by Merlin Hernandez

I was beginning to feel that the entire system of credit risk and ratings is a runaway train and that the banking industry has essentially conceded its duties concerning credit risk to the almost arbitrary rating system of the credit reporting agencies. For banks and other financial institutions to knowingly continue to rely on the inefficiencies that plague the credit reporting agencies, is an injustice to the banking population. Banks have not only a fiscal but an ethical responsibility to protect the interests of their clients. It would seem that the public is being forced to accept the obvious flaws in the system with all the medieval-themed ads advising us to monitor our own credit because the reporting agencies do not get it right.

Mistakes appear to be made with impunity and a monitoring and correction industry now exists to right the “mistakes”. However the system started, the model seems to have degraded to the point that personal intervention (at a price) is necessary in order to maintain some kind of accuracy. Something is very amiss here. I believe it is a failure of both the banking and credit systems for relying on the credit reporting agencies, as well as the regulatory authorities for not holding credit reporting agencies fully accountable for errors and imposing stronger guidelines for the way they operate. Someone has to say to these agencies, do it right or get out of that business. The problem just might be that there is no legal definition of what constitutes ‘doing it right’.

The Fair Credit Reporting Act (FCRA) of 1971 and its amendment in 2003 with the Fair and Accurate Transactions Act (FACT) outlined the responsibilities of credit reporting agencies. Financial institutions, however, are not typically credit reporting agencies and may not have the same obligations under the regulations. The regulations themselves have not subjected the reporting agencies to an adequate level of oversight with penalties for failing to meet established standards of reporting. In other words, the laws do not go far enough but more importantly, there has been no mechanism for enforcement.

Finally in July 2011, after years and thousands of complaints, the Consumer Financial Protection Bureau (CFPB) was formed to regulate financial products and services under the Dodd–Frank Wall Street Reform and Consumer Protection Act (2010). It was announced in July, 2012 that the companies that determine credit scores will come under government oversight under the CFPB which has rule-making authority. Of note is that the CFPB not only has an administration function but is also responsible for enforcing compliance with FCRA provisions. The new rules took effect on September 30, 2012. We might now look forward to some new regulations that will make the credit reporting agencies more accountable.