Finance: Consumer Credit
Putting Borrowers in a Bind
Fearful of competition, lenders won't divulge credit records
Think lenders are invading your privacy by doling out your credit information to anyone that asks? Wrong. Some of the largest credit-card issuers and mortgage companies regularly withhold information about their consumers' accounts from credit bureaus--to keep competitors from raiding their customers.
The practice, which has drawn protests from consumer groups and regulators since it surfaced last year, hurts not only poor credit-risk customers trying to improve their ratings. It also prevents some of banks' highest-rated customers from being offered bigger credit lines. A study by credit bureau Experian Information Services Inc. found that one out of four consumers gets a lower credit rating than he or she deserves.
The issue comes as competition in the credit-card industry gets fiercer and mortgage lenders strain for profits. Credit-card industry leaders, including Discover Financial Services, American Express, and Citigroup are refusing to report some customer information, citing competitive pressures. They haven't changed their policy despite a mid-January warning from a consortium of bank regulators. "If everyone else agrees to report, we will," said an American Express spokeswoman, echoing the sentiment of other lenders.MISSED SAVINGS. Withholding account information, and the stifling of competition that goes with it, has its most negative effects in the market for home loans to customers with poor credit history. For these borrowers, a record of prompt payment translates into a lower-interest loan and substantial savings. Refinancing a $100,000, 30-year mortgage with an annual percentage rate of 10%--not uncommon for a borrower with poor credit--into a more standard 8.25% loan would save the homeowner $1,600 a year.
Some subprime mortgage servicers are only reporting delinquencies, not prompt payments, the Federal Home Loan Mortgage Corp. says in a Feb. 22 letter to mortgage-service companies. The agency is stepping up its auditing efforts in this area and is threatening lenders with fines or suspension from Freddie Mac programs.
Consumers can't get better rates if lenders don't know they've been paying on time. The result has put consumer groups and credit bureaus--long-time adversaries on many issues--on the same side. Says Edmund Mierzwinske, a consumer advocate with U.S. Public Interest Research Group: "Most people don't know they're suffering."
The practice is "patently unfair," says Representative John J. LaFalce (D-N.Y.), adding that lenders "may also invite tougher regulatory scrutiny" if they continue. Incomplete credit information makes lending more risky for banks, adds David D. Gibbons, deputy comptroller for credit risk, Office of the Comptroller of the Currency. Gibbons stops short of recommending regulations. "It's a matter between lenders and credit bureaus," he says. The American Financial Services Assn., the trade group for nonbank lenders, said in January that its members would voluntarily report all information to credit bureaus. But so far, the problem persists.
The credit bureaus are trying to deal with it themselves. Trans Union and Equifax Inc. have already told lenders that they can't buy information about the competition unless they supply the same type of information about their own accounts. Experian expects to put out a "comprehensive" policy statement on the subject this month.
The reluctance to report comes as credit bureaus are being squeezed from all sides. The consolidation in financial services means fewer lenders requesting data. Meanwhile, lenders are relying more heavily on their own scoring systems to rate customers. The credit bureaus "need this data, or else the value of the whole data set is reduced," said Gregory E. Gieber, an analyst with Brown Brothers Harriman & Co.
Credit-scoring experts are quick to point out that the system has always been voluntary, and relatively reliable. "If there is regulation that comes into play, will they understand the issues?" asks Cheryl St. John, a senior vice-president at Fair, Issac & Co., which works with bureaus to rate borrowers.
Perhaps not, but if lenders continue to withhold information, regulation is inevitable.By Heather Timmons in New York