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A T A CT CT FAC FA A A C F t F t A A c c F ct t A T A c C T A T A A C C T F T F A A C C A Report F t F to Congress t c c F ct t A T A c t C T A T A Sections c TUnder A C C T 318 and 319 of F A A C C F t F t A A c the Fair and Accurate Credit c t F t F ct A A c Transactions Act ofT2003 T A A c A C C T A T F T AC AC FA FA ct t F t F ct A c ct Ac T A T A CT CT A A C C T F F t A A C c F t t A t F Federal A c c t Trade Commission A T A c c C C T A T A A A C F T CT AC F A December 2004 F t F t A A c c F ct t A T A c C T A T A A C C T T F A A C C F t t A FA t F ct c c A A c t C T A T A c A CT CT AC FAC FA F Federal Trade Commission Report to Congress Under Sections 318 and 319 of the Fair and Accurate Credit Transactions Act of 2003 December 2004 Federal Trade Commission Deborah Platt Majoras, Chairman Orson Swindle, Commissioner Thomas B. Leary, Commissioner Pamela Jones Harbour, Commissioner Jon Leibowitz, Commissioner Federal Trade Commission Federal Trade Commission Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. The Information Gathering Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 III. Accuracy And Completeness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 B. The Credit Reporting System in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 C. Challenges in Assuring Accuracy and Completeness . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 D. The Accuracy and Completeness Requirements of the FCRA . . . . . . . . . . . . . . . . . . . . . 16 E. FTC Efforts to Promote Compliance with the FCRA Accuracy Requirements . . . . . . . 18 F. Prior Studies of Accuracy and Completeness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 G. FTC Proposed Pilot Study and Nationwide Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 IV. Data Matching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 B. CRA Databases and the Matching Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 C. Benefits and Costs of the Proposed Matching Requirements . . . . . . . . . . . . . . . . . . . . . . 46 D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 V. Same Credit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 B. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 C. Benefits and Costs of a “Same Report” Requirement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 VI. Negative Information Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 B. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 C. The Benefits and Costs of Negative Information Notices . . . . . . . . . . . . . . . . . . . . . . . . 73 D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 VII. Common Unreported Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 B Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 C. Possible Approaches to Increase Reporting of Non-Traditional Credit Data . . . . . . . . . . 82 D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 VIII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Appendix A: Roundtable Federal Register Notice Appendix B: Pilot Study Federal Register Notice Appendix C: “Same Report” Federal Register Notice Federal Trade Commission Federal Trade Commission Executive Summary The Federal Trade Commission (“FTC” or “Commission”) submits this report pursuant to Sections 318 and 319 of the Fair and Accurate Credit Transactions Act of 2003, Pub. L. 108-159, 117 Stat. 1952 (“FACT Act”). The FACT Act, which was enacted on December 4, 2003, amends the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq. (“FCRA”), and contains, among other things, a number of provisions designed to enhance the accuracy and completeness of credit reports. Among these provisions are Sections 318 and 319, which require the Commission to conduct five studies regarding credit report accuracy and completeness. The accuracy and completeness of credit report data is of paramount importance to consumers. Credit reports are used by creditors and others to make critical decisions about the availability and costs of various products and services, including credit, insurance, and employment. The reports enable creditors to make fast and accurate decisions in providing these products and services, which benefits both creditors and consumers. At the same time, any errors in the data contained in these reports can cause consumers to lose these benefits or pay higher costs for them. Since the emergence of the credit reporting industry nearly a century ago, creditors and others have furnished data to the consumer reporting agencies (“CRAs”) on a voluntary basis. In 1970, Congress passed the FCRA, which provided significant consumer protections to, among other things, assure the accuracy of the data in credit reports. The FCRA’s protections include mechanisms for consumers to learn about possible errors in their credit reports and have them corrected, and a requirement that the CRAs that collect this data follow “reasonable procedures to assure maximum possible accuracy of the information” they report. Amendments in 1996 strengthened these protections by, among other things, placing certain legal obligations on creditors and other furnishers of data to the CRAs with respect to the accuracy of the information they provide. In 2003, the FACT Act further enhanced the FCRA by adding new requirements related to accuracy and completeness. These requirements include measures to strengthen the dispute and reinvestigation process, a new consumer right to obtain a free annual file disclosure, new requirements on those who furnish information to the CRAs, and measures designed to reduce identity theft (the unauthorized procurement and use of another’s personal information for fraudulent purposes). In addition to imposing new substantive protections, the FACT Act also directs the Commission to study and report to Congress on various issues related to credit report accuracy and completeness. Specifically, Section 319 requires an ongoing study of credit report accuracy and completeness, with a final report due to Congress in 2014. (See “Accuracy and Completeness,” below.) During the ongoing study, the Commission must submit five interim reports to Congress every two years beginning in December 2004. Part III of this report is the Commission’s first interim report to Congress. i Federal Trade Commission Section 318 directs the Commission to study and report to Congress on the benefits and costs of various specific proposals for improving credit report accuracy and completeness. Specifically, the studies must examine: • the effects of requiring the CRAs to match more points of identifying information (e.g., name, social security number, address) to ensure that a consumer is the correct individual to whom a credit report relates (See “Data Matching Proposal,” below); • the effects of requiring that a consumer who has experienced an “adverse action” (for example, the denial of credit) based on a credit report receives a copy of the same report that the creditor relied on in taking the adverse action (See “Same Report Proposal,” below); • the effects of requiring notification to consumers when negative information has been added to their credit reports (See “Negative Information Notice Proposal,” below); and • whether there are any common financial transactions that are not generally reported to the CRAs, but that would provide useful information in determining creditworthiness, and what actions might be taken to encourage greater reporting of these transactions. (See “Common Unreported Transactions,” below.) Parts IV, V, VI, and VII of this report comprise the Commission’s Report to Congress under Section 318. Over the past year, the FTC has used a variety of means to obtain information for these studies. Among other things, FTC staff interviewed consumer advocacy groups, the CRAs, resellers of credit reports, furnishers and users of credit report information, and numerous other knowledgeable sources. The staff also issued Federal Register Notices seeking relevant information and convened a roundtable meeting of experts to discuss issues related to designing the ongoing Section 319 study. For all of the studies, the FTC focused primarily on the activities of the three nationwide credit bureaus, which comprise the vast majority of the credit reporting industry. The studies also focused on the use of credit reports in credit transactions, which is the chief concern of the Section 318 proposals. Accuracy and Completeness Study In its ongoing accuracy and completeness study, the FTC has thus far (1) examined the history and current practices of the credit reporting industry; (2) identified the key areas where errors in credit report data could occur; (3) reviewed and evaluated the studies conducted to date on credit report accuracy and completeness; (4) examined possible methodologies for conducting a more reliable and comprehensive study, focusing in particular on the possibility of conducting a national consumer survey; and (5) proposed to conduct a pilot study to determine the feasibility of such a national consumer survey. As described in the report, there are a number of potential sources of inaccuracy and incompleteness in credit reports. These include the following: • First, a creditor or other furnisher of data to the CRAs may provide information that is incorrect, may provide incomplete information, or may not provide information at all. ii Federal Trade Commission • Second, there may be problems with assigning data to the proper consumer’s file, perhaps because the identifying information accompanying the data is incomplete or wrong. In such cases, the data might be assigned to the wrong file – thus creating a “mixed file” that includes data from more than one consumer. Alternatively, the CRA might mistakenly create a new file for a consumer that already has a file in the CRA’s system – thus creating a “fragmented file.” • Third, there may be problems when the CRA retrieves a consumer’s file in response to an inquiry from a user of credit reports. For example, a CRA might send the wrong report, might send multiple reports (one or more of which pertain to the right person), or might send no report at all for a consumer with a file in the system. In addition, there is a trade-off between accuracy and completeness. For example, when a CRA receives data from a furnisher, the information identifying the consumer may be inaccurate or incomplete. In such cases, the CRA must choose between adding information to an existing file or creating a new file. If the CRA adds information to an existing file, and the information in fact belongs to a different consumer, the CRA has created a “mixed file,” which is a source of inaccuracy. Further, if the added information is negative, it can lead to an erroneous denial of credit or an increase in the cost of credit. On the other hand, if the CRA creates a new file, but the information belongs to a consumer’s file already in the CRA’s system, the CRA has created a “fragmented file,” which is a source of incompleteness. Such a file can harm consumers to the extent that it fails to include information that reflects the consumer’s positive credit experience. Prior studies of consumer report accuracy and completeness essentially fall into three categories – consumer surveys, studies based on dispute data statistics, and studies based on anonymous data provided by the CRAs about a large number of individual consumers. The FTC’s review of these studies determined that, although each approach provides some useful information about credit report accuracy and completeness, none provides a comprehensive view. Indeed, none of the existing studies relied on the participation of all three of the key stakeholders in the credit reporting process: consumers, data furnishers, and the CRAs. Questions have also been raised about the reliability and representativeness of the samples used in the prior studies. For many of the same reasons, looking to consumer complaints filed with the Commission and other law enforcement agencies does not give a statistically reliable picture of the accuracy of all information in CRA files. (Consumer complaints are important, however, for other FCRA compliance purposes and the FACT Act thus prescribes a complaint-sharing mechanism, discussed further below.) The FTC is evaluating whether and how to conduct a survey that would attempt to address some of the limitations of the prior studies. In particular, it would focus on consumers and their experiences in identifying and disputing errors in their credit reports, would be based on a nationally representative sample, and would use a reliable method for identifying errors and omissions. The survey would also categorize errors by type and seriousness in terms of potential consumer harm. The pilot study will both test the feasibility of a national survey and allow the FTC to estimate the potential costs of such a survey. Depending on the outcome of the pilot study, the FTC may conduct further pilot studies; it may also need to reassess the design currently being contemplated for the national survey. The results of the pilot study, and the next iii Federal Trade Commission steps taken by the FTC in its ongoing accuracy study, will be provided in a later interim Report to Congress under Section 319. Data Matching Proposal The FTC’s Data Matching study examines the costs and benefits of requiring the CRAs to increase the number of points of identifying information used to match a consumer to a credit report – for example, requiring an “exact match” on name, social security number, address, and zip code. The proposed requirement is intended to address an important potential source of inaccuracy in credit reporting – namely, that a CRA could fail to assign data to the correct consumer’s file, or could furnish a file to a creditor or other user of credit reports relating to the wrong consumer. The FTC’s study examines the effects of the proposal on both the process of assigning data to consumer files (“file building”) and the process of retrieving data in response to an inquiry (“file retrieval”). As described in the report, matching difficulties arise from problems with the data available to the CRAs. For example, furnishers of information to the CRAs may possess and report identifying information for individual consumers that is not accurate or complete. As a result, matching with 100% certainty is sometimes impossible. The report concludes that, if the proposed matching requirement were imposed on the matching process for file building, there would likely be a reduction in “mixed files” because data would be less likely to be assigned to the wrong file. Although mixed files can be costly for consumers, the purpose of the FCRA’s dispute procedure is to reduce these costs by enabling consumers to spot and correct errors. (How CRAs and furnishers handle consumer disputes is the subject of another study, which will be separately reported to Congress under Section 313(b) of the FACT Act.) For this reason, the benefits of the proposal may be limited. At the same time, because the data provided by furnishers is imperfect and unlikely to allow precise matching, the proposal also would likely lead to more “fragmented files.” If this occurred, credit reports would be less informative and the cost of credit could increase substantially. For file retrieval, the proposed requirement could lead to a reduction in the number of times the CRA furnishes the wrong file. However, available evidence suggests that the incidence of this problem may be quite small, whereas the matching requirements could impose substantial costs. For example, the requirements would likely increase the frequency with which a user’s request does not return any file, which would impose costs and inconveniences on both users of credit reports and credit applicants. The report also discusses a new FACT Act requirement which may further the same goals intended by the matching proposal. Section 315 of the FACT Act requires CRAs to notify the user of a credit report when the address provided for a consumer “substantially differs” from the addresses in the CRA’s file. Although the main goal of this provision is to create a “red flag” pointing to possible identity theft, such a notice would also serve to notify the user of the possibility of an error. The FTC and the federal banking agencies are currently developing regulations to implement this new requirement. iv