On February 21st, the Occupy Wall Street Alternative Banking movement sent a letter to a gentleman named Richard Cordray. In case you don’t know who Richard Cordray is, he’s the newly appointed Director of the Consumer Financial Protection Bureau, or “CFPB” for short. Their letter asks the CFPB to implement new regulations relative to credit scoring. Whether you like or dislike the Occupy Wall Street movement, major media outlets, like the Washington Post, are reporting on their suggestions. The purpose of this piece is to address their suggestions and offer an industry insider’s perspective.
Credit Scoring: A Product, Not a System
The primary suggestion is that the CFPB take over and “centrally manage the credit scoring system” instead of allowing the credit bureaus to do so. The suggestion illustrates a misunderstanding of the credit scoring environment by the OWS folks. First, credit scoring is product, not a system. Think of credit scores like soft drinks, cereals, or beers. There are countless different options that all fall under a broad heading. There is no one credit score just like there isn’t one soft drink.
Even within the category of FICO, the recognized industry standard, there are dozens of different FICO scores that are commercially available for sale by the three national credit reporting agencies. To that point, the credit bureaus don’t “manage” credit scores. Credit scores are built by their respective software developers and then either resold by the credit bureaus or installed at countless companies such as lenders, insurers, and credit card processors.
The CFPB taking over credit scores would be like the CFPB taking over the soft drink industry. The suggestion simply doesn’t make sense.
Making Credit Scoring Models Public?
The next suggestion is that the CFPB should make credit scoring models “public and freely available.” This has been a constant request since consumers became first exposed to FICO scores in the late 1990’s because of Fannie Mae and Freddie Mac’s mandates that FICO scores be used for mortgage underwriting. The problem is that even if credit scoring models were publicly available, very few people would know what they’re looking at.
A credit scoring model in print results in a stack of paper about 3 inches thick. It’s not as simple as saying things like, “late payments are worth 10 points” or “inquiries are worth 20 points.” That’s not how credit scores work.
The only people who would understand what they’re looking at would be modelers. This would be unacceptably unfair to expose intellectual property to the single group of people who could use it to replicate and replace scoring systems. And, it does nothing to help consumers, but it certainly would cost people jobs. What do you think would happen if credit scoring companies lose revenue because their models have been compromised and “knocked off?”
Meaningless Score Cards
The next suggestion is that the free credit reports sent to consumers via www.annualcreditreport.com (the annual freebies) should “always contain the consumer’s numeric credit score.” The problem with that suggestion is two-fold. First, it’s evident that consumers don’t care about claiming their free credit reports. Only about 4% of the free credit reports consumers are entitled to under Federal law are claimed each year. There’s simply no evidence suggesting the inclusion of a credit score would increase that abysmal take rate.
The second problem is the same as with the first suggestion, there is no such thing as a consumer’s single numeric credit score. Sending the consumer every single one of their credit scores would result in a small booklet being sent to the consumer and most of those scores are not your FICO score and aren’t on their 300 to 850 scale and wouldn’t make sense to the consumer. Oh, by the way, all of those scores will change when something on your credit report changes, so your “score booklet” would become meaningless in a few days.
The next suggestion actually makes a great deal of sense. “There should be a way for an individual to forecast how his or her credit score would change under various circumstances – e.g., if he/she paid their electric bill late, had a different credit card balance, etc.” I know this is nitpicking, but your electric bill isn’t on your credit report, so missing a payment wouldn’t cause any change to your score. It would have to go to collections before it would be reported.
Notwithstanding my pickiness, understanding how your scores would react to changes to your credit report is important. In fact, it’s so important that there are already a collection of free estimator and simulator tools readily available to consumers to run “what if” scenarios with their credit scores. FICO has two on their website and Bankrate has one (built by FICO) on their website, as do several other websites. Point being, there’s no need for the CFPB to get involved here, as the tools have already been around for many years.
Disputing the Evidence
The next one is actually more about credit reports than it is about credit scores. “There should be due process for disputes over negative credit information.” This is absolutely a reasonable request. The problem is the OWS folks aren’t recognizing the fact that there are at least two Federal and 50 state laws that already provide for this. The Fair Credit Reporting Act (FCRA), which has been around since 1970, defines a required dispute protocol and provides penalties for non-compliance. Each state has their own version of the FCRA, some identical and some slightly different.
The last one I’m covering is a little maddening. “Credit scores should be tied to individuals and should not be imputed to spouses.” It’s pretty commonly known that credit reports are stored and maintained at the individual consumer level, not at the “family” level. Because of this, credit scores of one individual are never “imputed” to their spouses or any other person. As such, there’s no need to take action, on this one or any of the others.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.