Insights

Credit reports are widely used in the modern underwriting process. In a post Dodd-Frank world, the crucial role of credit reporting agencies in the lending industry make them a visible target for regulators.

In a 2012 study of credit report accuracy, the FTC determined that 26% of study participants found at least one potentially material error in their credit reports, and 13% of study participants experienced a change in their credit score as a result of modifications to their credit report after a dispute. A little over two years after the FTC study, the New York Attorney General's office reached a settlement with the three largest national credit reporting agencies, Experian Information Solutions, Inc., Equifax Information Services, LLC, and TransUnion LLC. (the "CRAs"). The CRAs maintain consumer credit information on approximately 200 million consumers.The New York Attorney General has been aggressive in regard to consumer protection, and investigations into credit reporting agency practices were not a surprising development.

The press release accompanying the settlements states that it was designed to "improve credit report accuracy; increase the fairness and efficacy of the procedures for resolving consumer disputes of credit report errors; and protect consumers from unfair harm to their credit histories due to medical debt." Attorney General Eric T. Schneiderman said the settlement will "reform the entire industry and provide vital protections for millions of consumers across the country."

The settlement did not provide for any monetary penalties and the CRAs did not admit any wrongdoing. However, the settlement requires the agencies to institute a number of reforms over a three-year period to improve the process for correcting credit report errors and to improve the overall accuracy of consumers' credit reports. Many of these reforms will be instituted nationwide. The settlement requires the CRAs to reform by:

• Improving the dispute resolution process. The CRAs must employ specially-trained employees to review all supporting documentation submitted by consumers for all disputes involving mixed files, fraud, or identity theft. For all categories of consumer disputes, when a creditor verifies a disputed item through the automated dispute resolution system, the CRA will not automatically reject the consumer's dispute but will have an employee who has discretion to resolve the dispute review the supporting documentation.
• Mitigating impact of medical debt on credit reporting. The CRAs must institute a 180-day waiting period before medical debt will be reported on a consumer's credit report and requiring the CRAs to remove all medical debt from a credit report after the debt is paid by insurance.
• Increasing the visibility of AnnualCreditReport.com. The settlement aims to increase consumers' awareness of their right to obtain one free annual credit report from each CRA via AnnualCreditReport.com by requiring the CRAs to include a prominently labeled hyperlink to the website on the CRAs' homepages.
• Additional free annual credit report. The CRAs must provide a second free annual credit report to consumers who experience a change in their credit report as a result of initiating a dispute.
• Mitigating impact of loans from bad lenders on credit reporting. The settlement prohibits the CRAs from including debts from lenders that have been identified by the attorney general as making high-interest loans in violation of New York law in consumers' credit reports. The press release to the settlement provides: "Predatory high-interest loans made in violation of New York lending laws are often referred to as 'payday loans.' New Yorkers who take these loans often have trouble paying them back, damaging their credit."
• Furnisher Monitoring. The CRAs must create a National Credit Reporting Working Group that will develop a set of best practices and policies that the CRAs must follow when monitoring the obligations and performance of furnishers.
• Media campaign about consumers' rights. The CRAs must implement a consumer education campaign in New York via public service announcements and paid placements on television, radio, and online and in print media.

Increasing the reliability of credit scores is inarguably a valid concern. The upcoming months and years will tell if this recent settlement is successful in addressing that concern and at what cost. In the meantime, Experian, Equifax, TransUnion and all the other credit reporting agencies reporting on New York consumers will need to work to adopt these new compliance standards.

Latif Zaman is an associate in the Maryland office of Hudson Cook, LLP. He can be reached at 410-782-2346 or by email at lzaman@hudco.com.