level of accuracy."

    Federal law also requires Credit Reporting Agencies to inform consumers, free of charge, when their information has been used after an adverse action, typically a denial of credit. Consumers also have a right to one free credit report every year from the three largest nationwide credit bureaus, and the right to dispute inaccurate or incomplete information in their report (credit bureaus by law must investigate dispute claims).

    The 2010 Dodd-Frank financial regulation overhaul (PL 111-203) established the Consumer Financial Protection Bureau (CFPB) and gave the new agency rulemaking and enforcement power over all credit bureaus for consumer protection issues. The law also allows the CFPB to conduct supervisory examinations of larger nationwide CRAs.

Credit Bureau Issues

    Despite those protections, some critics of the system have accused credit bureaus of not doing enough ensure accuracy of consumer information. Both the CFPB and the Federal Trade Commission (FTC) have found that many consumers have inaccurate information on their credit reports, a problem which can limit access to credit or increase the cost of borrowing. A 2012 FTC study found that 5% of credit report errors were serious enough to result in consumers being denied credit or paying more for mortgages, auto loans, insurance policies and other financial obligations. As of December 2019, the CFPB has reported handling approximately 391,560 credit reporting complaints about the top three CRAs, making credit reporting consistently one of the most-complained-about subjects on which the bureau accepts consumer complaints.

    Errors on credit reports can be due to incorrectly imputed data or confusion between individuals with similar names, as well as the result of identity theft and fraud. And while credit agencies are required to investigate, if requested by the consumer, a 2015 FTC review found that many consumers give up on trying to correct mistakes because of the often time-consuming and confusing nature of the dispute resolution process. In addition, the CFPB has found that many consumers are not aware of their rights and might be unsure where to look to find information.

    In addition to inaccurate information, some consumer advocates have also complained that negative information, such as defaulting on a loan or even a declared bankruptcy, remains on a credit report long after its power to predict a consumer's future financial behavior has diminished. While some research has found that the predictive power of this information diminishes after about two years, credit bureaus are allowed to maintain adverse information for seven years (10 years for bankruptcies). Critics argue that such adverse information continues to hurt the ability of consumers to obtain credit without actually improving their risk assessment.

    This adverse data can be especially difficult for the victims of predatory lending or fraud. For example, in the lead up to the 2008 housing crisis, a large numbers of minority borrowers who were eligible for safe and affordable loans were inappropriately steered toward high-priced subprime loans with ruinous features, which ultimately tarnished their creditworthiness.

    Some lawmakers have also called for both credit bureaus and lenders to adopt alternative credit scoring models that include nontraditional information such as utility payments to paint a more accurate picture of a consumer's financial behavior. Advocates of these systems argue that they would help reduce the number of so-called "credit invisibles" — those individuals without credit reports because they have not taken out lines of credit or applied for loans. Because of their lack of credit history, these individuals, who represent roughly 11% of the U.S. adult population according to the CFPB, have difficulty obtaining loans.

Member Concerns

     Supporters of the bill, primarily Democrats, argue that overhauling the nation's credit reporting system is needed to ensure that American consumers are not being unfairly denied access to loans and other credit. They say the measure will help improve the accuracy of consumers' reported credit information and provide consumers with more ways to dispute and correct inaccurate information. In particular, those changes will significantly reduce the amount of time adverse information continues to affect individuals whose debt has been paid off.

    The bill will also extend existing consumer protections to cover individuals who have been the victims of predatory lending or fraud, thereby ensuring that those individuals do not face additional obstacles to obtaining credit in the future. And it will significantly increase the transparency of the credit report and credit score process for consumers, they say, making it easier for individuals to understand the process and make informed financial decisions and prevent fraud. Finally, they argue that it will prevent a consumer's credit history from affecting their prospects for employment.

    Opponents of the bill, primarily Republicans, express concern about the overall impact it would have on the credit system, saying it fails to address underlying issues and will ultimately make it more difficult to access credit. They argue that some changes are needed to the nation's credit reporting framework, but say the bill's changes could limit the amount of predictive information contained in credit reports — which could ultimately increase the cost of credit and lead to more defaults, adversely impacting consumers across the U.S. financial system.

    It also contains contradictory directives, seeking to ensure credit report information is complete and accurate while simultaneously limiting the information credit bureaus and lenders can use to make financial predictions. It broadly expands the scope of the CFPB to issue regulations, which they say could impose undue burdens on the financial services sector. And instead of requiring helpful disclosures to increase transparency for consumers, they say it micromanages the data used by private companies without achieving the goal of making consumer credit information more accurate.

SUMMARY: The Rules Committee is expected to make in order a modified version of the bill, which combines provisions from six measures reported by the Financial Services Committee

    This bill takes numerous actions to modify the nation's credit reporting system in order to increase transparency and accuracy with respect to the information included on an individual's credit report, and to provide individuals with greater consumer protections and information.

    Among its provisions, the measure reduces the amount of time that adverse information may remain on an individual's credit report and expedites the removal of information on debts that have been fully paid off, while preventing certain student loan and medical debts from being included. It establishes new protections for consumers who have been the victim of fraud or abuse, such as predatory lending, and updates the process used by credit bureaus for resolving disputes over adverse information included on a credit report. It also requires credit bureaus to annually provide consumers with their credit score for free, if requested, along with information on how their credit score was calculated.

    The measure transfers a number of consumer protection functions established under the Fair Credit Reporting Act from the Federal Trade Commission (FTC) to the Consumer Financial Protection Bureau (CFPB), and it authorizes the CFPB to issue new regulations to implement the bill's provisions. It automatically voids any existing contracts that are in violation of the Fair Credit Reporting Act as modified by this measure. Most of the bill's provisions would take effect two years after enactment.

    Finally, to ensure that companies are in compliance with the Fair Credit Reporting Act, the bill authorizes federal courts to grant injunctive relief against companies that are either willfully or negligently noncompliant with the law's provisions — which could require a company to cease a particular practice. Courts could award attorneys fees and other court fees to consumers who file civil lawsuits against violators of the law's provisions.

Credit Report Information

    The bill reduces from seven years to four years the amount of time that credit bureaus can maintain adverse credit information (such as a default on a loan) on a credit report, and it reduces from 10 years to seven years the length of time a personal bankruptcy may remains on a credit report.

    It also requires that fully paid or settled debts be removed from a credit report within 45 days of full payment, and it prohibits a credit scoring model from using the fact an individual is participating in a credit restoration or rehabilitation program to reduce the consumer’s credit score.

    The measure establishes new protections for consumers who have been the victim of fraud or abuse, such as predatory lending, that can negatively impact their credit score. Specifically, it requires credit bureaus to remove adverse information relating to a private education loan or a mortgage loan if the CFPB or a court rules that the loans resulted from unfair, abusive, fraudulent, discriminatory or illegal acts or practices by a financial institution. It also grants consumers who have been the victims of financial abuse or fraud by spouses, relatives or caregivers the right to challenge adverse information on their credit report.

Medical Debt

    The CFPB has found that the medical billing process is prone to consumer confusion, and that many consumers often delay or withhold payments until they have resolved or clarified disputes with their insurance company or their health care providers.

    To prevent such delayed payments from affecting a consumer's credit worthiness, the measure prohibits any medical debt from being placed on a credit report until one year after the first billing delinquency, and it prohibits a credit report from including any debt related to a medically necessary procedure. The bill requires credit bureaus to remove any fully paid or settled debt related to medical services and products within 45 days of full payment.

Study on Alternative Credit History

    The CFPB also must conduct a study on the positive and negative impacts of including nontraditional data on credit reports — such as a history of utility or phone bill payments — including the affects on consumer privacy and potentially discriminatory effects. The Government Accountability Office (GAO) and CFPB have found that consumers with no traditional credit history often have difficulty in accessing affordable loans or credit. The CFPB must report to Congress on its findings and provide recommendations for any legislative or regulatory changes.

Credit Dispute Process

    The bill updates the credit dispute process outlined in the Fair Credit Reporting Act to increase information sharing between credit bureaus, credit information furnishers and consumers, and it requires credit bureaus to conduct additional training for employees on the dispute resolution process.

    Under the measure, each credit bureau must create a public webpage that contains a clear and concise description of how to dispute an item on a credit report, including the process for submitting required information. The description must also be available in common foreign languages and accessible for consumers with impaired vision. Credit bureaus must provide consumers with a revised consumer report and credit score if their file was changed due to an investigation. They also must include a notation in the credit report of any information that is being disputed, although consumers could opt out from this requirement

    Consumers would have the right to appeal the results of a credit reporting agency’s investigation, free of charge, within 120 days of receiving the investigation results. Credit bureaus must provide consumers with confirmation of the appeal request and the results of the appeal.

    The CFPB must establish standards for credit bureaus to ensure the accuracy of credit reports as well as procedures for reviewing, monitoring and correcting credit information, including standards for the dispute resolution process.

Credit Furnisher Requirements

    The bill requires furnishers of credit information (such as banks and businesses) to notify the consumer when it has adverse information it plans to submit to credit bureaus — before submitting that information to a credit bureau.

    Furnishers of information must retain the information for the full duration of time it will appear on a credit report.

     It also establishes new requirements for furnishers to provide information to credit bureaus as part of a dispute investigation, and prevents furnishers from dismissing a consumer dispute as frivolous or irrelevant.

    The CFPB must take corrective actions against furnishers who repeatedly furnish inaccurate or incomplete information, including by authorizing the CFPB to temporarily prohibit the furnisher from providing information to a credit bureau. The CFPB must also ensure that such adverse information reported by the furnisher is promptly removed from an individual's credit report.

Credit Scores

    While federal law currently requires all nationwide Credit Reporting Agencies to provide one free credit report to consumers each year if requested, consumers do not have the right to obtain a free credit score. CFPB consumer surveys have found that many consumers have difficulty understanding a credit report on its own and that more information, such as a credit score as well as information on what is used to calculate a credit score, can help consumers better understand this information and use it to make more financially sound decisions.

    The bill requires credit bureaus to provide consumers, upon request once a year, a free credit score along with explanatory information about how the credit score was calculated. These disclosures must include at least four key factors that adversely affected the consumer’s credit score, at least four factors that positively affected the credit score, and, when possible, specific actions consumer can take to improve their credit score. The measure mandates that credit bureaus maintain file information on a consumer's credit score for two years from the date the information is generated.

    If it is not practical to provide a consumer with a credit score when requested, a credit bureau must provide the consumer with a so-called "educational credit score," typically a credit bureau's proprietary credit scoring model based on the information in the consumer’s credit report. These scores can give consumers an approximate idea of their credit worthiness, but they are not the actual credit scores relied upon by creditors and lenders.

    Credit bureaus on their websites must inform consumers of their right to obtain a free credit score once a year, as well as identify other instances in which consumers are also entitled to free copies of their scores (similar to the rights for an individual's credit report for free).

    Private educational lenders, mortgage lenders and motor vehicle lenders would be required to provide consumers with free copies of any credit reports and credit scores they used to underwrite a lease or loan agreement, before the consumer signs the contract. Those lenders would be prohibited from passing any of the costs of obtaining the reports to the consumer.

Credit Score Formation

    The bill directs the CFPB, in consultation with the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit Union Administration, to issue regulations and standards for determining and validating the accuracy and predictive value of credit scoring models.

    The CFPB must conduct a review of the models at least every two years to determine if the factors used in the scoring models are effective. Following the reviews, the agency may prohibit a credit bureau and other institutions from considering or including certain factors are part of their models.

Other Provisions

    The bill requires credit bureaus that provide a credit monitoring product or service to consumers under promotional terms to notify a consumer when the promotional period is ending, and it prohibits the credit bureaus from continuing to sell the product without the consumer's expressed agreement. (This provision prevents a credit bureau from automatically converting a free promotional credit reporting service into a paid subscription service without the consumer's knowledge.)

    It authorizes the CFPB to set fair and reasonable fees on credit reporting and credit scoring products and services sold by credit bureaus to consumers, and requires the CFPB to issue a rule requiring credit bureaus to provide information, disclosures and other communications with consumers in each of the 10 most commonly spoken languages in the United States (as determined by Census Bureau), as well as in formats accessible to individuals with hearing or visual impairments.

    The CFPB also must establish and maintain a publicly accessible registry of credit bureaus and any other agencies it determines provide similar products and services.

Multiple Credit Inquiries

    Under many credit scoring models, too many credit inquiries in too short a period of time can negatively affect a consumer's credit score. Such inquiries can include a prospective landlord or mortgage lender reviewing a customer's credit, or a consumer reviewing their own credit history for errors. The impact of these inquiries on credit scores can discourage consumers from shopping around for better interest rates or reviewing the accuracy or their credit reports, the CFPB has found.

    The bill establishes a standard 120-day period during which all credit inquiries "of the same type," are treated as one inquiry, to prevent them from harming a consumer's credit score. The bill defines an inquiry of the same type as those where the credit bureau has reason to believe that the multiple inquiries are all made for the purpose of determining a consumer's creditworthiness when seeking to obtain a mortgage loan, a vehicle loan, a private education loan, or other financial products approved by the CFPB.

Identity Theft and Fraud Protections

    The measure expands the scope of existing identity theft tools, such as access to records and the removal of credit inquiries, to encompass other types of fraudulent activity, as well as unauthorized disclosures of consumer data. It directs the CFPB to issue rules defining classes of consumers who may receive free credit monitoring and other identity theft protection services, including victims of fraudulent activity, military servicemembers, or a consumer who is unemployed, is over the age of 65, or is a recipient of public assistance.

    It also extends from 90 days to one year the required duration of fraud protections to be provided.

Private Student Loan Debt

    The bill requires credit bureaus to remove adverse information about delinquent or defaulted private education loans from the credit reports of borrowers who demonstrate a history of timely repayment for those loans. Specifically, it would prohibit credit bureaus from including this information in a credit report if a borrower makes nine out of 10 consecutive monthly payments during the 10 months immediately after the delinquency or default occurred.

    The measure allows certain borrowers to stop making monthly payments for a set period of time during that 10-month period — including for deployed Armed Forces members and residents living in federally declared disaster areas. The CFPB could also grant this grace period to individuals (or a class of individuals) who demonstrate hardship, such as unusual extenuating circumstances or events that result in severe financial barriers.

Employer Use of Credit Scores

    Many companies use credit information when making employment decisions, largely as part of a larger background check on job applicants. According to the Society for Human Resource Management (an HR professional association), this information helps reduce the likelihood of employee theft and reduces the company's liability. However, some observers have criticized this practice, arguing that there is no direct link between credit history and job performance. Studies have also found that this practice often disproportionately impacts low- and middle-income households, making it harder for those individuals who are facing financial difficulties to obtain a job.

    Under current federal law, an employer must obtain consent from a prospective employee to perform a credit check. If the applicant is denied a job due to information in the credit report, the credit bureau must provide to the consumer a copy of the report.

    The bill prohibits an employer from using an individual's credit report to make an employment-related decision, unless obtaining the report is required by law or the information in the report is being used in relation to a national security investigation. It also prevents credit bureaus from providing employers with an individual's credit report, except when it meets these conditions.

    The measure prohibits an employer from requiring or requesting credit information from an employee or prospective employee as a condition of employment, and it prevents consumers from waiving these requirements. An employer could not pass the cost associated with obtaining a credit report on to the consumer.

    Finally, if a credit report is used to make an adverse employment decision under this section, the bill requires an employer to disclose additional information to the consumer, including the reasons for using the credit report, the citation to applicable law, and the specific factors from the report on which the decisions were based.

CBO Cost Estimate

    As of press time, the Congressional Budget Office (CBO) had not released a cost estimate for the modified version of the bill expected to be considered.

    However, to offset the costs of the bill's provisions, the measure reduces the amount of discretionary surplus funds that may be held by the Federal Reserve by $26 million — from $6.825 billion to $6.799 billion. The Fed's surplus fund holds the net earnings of each of the federal reserve banks after they pay their annual dividend; amounts in excess of the surplus limitation are transferred to the general fund of the Treasury.

    Reducing the Fed's discretionary surplus fund limit has been used in the past by Congress to offset spending and reduce deficits