By Kenneth J. Benton, Senior Consumer Regulations Specialist,
and Michael F. Bolos, Research Assistant, Federal Reserve Bank of Philadelphia
The Senate Conference report for the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) noted that approximately 30,000 data furnishers report, on average, 2 billion updates to consumer credit reports every month.1 Complaints about the accuracy of consumer reports consistently rank among the most common consumer complaints received by the Federal Trade Commission (FTC).2 Because consumer reports have become an indispensable tool for lenders to use in evaluating consumer credit applications, the potential harm caused by such reporting errors can be significant for consumers.
To address this issue, §312 of the FACT Act directed the federal banking agencies, the National Credit Union Administration, and the FTC (the agencies) to jointly write regulations establishing guidelines for furnishers to ensure the accuracy and integrity of information they furnish to consumer reporting agencies (CRAs) and identifying the circumstances under which a consumer can file a direct dispute with a furnisher about the accuracy of information in a consumer report. In response, the agencies jointly issued regulations that became effective July 1, 2010.3 The regulations require furnishers of information to CRAs to establish and implement reasonable written policies and procedures to ensure the accuracy and integrity of the information provided. The regulations also require furnishers to conduct a reasonable investigation of direct disputes filed by a consumer concerning information in the consumer’s credit report relating to the consumer’s account or other relationship with the furnisher. The goal of these new requirements is to ensure that accurate information is furnished to CRAs, thereby promoting fairness and efficiency in credit markets.4
Section 222.42 requires furnishers to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the consumer information furnished to CRAs. The agencies carefully defined accuracy and integrity. “Accuracy” means that the information provided by a furnisher correctly: (1) identifies the appropriate consumer; (2) reflects the terms of and liability for the account; and (3) reflects the consumer’s performance with respect to the account.5 “Integrity” means the information provided by a furnisher: (1) is substantiated by the furnisher’s records; (2) is in a form designed to minimize the likelihood that the information may be incorrectly reflected in a consumer report; and (3) includes information in the furnisher’s possession that the agency has determined would likely be materially misleading in evaluating a consumer’s qualifications if absent.6 The credit limit, if any, is the one item of information the agencies have determined would likely be materially misleading if omitted.7
The agencies placed particular emphasis on the duties of furnishers to report credit limits. A credit limit typically applies only to open-end credit products, such as a credit card or home equity line of credit. The agencies explained that a key factor in evaluating the creditworthiness of an individual is credit utilization, for which the credit limit is necessary to calculate.8 Credit utilization measures the percentage of a credit line a consumer is currently using. For example, if a consumer has a credit card balance of $4,000 and the credit limit for the card is $10,000, the credit utilization rate is 40 percent. Credit scoring models treat high utilization rates as a negative factor and low utilization rates as a positive factor when computing a credit score.
Without the credit limit, credit evaluators must either ignore credit utilization data or resort to inferior proxies to estimate credit utilization, such as using the highest balance ever owed on the account as the credit limit.9 These substitute measures frequently overestimate the consumer’s credit utilization, potentially resulting in higher perceived credit risk, worse credit terms for the consumer, and lower credit scores. Requiring furnishers to disclose the credit limit eliminates the need to rely on substitute measures, allowing credit evaluators to gain a more accurate picture of the consumer’s creditworthiness. The regulation contains an exception to the disclosure requirement when the credit limit is not in the furnisher’s possession and when it is not applicable, such as when a credit product does not have a credit limit.10
The agencies included guidelines for designing and implementing policies and procedures in Appendix E of Regulation V, 12 C.F.R. §222.11 Under §222.42(b), furnishers must consider the guidelines in developing policies and procedures and incorporate them as appropriate in light of the nature, size, complexity, and scope of the furnisher’s activities.
Prior to the rule change, consumers who wanted to dispute information in their credit report had to request an investigation through a CRA, which, in turn, would ask the furnisher to investigate the issue. The final rule allows a consumer to dispute information in a consumer report directly with the furnisher of the disputed information and requires the furnisher to conduct a reasonable investigation if the dispute relates to: (1) the consumer’s liability for a credit account or other debt with the furnisher; (2) the terms of a credit account or other debt with the furnisher; (3) the consumer’s performance or other conduct concerning an account or other relationship with the furnisher; and (4) any other information contained in a consumer report for an account or other relationship with the furnisher that bears on the consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.12 The direct dispute rule does not apply if the dispute relates to the consumer’s identifying information, the identity of past or present employers, inquiries or requests for consumer report information derived from public records or provided to a CRA by another furnisher, requests for a consumer report, or information related to fraud alerts or active duty alerts.13
The final rule specifies that a furnisher is required to investigate the dispute only if the consumer has submitted the dispute notice to one of the following addresses: (1) an address the furnisher has provided and is listed on the consumer report; (2) an address the furnisher has clearly and conspicuously identified for submitting direct disputes; or (3) if no address is specified, any business address of the furnisher. The dispute notice must contain sufficient information to identify the account in dispute, the specific information being disputed, an explanation of the basis for the dispute, and all supporting documentation reasonably required by the furnisher to substantiate the basis of the dispute.
After receiving the dispute notice, the furnisher must determine whether to initiate an investigation or dismiss the dispute as frivolous or irrelevant. A dispute is frivolous or irrelevant if the dispute notice (1) does not contain sufficient information to investigate the dispute, (2) raises a dispute about information exempted from the rule, or (3) raises a dispute that is substantially the same as a dispute previously submitted by the consumer and resolved in accordance with the regulations. If the dispute is found to be frivolous or irrelevant, the furnisher has five business days to mail the consumer a notice of determination. The notice of determination must include the reasons for the determination and any information required to investigate the disputed information.
If the furnisher does not find the dispute frivolous or irrelevant, the furnisher must review all relevant information provided by the consumer in the dispute notice and conduct a reasonable investigation. The furnisher has 30 days from receipt of the dispute notice (with the possibility for a 15-day extension under certain circumstances) to complete the investigation and report the results to the consumer.14 If the furnisher finds the information reported was inaccurate, the furnisher must promptly notify each CRA to which it provided the inaccurate information of the determination and provide the changes necessary to make the information accurate.15
The agencies’ FACT Act implementing regulations require furnishers to develop reasonable written policies and procedures regarding the accuracy and integrity of the consumer information they furnish to CRAs and to investigate direct disputes filed by consumers about information in a consumer report regarding a consumer’s account or other relationship with the furnisher. Furnishers should carefully review the regulations’ requirements and the guidelines in Appendix E to ensure that their policies and procedures are in compliance. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.
Complete Issue (1.66 MB, 20 pages)
Kenneth Benton, Editor
FEDERAL RESERVE SYSTEM
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