David Musto and James Francis discuss the New York AG's settlement with the three major credit bureaus

Most Americans have faced issues with consumer reporting agencies over errors and disputes that mar their creditworthiness. What has seemed like a one-way street might now become a level field soon. A settlement agreement the New York Attorney General’s office secured this past Monday requires the three credit bureaus — Experian, Equifax and Transunion — to add more staff and other resources to improve credit report accuracy, increase fairness and efficacy in resolving disputes, and protect New York consumers from harm to their credit reports owing to medical debt. It also raises hopes that other states would take the cue and institute similar reforms.

Even so, a debate has ensued over whether the settlement will genuinely bring respite to consumers or fall short of expectations. “Now, the idea is [the credit bureaus] fight for you with actual human capital to see that your credit report is accurate,” said David Musto, chair of the Wharton finance department.

James Francis, consumer law attorney with the Philadelphia law firm of Francis & Mailman, P.C., was skeptical. “Is this just window-dressing, or is there going to be a substantive change?” he asked. He explained that barring the agreement on protecting consumers from “unfair harm” owing to medical debt, many provisions in the settlement agreement are already mandated by the Fair Credit Reporting Act (FCRA) of 1970.

Musto and Francis discussed the likely benefits of the settlement and issues that continue to demand attention on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Under the settlement announced by the office of New York Attorney General Eric T. Schneiderman, the three credit bureaus will undertake a three-year campaign focusing on consumers’ rights to obtain a free annual credit report, dispute errors and submit documents in support of their disputes. Schneiderman said the agreement “will reform the entire industry and provide vital protections for millions of consumers.” The three agencies maintain credit information for more than 200 million Americans.

“Now, the idea is [the credit bureaus] fight for you with actual human capital to see that your credit report is accurate.”–David Musto

Positive Step

According to Musto, “this [settlement] is a good sign for consumers.” He highlighted “an interesting twist” where the relationship between consumers and credit bureaus is changing. Historically, credit bureaus have provided creditors information about what other creditors have to say about consumers, he said. “Now, it’s more like the reporting agency is your agent with respect to the creditors to make sure creditors say the right thing,” he added.

In repairing errors, Francis noted that the settlement makes it clear that credit bureaus can no longer function as just conduits passing disputes to the companies reporting the data. He said the settlement requires them “to help the consumer as well,” and “[not] just side with the company that is paying [their] bills.” He saw that as “the spirit” of the settlement. “If the spirit is complied with, there should be some improvement for consumers.”

Francis was not sure if the settlement would result in any sizable change for consumers. He said the existing law already requires the credit bureaus to review consumer documentation and disputes. “Why do we need a settlement over 40 years after the law (FCRA) has been passed to announce that they have to look at the documents that the law already requires they look at?” he asked.

Challenges in Ramping Up

Musto noted that the credit bureaus deal with hundreds of millions of reports and try to do that at a low cost. “The idea here is that they ramp up and staff up with a lot more people who have to bring more scrutiny to bear,” he said. “What tolerance they have to spend more money to improve their accuracy … remains to be seen.” Francis added that a provision in the settlement to train credit bureau staffers to resolve disputes comes late in the day. “They should have had people trained to do that, and they have not,” he said.

Medical debt is another big issue consumers face with credit bureaus, and the New York AG’s office has pointed out that a fifth of all credit reports have some type of medical debt on them. “Medical debts are not generally very indicative of a consumer’s financial worthiness or ability to pay, and that is part of the problem,” said Francis. “I’d like to see all medical debt reporting wiped out.”

Call for Metrics

Francis wanted a way to measure the performance of the credit bureaus over the next three years against the provisions of the settlement. “There is no test at the end of the study period to know whether or not they are achieving what they are supposed to,” he said. “This is an industry that is not very transparent to consumers. It operates in a cloak-and-dagger type of environment.”

According to Francis, “You can nail down some things specifically,” such as the incidence of “mixed files,” where files of people with the same name or other identifying information are mixed up. “Credit bureaus have been tracking the incidence rate of mixed files for years,” he said. Resolutions of dispute investigations are also measurable, he added.

“This is an industry that is not very transparent to consumers — it operates in a cloak and dagger type of environment.”–James Francis

Musto pointed out some difficulties in measuring credit bureau performance, however. “The test isn’t [measuring] every time we have 1,000 consumers who complain or 1,000 satisfied consumers, because some of them did go bad,” he said. “We don’t really know what the accurate information is, so it does make it hard to benchmark it.”

Seeking a Balance

According to Francis, the law seeks to achieve a balance. “The law exists so that consumers aren’t penalized unfairly or penalized through the reporting of inaccurate debts,” he said. “However, it is also designed to stimulate the economy so that companies can lend money to responsible people who can repay it. It’s [about] striking that balance, and that’s a difficult balance to achieve. The scoring models accurately find that people with lower credit scores generally have a lower ability to pay the debt or they are not paying the debt in a timely way.”

One immediate takeaway from the settlement is for consumers to review their credit reports, according to both Musto and Francis. “Check your credit report regularly, maybe every three or six months,” said Francis. “Look at changes and if there are problems, you dispute that as specifically as possible and get the dispute over to [the credit bureaus].”