Much of an individual's ability to secure credit depends on what the three national credit bureaus, Equifax Information Services, Experian Information Solutions, and TransUnion have to say about his/her creditworthiness.  Their information also impacts a person's ability to rent a home or a job and is a factor in setting insurance premiums.  Consequently is it important that credit bureau information be accurate and complete and that consumers are informed about the credit process. 

The Consumer Financial Protection Bureau (CFPB)  published a report on the National Credit Reporting Agencies (NCRAs) with a special focus on the infrastructure and processes currently used by the NCRAs to collect, compile, and report information about consumers in the form of credit reports.  The report covers a lot of information that is probably not familiar to consumers.  We have attempted to summarize some of the voluminous material below.

Credit bureaus originated in the late 1800s and were originally just lists of individuals who had failed to not repay their debts.  The credit reporting industry grew with the use of credit having particular growth spurts in the 1920s and 1950s.  By the early 1970s there were over 2,250 companies operating largely on a local or regional basis then automation spurred consolidation into large national bureaus.  Today there are still hundreds of smaller bureaus specializing in medical information, employment history or as resellers of credit reports.  In 2011 National Credit Reporting Agencies (NCRAs) generated U.S. revenues of about $4 billion, including revenues from ancillary businesses like the sale of lists for marketing purposes, the sale of credit monitoring services directly to consumers, and analytical services that provide credit scores or modeling tools to creditors.

The three major NCRAs each have more than 200 million files on consumers. In a typical month, they receive updates on about 1.3 billion "trade lines," individual pieces of data on consumer loans, from approximately 10,000 information "furnishers.," More than half of the trade lines come from the credit card industry (40 percent form general credit cards and 18 percent from "store" cards.  Thirteen percent are accounts in collection; education lenders and sales finance providers (i.e. closed end loans) and mortgage lenders each constitute 7 percent of furnishers and auto lenders 4 percent.

This part of the industry is very concentrated.  There are approximately 10,000 furnishers but 10 of them provide approximately 57% of the trade lines, the top 50 furnishers provide 72% of the trade lines, and the top 100 furnishers provide 76% of the trade lines in the NCRA databases.

Credit bureau files typically contain the following types of information:

• Information (name, SS#, DOB) to identify the consumer.
• Information on accounts or trade lines including type of credit, credit limit or loan amount, balance, payment history, dates account opened and closed and the current status.  Other information might include co-borrowers, reason for account closure, and any bankruptcy information.
• Public records information including bankruptcy filings, judgments, and federal tax liens.
• Third party collection reports.
• Inquiries. Bureaus are legally required to list inquiries for employment related uses for two years and one year for credit uses. Bureaus differentiate between "hard" inquiries, (consumer-initiated activities such as applications for credit cards) and "soft" inquiries which are generally user-generated for prescreening or marketing.

A consumer's file also has information on whether the consumer has initiated a security freeze, fraud alert, active duty alert, or filed a consumer statement on his or her file.

This information is used to generate credit reports to lenders and other users.  The Fair Credit Reporting Act (FCRA) limits how long a credit bureau can communicate certain adverse information; typically seven years for late payments or collections and no more than ten years for bankruptcies. 

Users vary in how they evaluate credit reporting information.  The NCRAs provide a modified credit report for employment purposes that removes some sensitive information and credit data.  Financial services users rely on credit reports as well as proprietary or third-party "scoring" models to interpret the information in a credit report.

Along with credit reports credit bureau will usually also deliver a credit score.  The score is calculated from the information in a credit report along with variables derived from the credit report (often called attributes.)  Lenders use credit scoring systems to assess the relative risk of consumers not repaying a loan.  Consumers with very high scores are likely to get more favorable interest rates and loan terms.

Creditors use credit scores to enhance the efficiency and consistency of decisioning.  Credit scores may also reduce subjective decision making by lenders based on impermissible factors like marital status, age or national origin.

NCRAs can deliver reports and scores to users almost instantly making it possible for lenders to grant instant credit where it is integral to a purchase decision. Incorporating the use of credit scores in mortgage underwriting has enabled Fannie Mae and Freddie Mac, to introduce automated underwriting systems to streamline the mortgage underwriting process and provide rapid mortgage approvals.

Inaccuracies in credit report information can affect consumers' credit scores and some matter more than others.  An identification error (wrong address, misspelled name) won't typically impact a credit score or perceived credit worthiness but a public record or trade line incorrectly reporting a tax lien or a severe delinquency could cause a lender to deny credit or significantly raise its cost.  

The NCRAs also provide lenders with analytical models using credit report data which may predict the likelihood of accepting a credit offer, of future account utilization, of consumers leaving an existing account, or of collectability on an outstanding debt.

Not all creditors report information about their borrowers. Some creditors report information about from some of their credit products, but not others.  Reporting is voluntary but furnishers have multiple incentives to participate.  They recognize the necessity of widespread participation to availability of information.  Reporting also provides an incentive to borrowers to make timely payments.  Consumers recognize both the risk of having delinquent accounts reported as well as the benefit of on-time performance.

There are also disincentives.  For example, the names of individuals with high credit scores may be sold by the bureau to lenders competitors.  There may also be costs for specialized equipment and the obligation to correct errors in a timely manner.

The NCRAs have extensive data quality processes in place that start with their screening of new furnishers. This generally includes gathering information on physical headquarters, license, and company records and some NCRAs may hire third-party investigation services to screen for illegal or unethical business history.  Sole proprietorships and new businesses may receive more specialized screening. Risk events may trigger reinspections and bureaus continue to monitor for data quality and fraud once a furnisher starts contributing live trade line data.

Furnishers generally provide monthly trade line updates through data file transfers that contain trade line updates on all of the furnishers' active accounts.  Data generally goes through a multi-stage process to identify data irregularities such as blank fields or logical inconsistencies.  Individual consumer base records and tradeline updates are similarly screened for formatting errors, logical errors, internal inconsistencies, and anomalies. The NCRAs do not conduct independent checks or audits such as contacting a consumer to verify information.  The NCRAs rely on furnishers to report information on consumers that is complete and accurate.

In 2009 a number of federal regulatory agencies issued the "Furnisher Rule" which has now been restated by CFPB.  Under the Rule furnishers have are obligated to supply accurate data and required to "establish and implement reasonable written policies and procedures concerning the accuracy and integrity of the information it furnishes to consumer reporting agencies."

Once the NCRAs have received trade line information from a furnisher they must assign it to a specific consumer's identity.  Each NCRA has about 200 million individual files and the average one contains 13 past and current credit obligations, including nine bank and retail cards and four installment loans.  

To locate and identify a consumer, NCRAs will use various combinations of personal information such as name, address, or date of birth. A trade line may not contain all of this identifying information and many consumers have the same or similar personal identifier.  This presents challenges when a NCRA tries to match an incoming trade line with the correct consumer's file. Adding to the complexity, millions of individuals change how they identify themselves over time or between furnishers, changing their name or using names inconsistently (i.e. an Elizabeth or may also be Betty, Beth, or Liz.  Also creditors themselves vary as to what information they require on credit applications.

Inaccuracies in credit files occur when information is attached to the wrong consumer, omitted, or where there are factual errors in the trade line or other information.  Some errors come from matching challenges and others from data and data entry errors on either the bureau or furnisher level, processing errors, or from identify fraud or time lags in reporting payments or corrections of other errors.  Some supposed errors are actually borrower misperceptions - thinking a bill has been paid when it has not or assuming that paying an account in collection removes the delinquency notation.

Each type of credit report errors may affect how a creditor or a credit score assesses the credit worthiness of a consumer. Trade line errors can both hurt or help a consumer's credit score.  An omitted current trade line, for example, may lower a credit score; a delinquent trade line inadvertently assigned to another consumer or incorrectly marked as current, could raise it.

The FCRA gives consumers the right to dispute information they deem inaccurate with an NCRA or a furnisher (where covered by the Furnisher Rule), or both and requires the NCRAs and furnishers to "reinvestigate" information contained in a consumer's credit file when disputed.    Consumers are given the several ways to obtain their file information including a free credit report from each NCRA each year.  

The CFPB estimates that as many as 44 million consumers obtained copies of their consumer file disclosure annually in 2010 and 2011 - either through the free report website (15.9 million) through a credit monitoring service (26 million);  directly from the NCRAs after receiving adverse action notices or risk- based pricing notices (approximately 1 million) or other sources.  Still this is only about one in five of the consumers who are entitled to them.

In 2011, the NCRAs received approximately 8 million consumer disputes.  Many of these consumers disputed more than one item in their file, leading to approximately 32 to 38 million dispute reinvestigations. This volume has declined significantly since 2007 when consumers were more active in applying for credit and dispute 47 to 53 million items.  Almost 40 percent of the disputes in 2011 related to debt in collections which is five times more likely to be disputed than mortgage information. 

The NCRAs handle most consumers' trade line disputes they receive through an electronic information network called e-OSCAR (the Online Solution for Complete and Accurate Reporting). NCRAs report they handle trade line disputes through five steps.

1. Consumer initiates a dispute by mail, on-line or by phone and reason codes are assigned.
   
2. The NCRA reviews and uses proprietary decision rules to see if it can resolve the dispute internally. The NCRAs resolved or rejected an average of 15% of the disputes they received in 2011.
   
3. If the dispute cannot be resolved internally, the NCRA will forward it through e-OSCAR to the appropriate furnisher. Consumers can provide supplementary documentation (such as billing or letters to and from creditors) regarding a dispute via mail to an NCRA, but it appears the NCRAs generally do not pass these to furnishers.
   
4. The data furnisher investigates the request and routes back the response to the requesting NCRA with one of four responses: (a) verify account as accurate, (b) modify account/trade line information as indicated, (c) delete account, or (d) delete account due to fraud.
   
   In a recent 120 day period in 2012, 22% of furnisher responses indicated that the initial data was accurate (rejecting the consumer's claim), 61% modified a trade line or other information, 13% deleted a trade line or other of information, and 0.5% deleted a trade line or other information due to fraud. The NCRAs deleted or modified 4% of disputed trade lines because the furnisher did not provide a response within the statutory time frame. 
   
5. Referral: If an account is modified or deleted, the furnisher is supposed to send copies of its modification to other CRAs with whom the data furnisher has a reporting relationship so that all can meet their responsibilities to update the credit files.

The NCRAs initiate their investigation of a public record dispute by again collecting the public record and re-checking. A data retrieval service called LNRDRS collects a combined 1-2 million public records annually at the NCRAs' request.  In response to a dispute related to a public record, LNRDRS will typically send a data collector to the source to re-check the record and look for updates and report one back to the NCRA that the  status has changed (e.g., lien paid off); status is unchanged or unable to verify.  The NCRAs retain responsibility for determining whether a public record is accurately attached to a consumer's file.

Recent reviews of NCRA accuracy to data have been either industry or consumer advocacy based and thus potentially bias. The FTC is expected soon to complete a mandated decade-long study on credit report accuracy and expects to issue a final report in 2014. It will attempt to estimate the proportion of credit files that contain material errors, identify the main types of errors and their frequency, as well as their impact on consumers' credit scores and hence the errors' impacts on affected consumers' access to and cost of credit.

The CFPB is now accepting consumer complaints about credit reporting, giving consumer's individual- level complaint assistance for the first time at the federal level with consumer reporting agencies. Finally, as part of its supervision of large financial institutions, it is examining the consumer reporting practices of the furnishers that are responsible for a preponderance of information contained in credit reports. These efforts will give the CFPB an opportunity to further evaluate the potential roles of credit report accuracy measurements and of metrics related to the NCRAs' and furnishers' various business processes in improving overall accuracy in the U.S. credit reporting system.