An overview of consumer data and credit reporting

Federal Reserve Bulletin, Feb, 2003 by Robert B. Avery, Paul S. Calem, Glenn B. Canner

For some time, the Board of Governors of the Federal Reserve System has sought to obtain more detailed and timely information on the debt status, loan payment behavior, and overall credit quality of U.S. consumers. Such information could facilitate the Board's analysis of macroeconomic conditions, improve its understanding of the way credit is provided to consumers, and enhance the System's supervision of banking activities. For decades, information of this type has been gathered by credit reporting companies, primarily to assist creditors in evaluating the credit quality of current and prospective customers. The information gathered by credit reporting companies is vast and seeks to cover virtually all U.S. consumer borrowing. (1) To the extent that this information is complete, comprehensive, and accurate, it represents a potential new source of statistical data for the Federal Reserve on consumer credit markets and behavior.

To evaluate the potential usefulness of these data, the Federal Reserve Board engaged one of the three national credit reporting companies to supply the records of a nationally representative sample of individuals. (2) The data provide a unique opportunity to profile the nature and content of information contained in credit reporting company records.

Assessing the usefulness of these data as a potential source of information for the Board involves several tasks. This article is an initial step in the process; it examines the scope and content of the data, using a framework based on key aspects of credit evaluation. This approach is a natural way to begin the assessment process because the credit reporting companies' primary purpose for collecting these data is to facilitate credit evaluation. Future steps will focus on other aspects of this evaluation, including comparing measures of aggregate borrowing activity and credit quality derived from the credit reporting data with measures from other sources.

The article begins with a brief description of the way the credit reporting companies compile and report their data and gives background on the regulatory structure governing these activities. This description is followed by a detailed look at the information collected in credit reports. The discussion of these data is divided along the lines of the major components of consumer credit report data--credit accounts; public records relating to the person's debt or payment obligations (bankruptcy filings, liens, judgments in civil actions, and so on); collection agency accounts; and inquiries regarding credit status. The distribution patterns of items such as account balances, credit utilization, and measures of payment performance by type of account and creditor are broadly described. Key aspects of the data that may be incomplete, duplicative, or ambiguous as they apply to credit evaluation are highlighted in the analysis. The article concludes with a discussion of steps that might be taken to address some of the issues identified.

COMPOSITION AND SOURCES OF CREDIT REPORTING COMPANY RECORDS

Credit reporting companies gather information on an individual's experiences with credit, leases, noncredit-related bills, money-related public records, and inquiries and compile it in a credit record. A credit record generally includes five types of information:

* identifying information such as the name of the individual, current and previous residential addresses, and social security number

* detailed information reported by creditors (and some other entities, such as a medical establishment) on each current and past loan, lease, or non-credit-related bill, each of which is referred to here as a credit account (3)

* information derived from money-related public records, such as records of bankruptcy, foreclosure, tax liens (local, state, or federal), garnishments, and other civil judgments, referred to here as public records

* information reported by collection agencies on actions associated with credit accounts and noncredit-related bills, referred to here as collection agency accounts

* identities of individuals or companies that request information from an individual's credit record, the date of the inquiry, and an indication of whether the inquiry was by the consumer, for the review of an existing account, or to help the inquirer make a decision on a potential future account or relationship.

The consumer credit report, the basic product that the credit reporting companies provide to those seeking information about the credit history of an individual, is the organized presentation of the individual's credit record at the credit reporting company. (4) Industry sources report that credit reporting companies issue approximately 2 million consumer credit reports each day. (5) Access to the information and maintenance of each credit record is governed by conditions spelled out in the Fair Credit Reporting Act (FCRA)(see box "A Summary of Consumer Rights under the Fair Credit Reporting Act").

A Summary of Consumer Rights under the Fair Credit Reporting Act

The federal Fair Credit Reporting Act (FCRA) seeks to
promote accuracy, fairness, and privacy of an individual's
"consumer report" maintained by a "consumer reporting
agency" (or credit reporting company). (1) The FCRA provides
the following consumer rights and protections:

* The right to be told if information in a consumer
report has been used to take adverse action against
a consumer. Any person who uses information from a
consumer report obtained from a consumer reporting
agency to take adverse action against a consumer--such
as denying an application for credit, insurance, or
employment--must tell the consumer the name, address,
and phone number of the reporting agency that provided
the consumer report, inform the consumer of the right to
obtain a free copy of his or her consumer report within
sixty days of receiving the notice, and notify the consumer
of the right to dispute with the reporting agency the
completeness or accuracy of the consumer report.

* The right to see the contents of a consumer report.
Upon a consumer's request, a consumer reporting agency
must provide the consumer with all information in his or
her file at the time of the request, except for credit scores,
and identify each person who has requested it recently.
There is no charge for the report if an adverse action has
been taken against the consumer because of information
in a consumer report supplied by the reporting agency and
the consumer requests the report within sixty days of
receiving notice of the adverse action from the person
taking the adverse action.

* The right to dispute inaccurate or incomplete information
with the consumer reporting agency. If a consumer
notifies a reporting agency that his or her file contains
inaccurate or incomplete information, the agency must
investigate the items (generally within thirty days) by
presenting to the furnisher or source of the information all
relevant evidence submitted by the consumer, unless the
agency determines that the dispute is frivolous. The furnisher
or source must review the evidence, investigate the
disputed information, and report its findings to the reporting
agency. The agency must provide the consumer with a
written notice of the results of the investigation, a copy of
the consumer report as revised based on the results of the
investigation, notice of the procedures used in the investigation
(including the furnishers contacted), notice of the
consumer's right to add a statement to the file disputing
the accuracy or completeness of the information, and
notice of the consumer's right to request that the reporting
agency notify certain recent recipients of consumer
reports of the deletion of the disputed information.

* The right to have inaccurate information corrected or
deleted. A consumer reporting agency must remove or
correct inaccurate, incomplete, or unverified information
from its files, generally within thirty days after a dispute
is filed. However, the reporting agency is not required to
remove accurate data from a consumer's file unless it is
outdated information that is required to be excluded from
consumer reports.

* The right to dispute inaccurate items with the furnisher
or source of the information. If a consumer tells
a furnisher of information, such as a creditor who reports
to a consumer reporting agency, that specific information
is inaccurate or incomplete, the furnisher may not then
report the information to a reporting agency without
including a notice of the dispute.

* The right to have outdated information excluded from
a consumer report. In most cases, a consumer reporting
agency may not report negative information that is
more than seven years old. However, there are certain
exceptions:

--Information about criminal convictions may be
reported without any time limitation.

--Bankruptcy information may be reported for ten years.

--Information reported in response to an application for
a job with an annual salary of more than $75,000 has
no time limit.

--Information reported because of an application for
more than $150,000 worth of credit or life insurance
has no time limit.

--Information about a lawsuit, an unpaid judgment
against a consumer, or record of arrest can be reported
for seven years or until the statute of limitations runs
out, whichever is longer.

* Limits for access to a consumer report. A consumer
reporting agency may furnish a consumer report only to
a person with a permissible purpose recognized by the
FCRA--usually to consider an application for credit,
insurance, employment, housing rental, depository
account, or other legitimate business need, or in accordance
with the written instructions of the consumer.

* The requirement for consumer consent to furnish
reports to employers or to furnish reports containing
medical information. A consumer reporting agency may
not furnish a consumer report generally to a consumer's
employer or prospective employer, or a consumer report
containing medical information about the consumer in
connection with a credit or insurance transaction, without
the consumer's written consent.

* The right to choose to exclude a consumer's name
from consumer reporting agency lists for unsolicited
firm offers of credit and insurance. Creditors and insurers
may use reporting agency file information as the basis
for sending unsolicited firm offers of credit or insurance.
Such offers must include a toll-free phone number or
address established by the agency from whom the creditor
or insurer obtained the information and whom the consumer
may call or write to have his or her name and
address removed from future lists.

(1.) For the complete text of the FCRA, see 15 U.S.C. [subsection]
1681-1681u, on the Federal Trade Commission's web site
(http://www.ftc.gov).