Insights

Today's Trends in Credit Regulation

The Bureau Scores Credit Scores
By Michael A. Benoit

September’s big news from the Consumer Financial Protection Bureau deals with credit reports. On September 25, the Bureau released a study that compared credit scores sold to creditors with those sold to consumers. The study found that about one out of five consumers would likely receive a meaningfully different score than would a lender.

The Dodd–Frank Act directed the CFPB to compare credit scores sold to creditors with those sold to consumers by nationwide credit bureaus and to determine if differences between those scores harm consumers. The Bureau’s study, based on scores from 200,000 credit files from TransUnion, Equifax, and Experian, follows a 2011 Bureau study that described the credit scoring industry, the types of credit scores, and potential problems that could arise for consumers from differences between the scores they buy and the scores creditors use.

The Bureau’s study found three things:

  • One of five consumers would likely receive a meaningfully different score than would a creditor. When a consumer buys his or her score from a bureau, that score may be meaningfully different from the score a lender would use in making a credit decision. A meaningful difference means that the consumer would be likely to qualify for different credit offers – better or worse – than the consumer would expect to receive based on the score the consumer bought.
  • Score discrepancies may harm consumers. When discrepancies exist, consumers may take action that does not benefit them. For example, a consumer who has reviewed his or her own score may expect a certain price from a lender and may waste time and effort applying for loans that he or she doesn’t qualify for or may accept offers that are worse than he or she could get.
  • Consumers are unlikely to know about score discrepancies. There is no way for consumers to know how the scores they receive will compare to the scores creditors use in making lending decisions. As such, consumers cannot rely exclusively on the credit score they receive to understand how lenders will view their creditworthiness.

Based on these three findings, the Bureau made these recommendations for consumers: shop around for credit, make sure that the information in the consumer’s credit file is accurate, and use error disputing procedures to correct any errors.

The Bureau began supervising consumer reporting agencies on September 30. The CFPB’s supervisory authority will cover about 30 companies that account for about 94% of the market’s annual receipts. The Bureau’s examiners will verify that consumer reporting companies are complying with federal consumer financial laws, using and providing accurate information, handling consumer disputes, making disclosures available, and preventing fraud and identity theft.

Discovering the Bureau’s Enforcement Powers

On September 24, the Federal Deposit Insurance Corporation and the Bureau announced a joint enforcement action with an order requiring Discover Bank to refund about $200 million to more than 3.5 million consumers and to pay a $14 million civil money penalty. The joint investigation concerned deceptive telemarketing and sales tactics used by Discover to mislead consumers into paying for various credit card “add-on products.” “Payment Protection” was marketed as a product that allows consumers to put their payments on hold for up to two years in the event of unemployment, hospitalization, or other qualifying life events. “Credit Score Tracker” allowed a customer unlimited access to his or her credit reports and credit score. The third product, “Identity Theft Protection,” was marketed as providing daily credit monitoring. “Wallet Protection” was sold as a service to help a consumer cancel credit cards in the event that his or her wallet is stolen.

The agencies charged that Discover’s telemarketing scripts contained misleading language likely to deceive consumers about whether or not they were actually buying a product. Discover’s telemarketers also often downplayed key terms and spoke quickly when prices and terms of the add-on products were disclosed.

The agencies charged that consumers were misled about the fact that there was a charge for the products, misled about whether or not they had bought the products, enrolled for products without their consent, and not told of material eligibility requirements for certain benefits. Under the order, Discover agreed to stop deceptive marketing and to pay restitution to consumers who bought the products.

The order required Discover to provide refunds or credits without any further action by consumers, submit to an independent audit, and pay a $14 million penalty ($7 million to the U.S. Treasury and $7 million to the CFPB’s Civil Penalty Fund).

Michael A. Benoit is a partner in the Washington, D.C., office of Hudson Cook, LLP. Michael can be reached at 202.327.9705 or by email at mbenoit@hudco.com.

Article Archive

2018   2017   2016   2015   2014   2013   2012   2011   2010   2009