Credit Bureaus’ Role Is Often Misunderstood

A Los Angeles man applying for a mortgage loan was accused by the lender of not disclosing a $122,000 debt that showed up on his wife’s credit report, although it was a home loan that had been assumed a year before when the house was sold. An Imperial Valley woman was incensed when a credit card issuer turned her down because her credit report showed what she called an “erroneous” tax lien. “No company should have this power,” she says.

There certainly is a power at work here, but it’s not always in error. Often consumers simply don’t understand how credit reports work. The woman and her husband indeed once had, and paid, a tax lien, but that doesn’t mean it’s wiped off the record. (It may not even be erased if the person wins in tax court.) The couple with the assumed loan suffered from an error made by their former lender, who sent the credit bureau notice of a “satisfied” debt, but only in the husband’s name, leaving it on the wife’s record.

Library of Information

“We act only as a library of information,” says a spokesman for TRW, one of the nation’s biggest bureaus, “using information sent us by the credit grantor (or taken from public record), and assuming that information is correct.” If it isn’t, it can cause the consumer trouble in getting further credit. And when it surfaces, it can cost them no little effort to straighten out.

First they must write the bureau about the error, including their full name, address, birth date and Social Security number, if they don’t want to risk further error. The bureau must then “reinvestigate”--a word from the federal Fair Credit Reporting Act that credit bureaus take to mean simply asking the credit grantor involved to check his records, or checking the relevant public record. By law, this procedure must be completed in a “reasonable period of time.”

If the creditor confirms that there was an error, the bureau makes the correction, sending it to the consumer and, if asked, to everyone who recently made a credit inquiry. If the creditor claims no error, the information stands, but the consumer can add a statement of disagreement to his file. As it happens, very few suspected “errors” actually end up in a correction: Of the 1.5% of reports issued by TRW that result in consumer inquiries, only a third result in a change.

The crucial point is that any questions of error are considered between creditor and consumer; the credit bureau’s stance is neutral.

“People think when there’s a dispute, TRW will conduct a trial on the merits to see if the item is proper,” says Harry Jacobs, senior counsel for TRW’s information services division. “In most cases, the law only requires you go back to the source and ask them to reverify.”

Gives Creditors Power

It would seem that this system, with its careful neutrality on the part of credit bureaus, puts a lot of power in the hands of creditors. Given the weight, and the effect of their information, the credit reporting system could conceivably be both a means of disciplining deadbeats and of simply intimidating consumers.

In fact, the “reinvestigation” required by law might sometimes demand more involvement. “If they’re told there’s something wrong with the information they got,” says Federal Trade Commission attorney George Schulman in Los Angeles, “and are given material that helps them check it out--canceled checks, for instance--they can’t just ignore it.” Nor do they: If the consumer “can prove that something’s paid, TRW will show it as paid,” says Jacobs. (The exception is revolving or open-end credit credit cards, for example--which could be paid one day and have new charges added the next.)

Plenty of consumers rant and rave about suing credit bureaus, but generally, says Jacobs, “if (a credit grantor) gives us an item that’s untrue, they’re the ones at risk.” Says Schulman: “There aren’t many lawsuits over credit reports at all, because people go to a lawyer and the lawyer says that regardless of who’s at fault, there are no damages. What’s the financial loss if you’re turned down by Sears?”

One might claim a financial loss if a credit report error held up a car loan, say, until prices went up, but the bureau still only followed dictated procedures in a reasonable time. That’s not even the usual basis of a lawsuit. Of those who have sued TRW, almost half never disputed an item on file. A tenth never even saw the file. Some, for example, had been told that if they paid a bill, the creditor wouldn’t report a delinquency or would wipe it off--something the person who made the promise rarely has authority to do.

Matter of fact, says Jacobs, “the bulk of the lawsuits come from people who just don’t understand.” They don’t understand the correction procedure, or the reporting procedure, and they certainly don’t understand the role or limited responsibility of the credit bureaus.