Jeff Gelles: New regulation of credit-reporting agencies could help consumers

Posted: August 05, 2012

For a generation, conservative politicians have complained about "job-killing regulation" as if the words were fused at the hip - a linkage that works better as rallying cry than as rational argument. Sensible rules of the road can help markets as well as traffic. Ill-conceived ones can cause economic harm or crashes - of either type.

But last week, I caught up with one person whose business may truly suffer because of regulation by the new Consumer Financial Protection Bureau: Jim Francis, a Philadelphia lawyer who specializes in fighting credit-reporting agencies over practices that have caused nightmarish problems for his clients.

Next month, the CFPB will start overseeing the largest of the agencies - including the Big Three: Equifax, TransUnion and Experian; and others you've probably never heard of - more closely than anyone has before. And if it does its job well, Francis' seven-lawyer firm, Francis & Mailman, could lose a sizable chunk of work that has brought in millions of dollars in court verdicts and settlements.

Is he upset? Not at all, he says - there are lots of other battles to fight. But it's fair to say that, more than most outsiders, Francis knows why this poorly understood industry can plunge innocent consumers or job-seekers into surreal circumstances that would do Franz Kafka proud.

Before I share more of Francis' perspective with you, a quick update on where things stand.

For the first time, regulators will be able to examine and supervise the inner workings of vast data repositories that have come to play a critical role in our markets and our lives. Last I checked, consumers were not offered a choice on whether to do business with these data companies. But since their main customers are businesses that buy reports about us, we have no choice but to deal with them if anything goes wrong.

If the CFPB finds practices that violate the Fair Credit Reporting Act, or other federal laws or rules, it will be able to insist on changes without having to take the more drastic step of filing a lawsuit, as the companies' former chief regulator, the Federal Trade Commission, has done in the past.

The CFPB will also have traditional enforcement tools at its disposal, as it showed last month in a case against Capital One, which was required to pay $210 million in restitution and penalties over mysterious, add-on charges on credit-card bills.

And for consumers frustrated by persistent errors on their credit reports, one other change may matter most: Though it's not clear when, the CFPB also plans to take individual complaints about the agencies, as it has done since July 2011 for more than 55,000 credit-card complaints. More than 80 percent were forwarded to the credit-card issuers for responses.

How common are errors on credit reports, or on the other kinds of reports these companies sell to lenders, employers, or landlords? Studies have found serious mistakes on as many as one in four reports, or as few as 1 percent.

But even a small rate is enough to have huge consequences for those directly affected. As a whole, the $4 billion-a-year consumer-data industry maintains files on about 200 million Americans. According to CFPB director Richard Cordray, about 400 data companies issue an astounding 3 billion reports a year and make more than 36 billion updates a year to someone's credit file.

Francis doesn't expect companies that handle so much data to never make mistakes. But he has repeatedly taken them to court over failures to handle data carefully and to investigate and correct errors as the law requires. He has won hundreds of thousands of dollars for individual clients and recently helped win a $28 million class-action settlement.

Trust me - you wouldn't want to be on the receiving end of one of those settlements. Many of his worst horror stories lately involve clients who lost out on jobs because of erroneous data.

"Especially in this economy, the bad background checks - the ones that are most inaccurate - are causing the biggest harm," Francis told me last week. "Somebody applies for a job, and another person with the same name has a sex-offender record from Montana, and the files get mixed up."

Mixed up? Yes - two people's files can get accidentally merged, and all of a sudden someone else's foibles, or criminal record, can come to haunt the wrong person.

It probably happens most often to people who are related, such as men whose names partly match those of their fathers or grandfathers and a common past or present address. But even unrelated people are vulnerable, too.

Francis says one South Jersey client, an ex-Marine, was twice rejected in applying to be a federal air marshal because of tax liens reported against his father's construction firm.

Francis' client found the so-called mixed-file error when his first application was rejected. He followed the reporting agency's dispute-resolution procedure, and thought the problem was resolved - until he was turned down a second time.

Other Francis cases illustrate the flaws in common data-handling practices, such as the use of loose matching criteria.

According to Francis, the credit agencies say lenders or employers are leery of missing information about a prospective borrower or employee because, say, somebody mixed up a letter or number while inputting data. So rather than limiting reports to data that fully match a name, Social Security number, and other identifiers, the agencies sell files with partial matches.

If lenders or employers don't bother to sort through the data, the consumer or job applicant can suffer. Worst of all, the consumer might never know that was the problem. When you request your own credit report - as you can do annually, free, at - what you see is a complete match, limited to data that's clearly about you.

"The consumer is never really seeing what the lending world is seeing about them," Francis says. "That's not how it's supposed to happen."

As Cordray puts it, "Accuracy is critical for consumers and for markets." And if he can help ensure it, sensible regulation will benefit us all.

Contact Jeff Gelles at 215-854-2776 or

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