Fixing Credit Reporting and Consumer Protection with National Consumer Law Center Attorney Chi Chi Wu
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Today, I had the great pleasure of tackling the crucial topic of credit reporting and data with Chi Chi Wu, Attorney at The National Consumer Law Center. Since 1969, the nonprofit National Consumer Law Center has used its expertise in consumer law and energy policy to work for consumer justice and economic security for low-income and other disadvantaged people in the U.S.
Chi Chi is a Harvard Law grad who has dedicated her life to fighting for consumer protections around the country, with a focus on credit reporting, credit bureaus, and medical debt. Chi Chi is just an amazing individual — her passion for consumer protection and empathy for Americans wronged by the system shines in today’s episode. Let’s break down some notable moments below:
Fair Credit Reporting Act 101
The Fair Credit Reporting Act is a 50-year-old law that helps consumers understand what actions they can take in regard to the information in their credit report. The FCRA governs the big 3 credit bureaus — TransUnion, Experian, and (gulp) Equifax. Yes, that Equifax...
Credit reports are critical to accessing basic features of American life. They serve as gatekeepers for landlords, banks, insurance companies, employers, and more. Negative credit history can be crippling, hamstringing you with high-interest rates and preventing access to parts of the American financial system. So the FCRA and 3 bureaus are critical.
Chi Chi discusses the key stipulations of the act, what consumers should know, and how it applies to Fintech. The key tenets are pretty standard (not exhaustive):
- Bureaus must make customer information available to consumers
- Consumers have the right to access their own information
- Everyone has the right to a free annual credit report (you can get yours at annualcreditreport.com)
- Negative credit information can only last on a report for 7 years (bankruptcy lasts 10 years, and criminal activity can be permanent)
- People have the right to dispute anything on their credit reports, and the agencies are legally required to reasonably investigate
These are all good baseline laws that have served as sound frameworks for decades. But wait, what about accuracy?
There are requirements for data accuracy, but not as good as consumers would hope. This is where Chi Chi shines, shaking your faith in the US Credit system. The law’s wording is below:
Credit reporting agencies need to “follow reasonable procedures for maximum possible accuracy.”
Referencing the above, Chi Chi explains the agencies are not mandated to have 100%, or even 95%, accuracy, which is where things get tricky.
The Very, Very Ugly of Credit Reports and the Plight of People Named Judy Thomas
There is a lot of depressing information I found digging through credit reporting, but let me summarize the situation in 2 simple stats:
- 20% of credit reports have a material inaccuracy
- 5% of credit reports have such a serious mistake that significantly alter the credit decision
I jumped right into this question with Chi Chi — why and how does this happen?!
“In what other industry do we tolerate a 5% fatal error?”
The root cause of these errors is almost scarier than the outcome…something called a “Mixed File.” A mixed file is when information from one consumer gets mixed up with another consumer due to the bureaus’ overly loose matching criteria.
Overly loose matching criteria? But don’t you input your SSN?
Yes, but bureaus only require a match on 7 of the 9 digits of an SSN.
I had to bold that line because it is a stunning indictment of the industry. What about other identifying information? For names, bureaus will sometimes just look for a first name or last name match, and for address they might only match on zip code or even state. So let’s say there are two John Smiths in Massachusetts, and they happen to have similar socials, there is a very good chance their data will end up in each others’ files. Maybe Elon was onto something…
One fascinating story Chi Chi shares is the plight of “Judy Thomas.” Judy Thomas has historically been the most problematic mixed file name, coming up in many court cases and settlements. If you have a Judy Thomas in your life, give them a call to check-in.
In addition to mixed files, other common errors include negative information not coming off reports after 7 years, and basic data inaccuracies like something getting marked as paid late when it was actually paid on time.
Isn’t This Fixable?
Why don’t they go full match on SSN? Or even move to 8 numbers? And require full name and city match? And why aren’t these bureaus audited more?
Chi Chi explains that the industry incentives are horribly aligned. End consumers like you and me are not the real customers of the bureaus, it’s the creditors and users of the information. So these users and the bureaus would rather see more false positives than false negatives, which makes them push for more lenient requirements. In addition, the bureaus are publically traded. So in reality, their real obligation isn’t even to the creditors, it's to shareholders. Sorry, Jamie Dimon…
Chi Chi explains that credit reporting is an oligopoly, but it’s worse than telecom or other oligopolies because in those industries, you can at least vote with your feet! Verizon is still incentivized to bring you great service. However, with credit, your life is intertwined with all 3 companies. Add that dynamic to the natural lobbying power of these companies and you have a really big problem.
Her potential solutions? Of course, stronger government regulations and changes to matching would be first on the list. But she argues that these companies have no business being public corporations in the first place, and should really be thought of as infrastructure utilities.
“Infrastructure isn’t bridges and tunnels anymore. It’s data, internet, and financial access.”
Making credit data a public utility will come with its own host of issues, but Chi Chi argues at least the incentives will be aligned. Lastly, she calls for stronger oversight and power given to organizations like the CFPB to audit these organizations, allowing them to be proactive instead of reactive.
Chi Chi and I spend the rest of the episode getting into alternative data (cash flow underwriting, rent payments, utility payments, etc), COVID’s effects on credit, the new CFPB and administration, and much more. Tune in below for all of Chi Chi’s wisdom!
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Ryan Zauk
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Ryan Zauk is an MBA Candidate at The Wharton School, where he runs the Wharton FinTech Podcast. He currently works with the US International Development Finance Corp looking at technology impact investments in developing markets. He has a passion for music, media, and all things FinTech.
You can reach him at rzauk@wharton.upenn.edu or on Twitter.
