Giving Credit Scores a Post-Crash Overhaul

Representative Maxine Waters of California, the ranking Democrat on the House Financial Services Committee, has proposed a bill that would overhaul credit reporting, essentially from top-to-bottom. To call the draft bill comprehensive would be an understatement—the summary (PDF) alone is seven pages long. Whether or not it passes—probably unlikely, given the state of Congress these days—it provides a thorough wish list to address the concerns that consumer advocates have flagged in the years since the market crashed.

The legacy of bad debts: Missed payments or defaults can stay on a credit report for seven years  to ten years. The legislation would reduce that time to four years to seven years on the argument that older debts aren’t useful in predicting the future consumer behavior. The bill also removes the black mark for borrowers who have rehabilitated delinquent loans through arrangements such as settling with a lender or getting a mortgage modification through a government-supported program.

Not all debts are the same: If borrowers miss payments on federal student loans and then get back on the wagon by making at least nine consecutive on-time payments, the missed payments are removed from their credit report. But private lenders still have to report the original delinquencies, a requirement that the bill would remove. And in a reaction to the loopy lending that characterized the housing bubble, the bill would also remove adverse credit information that resulted from any mortgage that was lent in an “unfair, deceptive, or abusive” way, as determined by the Consumer Financial Projection Bureau, the Federal Trade Commission, or the courts.

Disputing errors: The Federal Trade Commission estimates that as many as one in five Americans have experienced errors on their credit reports and that for a quarter of them, the errors negatively affected credit scores. The bill offers more help for consumers who dispute their errors. It says lenders must keep the original paperwork to prove a debt is accurate for as long as the information remains on the credit report. It also says a credit history being disputed by a borrower shouldn’t appear on a credit report while it is under investigation, so long as the dispute isn’t “frivolous or irrelevant.”

Consumer products: The three major credit bureaus each let consumers access a free credit report a year, but they charge to hand out credit scores. The bill would require each bureau to give a free credit score every year and to charge no more than $10 for additional scores. It prohibits the bureaus from advertising “free” credit scores that effectively sign consumers up for services that automatically start charging fees after a brief trial period.

Limit use by employers: Almost half of employers use credit reports to screen applicants and make hiring decisions. The bill would restrict the reports’ use to all but a few cases, such as when required for security clearances or required by law. The only other time credit reports could be used would be in ways determined by the Consumer Financial Protection Bureau to be “a more reliable predictor” of employee performance than alternate available scoring methods.

Inaccurate credit reports don’t help lenders or borrowers. The question for lawmakers is what’s needed to ensure accuracy. They should balance the need to keep enough information to help lenders predict a borrower’s behavior while removing negative factors that aren’t fair or relevant.

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