The Newest Credit Reporting Act Doesn't Have A Chance
The bill proposes sweeping changes to almost all aspects of the credit reporting and credit scoring environments. It contains two or three provisions that would reasonably improve the credit reporting environment, but it also contains many more that would radically alter credit report data and credit score capabilities.
The bill is sure to get considerable opposition, and rightfully so. Here's why …
Unreasonable data retention limitations
Today, bankruptcies can be maintained for 10 years and all other derogatory credit entries (collections, judgments, late payments, defaults) can be maintained for seven years.
The act would require that bankruptcies be removed from a consumer's credit report in seven years, and all other derogatory entries be removed after four years. The reason Ms. Waters gives for the reduction in credit reporting time frames: "Sweden limits the reporting period to three years and Germany limits the period to four years."
The most unreasonable aspect of the Waters' bill is a requirement for the credit reporting agencies to delete any adverse item within 45 days of it being paid or settled. That means if you settled your defaulted credit card debt or disposed of your home via a short sale, the item would be removed 45 days after the item was updated to show a zero balance, as if it never existed.
This would act as an incentive for some people to game the system by taking out large amounts of debt, defaulting, and then settling the debt knowing their credit reports would be clean in less than seven weeks.
Unreasonable dispute investigation procedures
Today, if you challenge information with the credit reporting agencies, they are required to perform a reasonable investigation, which almost always includes them going back to the lender or collector and asking them to confirm that what they're reporting is accurate. This process is widely criticized by advocates as not being an actual investigation.
The Waters bill would require the credit bureaus to perform an investigation independent of contacting the furnishing party, which makes no sense at all.
How in the world would Equifax know the actual correct balance on your Chase credit card? How would Experian know if your Wells Fargo mortgage was or wasn't paid late? How would TransUnion know if you've never actually applied for an account with Verizon wireless? Of course the answer to all of these questions is, "they wouldn't."
Most of the incorrect information on credit reports isn't caused by the credit reporting agencies but is, instead, incorrectly reported by the banks and/or collectors. It's imperative that the credit bureaus be allowed to continue to go to those companies and ask them to check their records and documents to determine if what is on your credit report is accurate.
Unreasonable changes to credit scoring models
If the Waters bill were passed, then credit scoring models would not be able to consider any derogatory credit entry that was subject to a "Federal credit restoration program."
This one is especially confusing, because there is no such thing as a federal credit restoration program, which the bill defines as any federal program that assists a consumer to rehabilitate their credit. Are the feds really considering getting into the credit repair business?
Further, credit scoring systems would have to treat all auto, mortgage, and student loan credit inquiries that occur within 120 days of each other as a single inquiry in the consumer's score. No credit scoring model that is or was commercially available in the history of credit scoring has ever treated inquiries in such a way.
If this became the new standard, then it would render all 60+ FICO scores and all three VantageScore credit scores illegal to use, because they don't treat inquiries like that.