Consumer Credit Reporting profile: Overview

overview

evolution

overseas

Australia

tenancy

access

overview

This profile considers the consumer credit reporting and tenancy reporting industries, in particular issues and legislation regarding privacy, the ownership of information and electronic commerce in a networked global economy.

It covers -

an introduction to the industries and key issues
a discussion of how the industries have evolved, practice and legislative responses
overseas credit reporting regimes, including profiles of major credit reporting enterprises and public registries
the Australian and New Zealand regimes
tenancy - Australian tenancy, hotel and other retail reporting
access by consumers to their own credit ratings and reference data
pointers to Australian and overseas regulators, industry representatives and consumer advocacy bodies
prediction - decisionmaking on the basis of credit reporting data
landmarks in the growth of the industry and its regulation

The profile supplements discussion in the separate guides on Privacy & Data Protection, the Digital Economy and Online Consumers. It is complemented by a note exploring vetting services, of interest because credit reporting services also often provide such identity verification.

There is a separate note on corporate rating services.

     introduction

Credit reporting information - personal financial history data - is a glue that binds together different parts of contemporary advanced economies and has become a focus of concerns about electronic privacy. Scott Sandage's Born Losers: A History of Failure in America (Cambridge: Harvard Uni Press 2005) comments that credit reporting normalized surveillance so that it has become "a ubiquitous part of our lives, from the supermarket to the automatic teller machine".

Practice across the globe varies but typically information about consumer credit performance - slow payment or non-payment of loans from financial institutions, court judgments relating to debts and bankruptcies - is added to a small number of data repositories that are operated on a commercial basis.

That information is provided and accessed by a wide range of organisations, which include banks, retailers, health service providers, telecommunication operators, government agencies, debt collection services, vetting services and recruitment agencies.

There is a similar variation in regulation of how data is collected, stored, disseminated and corrected.

Growth of major national and transnational credit reference services has reflected the ease with which financial history data can be gathered in an electronic environment and the advantages of economies of scale. As the following pages suggest, the services have attracted increasing attention from government regulators concerned with privacy, trade practices and financial supervision.

Large-scale tenancy reporting services - databases about the rental of residential accommodation - were slower to emerge and have attracted less attention. Arguably that is because the data often relates to poorer members of society.

Large-scale identify verification or reference services are a more recent development, centred on confirming the accuracy of claims about employment history and qualifications (and the absence of criminal histories). Although initially aimed at employers they have sought to expand into new markets such as dating, on the premise that your potential loved one cannot be trusted to divulge past convictions for drink-driving or axe-murder.

     how much data

Estimates of the extent, composition, accuracy and use of credit data vary significantly.

It has been suggested that there are two credit reporting files for every Australian and over three for every US citizen. The US Consumer Data Industry Association (CDIA) claims that the three largest credit reference bureaus maintain around 190 million credit files, used by credit reporting agencies across the nation. Over two billion items of data are supposedly added to US credit records each month, with an estimated one billion consumer credit reports being issued annually.

The extent of inaccuracy is uncertain, typically identified when consumers are denied credit, are victims of identity theft or respond to offers to purchase access to their credit records. Comprehensive figures are not available: industry studies have claimed that error rates are under 1%, consumer groups have identified inaccuracies of over 10% (although from what appear to be different samples).

Estimates of the size of tenancy databases varies, with suggestions that there may be over 1 million files in Australia.

     credit data in other decisions

Credit scores play an increasingly important role in the ' financial lives of consumers and can affect their economic security, for example affecting both their ability to get mortgage/non-mortgage credit and - as importantly important - the price they will have to pay for it.

In addition to credit applications, credit scores are increasingly used for other purposes such as determining auto insurance rates, recruitment and approving rental applications. In some US states utility companies may use credit scores to determine whether a deposit is required. Texas for example allows credit scores to be used to determine what rate consumers will have to pay for electricity.

Several US states have introduced legislation to ban use of credit scores for particular noncredit purposes, such as car insurance and utility rate setting. Others mandate that credit-scoring models are publicly accessible, so that consumers can better understand how scores affect access to and pricing of products. At the national level there has been discussion about the need for creditors to provide credit bureaus with complete and accurate data. The rationale is that consumers would thereby benefit from on-time payments, lower credit balances, and other behavior that should improve their credit risk and thus their credit scores.

     studies

We have pointed to studies of individual credit rating organisations later in this profile.

There has been no major study of the Australian and New Zealand credit reporting industry. An introduction to the US industry is provided by Mark Furletti's 2002 An Overview and History of Credit Reporting (PDF), Robert Hunt's 2003 The development and regulation of consumer credit reporting in America (PDF) and the 2003 An Overview of Consumer Data and Credit Reporting (PDF) by Robert Avery, Paul Calem & Glenn Canner.

Background to the early development of the industries is provided by Lendol Calder's Financing the American Dream: A Cutural History of Consumer Credit (Princeton: Princeton Uni Press 1991), James Grant's Money of the Mind: Borrowing & Lending in America from the Civil War to Michael Milken (New York: Farrar Straus Giroux 1992), the elegant Born Losers: A History of Failure in America (Cambridge: Harvard Uni Press 2005) by Scott Sandage and As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America (Oxford: Oxford Uni Press 1989) by Theresa Sullivan, Elizabeth Warren & Jay Westbrook.

Financial Privacy, Consumer Prosperity, and the Public Good (Washington: Brookings Institution 2003) by Fred Cate, Robert Litan, Michael Staten & Peter Wallison might usefully be read in conjunction with Reputation: Studies in the Voluntary Solicitation of Good Conduct (Ann Arbor: Uni of Michigan Press 1997) edited by Daniel Klein. Klein's Credit Information Reporting: Why Free Speech is Vital to Social Accountability and Consumer Opportunity paper is one of the more cogent arguments for increased transparency in reporting consumer financial histories.

Transborder issues are explored in papers in Credit Reporting Systems & the International Economy (Cambridge: MIT Press 2003) edited by Margaret Miller.

For Australian tenancy reporting services the salient documents are the Australian Housing & Urban Research Institute's 2003 Tenancy Databases in the context of Tenure Management: Risk Minimisation and Tenant Outcomes in the Private Rental Sector (PDF), 2001 Queensland Residential Tenancies Authority study (PDF) and the Commonwealth/State Ministerial Council on Consumer Affairs 2003 discussion paper.

     issues

Information about personal financial history - such as bankruptcy, degree of indebtedness, delays in repaying borrowings and failure to comply with conditions when renting residential accommodation - is of value to banks, real estate managers, insurance providers and other bodies. That value underpins dealings with individuals and more broadly allows lenders and property owners/agents to assess markets and make investment decisions regarding groups of individuals.

Operators of rental tenancy databases have suggested an additional 'deterrent' value, with claims that problem tenants are inhibited from applying for housing through agents that use the databases. One agent quipped that with a national database "you can run but you can't hide ... especially not in my properties".

Operators of credit reference and tenancy reporting services have thus used data in two ways.

The first, sometimes called negative or black data, primarily involves adverse information. It is used to exclude applicants (eg ensure that loans are not made to poor credit risks) or impose an appropriate premium (eg those with a poor credit history pay a higher interest rate for loans or a higher service fee to offset the likelihood of default and recovery action).

The second use - positive or white listing - features applicants with a 'good record' or other desirable attributes.

The accuracy and use of credit/tenancy databases is contentious. A 2004 study by US group PIRG claimed that -

25% of its sampled credit reports contained errors serious enough to result in denial of credit
79% of the reports contained mistakes of some kind
54% contained personal demographic identifying information that was "misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect"
30% of the reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open

In practice those figures are less alarming than the difficulty of achieving corrections, recognised by legislation such as the US federal Fair & Accurate Credit Transactions Act 2003 (FACT Act), which identifies a right to a free annual credit report on request. We have discussed issues of access to and correction of faulty ratings/reference data later in this profile.

A largely undiscussed issue is dissemination and aggregation of data, with use - unknown to (and uncontrolled by) consumers - by third parties. Those third parties may include government agencies. Lack of knowledge about what information is being data mined is a concern, particularly when information may not be correct.

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