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January 29, 2020

Yahoo Finance: House bill to reshape credit reporting, help borrowers improve scores

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A new bill is up for vote in the House of Representatives aimed at reforming credit reporting practices.

The bill would require credit reporting agencies (CRAs) to remove negative comments for private student loan borrowers after completing rehabilitation, prevent employers from using credit scores in hiring decisions, and eliminate medical debt from credit reports once paid. The bill also plans to improve the credit dispute process.

The bill would also direct the Consumer Finance Protection Bureau to study the impact of traditional credit reporting on minorities, people with limited or no credit history, immigrants, and those receiving government assistance.  

According to the Federal Trade Commission, 1 in 5 Americans have found “potentially material” errors in their credit report. While 20% had modifications to their report, the FTC found, only 13% had a change in their score due to their dispute. The study also found that 5% had errors in their report that negatively impacted their ability to receive credit, or the terms of the credit received. 

The bill, the Comprehensive Credit Reporting Enhancement, Disclosure, Innovation, and Transparency (CREDIT) Act hopes to change that. 

Rep. Ayanna Pressley (D-MA), who sponsored the bill, says it “will greatly improve a fundamentally flawed credit reporting system, providing much needed relief for families across the country.”

“It is past time for Congress to affirm economic justice for hardworking Americans and create a credit reporting system that truly works for all,” Pressley said. “When credit reports determine where you can live, work and how much you will have to pay for everything from a car to a college degree, consumers deserve a system that ensures equity, transparency and accountability.”

The CREDIT Act, or HR 3621, is a broad bill packaging together several changes to the Fair Credit Reporting Act (FCRA) that had been introduced in the House Financial Services Committee. All together, the bill writers say it will create a more “equitable and transparent credit reporting process.” 

While the credit reform bills passed through the committee, voting fell along party lines. House Republicans opposed the measures, arguing the reforms could have “potential negative impact on access to credit as well as the cost of credit for all Americans.”

The changes

First, the bill highlights changes it wants to make to the dispute process. The proposal directs credit reporting agencies – the three main ones are Transunion, Equifax and Experian – to extend the period of reinvestigation by an additional two weeks, with exceptions being made for instances where information needed in the dispute is found to be inaccurate or incomplete. The bill also requires CRAs to notify information suppliers — the agencies that provide the information found in your credit report — of a dispute within five days. CRAs would also have to notify a consumer of the results of a reinvestigation within five days.  

And while CRAs are required to give consumers one free credit report annually, they are allowed to charge consumers for credit disclosures. But according to the proposal, oftentimes the credit reports provided to the public are not the same scores and reports given to lenders. If the CREDIT Act were to pass, CRAs will be required to clarify the differences in credit scores. 

Boosting scores

But some of the most important pieces of the bill will help boost consumer credit scores by removing student loan and medical bill delinquencies, preventing discrimination based on a bad credit score, and shortening the lifespan of negative events in a credit report.

According to the New York Fed, student loan debt rose $20 billion to $1.5 trillion by the third quarter of 2019. Roughly 10% of them were in serious delinquency. As part of the House bill, a rehabilitation process will be established for private student loan borrowers to help improve their credit. Once a borrower makes nine out of 10 on time monthly payments, CRAs won’t be allowed to include their delinquent or defaulted loan. Loan rehabilitation already exists for federal student loans. 

For those suffering with medical bills, the CREDIT Act extends the time before which medical delinquencies and defaults are reported. And once medical bills are settled or “charged off,” the bill instructs those negative markings to be removed from a consumer’s credit report. 

The legislation also wants to shorten the lifespan of negative marks on credit reports. Depending on the negative event, delinquencies and defaults continue to weigh on your credit score for 7 or even 10 years. The bill would knock that down to 4 or 7 years, respectively. 

And for those with poor credit seeking employment, the bill would prohibit the use of credit scores in making employment decisions with specific exceptions like the involvement in a national security investigation. Even then, none of the cost, the bill states, “will be passed on to the consumer to whom the report relates.”

Reducing accuracy

House Republicans weren’t the only ones to oppose the bill. The American Bankers Association (ABA) issued a memo to members of the House Financial Services committee, stating that the legislation “would make credit reports less accurate and potentially seriously diminishing the value of credit reports that are the foundation of a fair and fact-based credit market.”

As a result, the ABA noted, the bill would ultimately “reduce access to credit,” and force lenders to “find alternatives to credit reports in order to continue lending and to meet bank regulators’ underwriting standards and expectations.”

It’s a notion that Pressley rejects.

Pressley’s spokesperson told Yahoo Finance that “given that the FTC has found that 1 in 5 consumers have errors on their reports Pressley’s bill would actually help associations like that ABA since the credit reporting system as it stands does not provide accurate information about a consumer’s creditworthiness.” 

“The Comprehensive CREDIT Act substantively improves accuracy in credit reporting by enhancing a consumer’s ability to spot errors in real time and by streamlining the report correction process.”

Despite objections, the bill is largely expected to pass the House when it goes up for a vote Wednesday.