Senate looks to fix “broken” credit reporting system

The Senate Committee on Banking, Housing and Urban Affairs held a hearing Thursday morning on “An Overview of the Credit Bureaus and the Fair Credit Reporting Act,” where Senators on both sides of the aisle expressed their concern over the current credit reporting system.

The Senate called on two witnesses for the hearing, including Peggy Twohig, Consumer Financial Protection Bureau division of supervision, enforcement and fair lending assistant director of supervision policy; and Maneesha Mithal, Federal Trade Commissionbureau of consumer protection associate director of the division of privacy and identity protection.

The greatest concerns brought up by the senators was the FTC and CFPB’s lack of ability to apply penalties when credit bureaus mess up, as well as the consumer’s lack of control over their information.

Sen. Brian Schatz, D-Hawaii, pointed out that 5% of credit reports contain confirmed material errors, affecting about 10 million people. What’s more, Schatz pointed out that even two years after the errors were found, 84% of those remained on the credit reports.

And Sen. Tim Scott, R-S.C., pointed out that many consumers don’t have credit scores at all, and are credit invisible. During the hearing, Scott quoted a study from Brookings Institution, which says inclusion of alternative data could cause a 20% increase in credit visibility for those making less than $20,000 per year, and a 15% increase for those making from $20,000 to $30,000 per year.

Twohig agreed the use of alternative data could be a potential solution for the credit invisible population, saying the CFPB is currently monitoring alternative data options and how it could help expand access to credit. Last year, after issuing a request for information, the bureau received more than 100 comments, which it is now monitoring as a potential solution.

Over the course of the hearing, other senators chimed in with potential solutions to fix the credit reporting system. Here are a few of the ideas:

Give consumers sharing power: Sen. Robert Menendez, D-N.J., started his time by asking the two witnesses for the last four digits of their Social Security numbers as well as other sensitive information. As would be expected, both Twohig and Mithal declined to share. However, Menendez pointed out that, to a certain extent, credit bureaus can sell consumers’ personal data without ever getting their consent. He insisted that consumers should be given the power to decide when and with whom their data can be shared.

Technology: Sen. John Kennedy, R-La., suggested utilizing technology to solve some of the problem. “We should be smart enough to come up with technology to fix the broken system,” he said, referring to the confusing and time-consuming process consumers must go through to report an error in their credit report.

Penalties: Sen. Mark Warner, D-Va., argued that one of the strongest actions Congress can take against credit bureaus that mess up is give FTC and CFPB authority to examine CRAs and levy penalties. Under the current system, Warner argued that the regulators’ authority to act is limited, and therefore does not motivate credit reporting agencies to act in the consumer’s best interest.

And Sen. Elizabeth Warren, D-Mass., agreed, saying while the CFPB currently has some authority to oversee credit bureaus, it does not have authority to seek civil penalties.

Medical debt: Unlike other forms of debt, medical debt can come on at any time, and consumers have no choice but to deal with it. Those who can’t afford health insurance are at the mercy of chance. That is why Sen. Sherrod Brown, D-Ohio, suggested pausing medical debt reporting until there is a more affordable health care option.

Through most of these suggestions, the witnesses expressed their support, saying the CFPB and the FTC are willing to work with Congress to come up with a plan that creates a safer, more controlled credit reporting system.

There were, however, some exceptions. For example, Sen. Catherine Cortez Masto, D-Nev., suggested an opt-in credit system to give consumers more power over their information. And while Twohig and Mithal were both on board with giving more power to the consumer, they pointed out that an opt-in system would do more harm than good when it comes to opening access to credit and consumer lending.