Consumer Credit

When a consumer makes an application for credit, the creditor must decide whether he or she is a good risk. Most creditors regularly order a credit report on an applicant rather than undertake a costly investigation on their own. Files are retained by two types of credit agencies.

Credit Bureaus Credit bureaus publish reports which are primarily used by merchants who are attempting to decide whether to allow consumers to purchase merchandise financed by credit that will be repaid on time. Such reports ordinarily disclose financial information, such as the location and size of an individual's bank accounts, charge accounts, and other debts and the person's bill-paying habits, income, occupation, marital status, and lawsuits.

Credit bureaus supply such information to a group of subscribers who, in exchange, provide them with information for their files. All the information obtained is filed in case it is requested by someone in the future. Nonsubscribers can ordinarily obtain information through the payment of a fee.

A majority of credit bureaus are members of the Associated Credit Bureaus of America, which regulates public information for them. It keeps members apprised of financial transactions that might cause people to be unable to meet their obligations.

Credit Reporting Bureaus Credit reporting bureaus formulate financial reports on individuals for purposes not directly related to the extension of credit. Such reports are used by employers to evaluate job applicants, by insurance companies to assess the risk in relation to a prospective policy buyer, and by landlords to avoid renting to tenants likely to cause damage to the property or disturb other tenants. Bureaus of this type compile data and provide it upon request to interested parties.

These reports contain personal information about the subjects and their families that is obtained from interviews with neighbors, associates, and co-workers. Information is kept for possible future investigation requests.

Problems In the late 1960s, Congress investigated abuses in the collection and dissemination of information by credit bureaus and determined that such bureaus compiled files on more than 50 percent of the people in the United States. These information files, however, frequently contain inaccurate, misleading, or irrelevant facts and were not kept confidential. The most frequent error was to confuse two individuals having the same name or similar names. The possibility of committing this error increased as the area covered by the bureau became larger.

Supervision Many states have enacted statutes to regulate the business practices of credit bureaus. However, the need for national uniformity led to the enactment of federal laws dealing with consumer credit information.

The FAIR CREDIT REPORTING ACT, which is title VI of the CONSUMER CREDIT PROTECTION ACT (15 U.S.C.A. § 1601 et seq.), was enacted in 1970. This congressional enactment affects and regulates businesses that regularly obtain consumer credit information for other businesses, either for payment or in a cooperative exchange.

The law covers any report by an agency if it is related to a consumer's creditworthiness, credit standing or capacity, character, general reputation, personal characteristics, or mode of living. Further, the law applies to any such report when employed or expected to be used for evaluating a consumer for one of four purposes: credit or insurance for personal, family, or household use; employment; licenses to operate particular businesses or practice a profession; and any other legitimate business need.

The requirements of the Fair Credit Reporting Act affect (1) the credit bureau; (2) the businesses that use the credit reports compiled by credit bureaus; (3) the rights of consumers who are the subjects of such reports; and (4) how the consumer can enforce his or her rights when errors are discovered in such reports.

Credit bureaus are required to have standard procedures for determining and updating the accuracy of the information in their files. There is a seven-year limit on the information on file, except where the file discloses that the party was bankrupt within a period of ten years. Data relating to an individual's character, reputation, or lifestyle that are obtained through personal interviews with neighbors and friends cannot remain in a file unless it is verified every three months.

While the Fair Credit Reporting Act does not prohibit the collection and compilation of information unrelated to finance—such as appearance, political tenets, and sexual orientation—such information must be accurate and not obsolete. The law does, however, restrict credit bureaus to furnishing reports for reasons of credit, insurance, employment, obtaining a government license or other benefit, or other legitimate business needs related to business transactions with the consumer. Credit bureaus are required to investigate new clients to ascertain that they are using reports solely for one of these five permitted purposes. In addition, prospective clients are required to file a statement with bureaus certifying the purpose for which the reports will be used and agreeing not to use them for any other purposes.

Consumers are legally entitled to ascertain that no inaccurate or obsolete information is kept in files on them and to be notified when a creditor relies upon a report issued by a credit bureau, so the consumer can see the type of information kept on file and correct all mistakes in it.

A consumer, however, has no right to examine the actual file kept on him or her by a credit reporting agency. Anyone who has been refused credit on the basis of a report can discover the nature and substance of all but medical information contained therein, as well as the source of the information, except investigations based on comment from neighbors and associates. The consumer can also find out the identity of anyone who has received the report for employment purposes during the last two years or any other purpose during the last six months.

A consumer who discovers inaccurate or misleading information in his or her file can request that the agency reinvestigate his or her credit background and submit a brief statement which either explains or corrects the information. The agency must include such information in the consumer's file and notify recent users of the changes in the consumer's file upon the consumer's request.

Federal agencies, such as the FEDERAL TRADE COMMISSION (FTC), can issue orders for the enforcement of this law. Officers and employees of the credit bureau who willfully or intentionally violate this law are subject to criminal prosecution. Both a fine and imprisonment for each violation can be imposed upon conviction.

A credit bureau that fails to treat a consumer in the manner required by this law can be sued by the consumer who must prove that the credit bureau or the business that used the report did not properly maintain reasonable procedures to ensure compliance with the law. The consumer must also show that such failure to maintain was negligent or careless and that he or she incurred personal or financial injury from this failure.