Credit reporting agencies coming under CFPB supervision this fall

The CFPB will begin monitoring credit reporting agencies beginning this fall. Photo Credit: Trinity Credit Services/Flickr.com/CC-BY

For decades, credit worthiness has been determined by the credit reporting agencies, which heretofore, had not been under as much scrutiny as other institutions of consumer finance. However, starting this fall, they operate under supervision by the Consumer Financial Protection Bureau.

Regulatory attention focused on credit reporting agencies

The financial activity of nearly every adult American is monitored and logged by credit bureaus, as their proprietary metrics are, ostensibly, designed to predict how credit-worthy a person is. Timely payment of obligations and debt are recorded, the amount of debt relative to available credit and so forth are tracked by credit reporting agencies and used to determine a credit score. Those scores are then sold to loan lenders, landlords and so forth.

There are more than 400 credit reporting agencies, according to CNN, which monitor the auto loans, credit cards, personal loans and other accounts of millions of people. Collectively, according to MSNBC, they issue more than 3 billion reports per year to interested parties. However, there isn’t a great deal of government oversight for such agencies and they have never been under a great deal of scrutiny, at least until now.

CFPB monitoring beginning in September

The Consumer Financial Protection Agency has announced that starting September 30, all credit reporting agencies will be under CFPB supervision. The federal agency will be in charge of regulating the industry. The three major credit bureaus, namely Experian, TransUnion and Equifax, will obviously fall under the agency’s purview. However, any credit report bureaus doing less than $7 million per year in business will be exempt.

FICO, or the Fair Isaac Corporation, which sells a proprietary formula for determining credit scores, according to CNN, is also exempt. That company is neither a credit bureau nor a lender, so it cannot be regulated by the CFPB.

The regulation will also include companies similarly reporting on checking account activity, such as ChexSystems. ChexSystems is used by roughly 80 percent of the nation’s banks to screen potentially risky account holders.

To err is human

The reason that the CFPB wants to get involved, according to Reuters, is to determine how common errors are in credit reporting and how easy it is to fix an error. A credit report error can easily result in a lower score, which can lead to the denial of credit or even employment, when or where employers are allowed to check the credit of potential employees.

The issue prior to now is that no one knows how common credit report errors are. Credit reporting agencies are bound by the Fair Credit Reporting Act, but enforcement hasn’t been staunch. Every American is entitled to one free credit report from each of the three main bureaus, but only 4 percent of eligible people actually request and view their reports, according to MSNBC.