Suits target dominant credit bureaus

Nation's Housing

May 02, 2004|By KENNETH HARNEY

TWO NEW legal challenges to the dominance of the American credit system by three private corporations - Equifax Inc., Experian Information Solutions Inc., and Trans Union LLC - could have far-reaching effects on homebuyers and mortgage applicants nationwide.

In separate class action suits, independent credit reporting companies have accused the three national credit bureaus of antitrust violations and predatory pricing designed to put them out of business. That, according to the suits, would harm millions of home mortgage applicants whose credit files contain erroneous, incomplete and outdated information.

The independent reporting companies pioneered and specialize in "rapid re-scoring," a technique that allows mortgage applicants' credit files to be corrected within days, rather than a month or more it takes through the national bureaus. Rapid re-scoring typically allows homebuyers to qualify for better interest rates and terms than they'd receive with erroneous information artificially depressing their credit scores.

In suits filed in federal and state courts in California, the independent agencies said Equifax, Experian and Trans Union have tried to eliminate them by charging them higher wholesale prices for credit reports and scores than the bureaus charge the independent agencies' own mortgage lender customers.

The plaintiffs also charged that the three bureaus have drastically raised prices for rapid re-scoring while simultaneously prohibiting local re-scoring specialists from "directly or indirectly" passing on those costs to the consumers seeking the re-scoring services.

Equifax and Experian declined to comment on the suits. Trans Union did not respond to requests to comment.

In the federal case, filed in U.S. District Court in Santa Ana, Calif., the plaintiffs are 23 independent credit agencies with home offices in 15 states. In the second suit, filed in California Superior Court in Alameda County, the sole plaintiff is the National Credit Reporting Association , which represents small, independent credit agencies.

The independents are known in the trade as "resellers." They buy raw credit file data and scores from each of the national bureaus and merge the information into credit reports for mortgage applications. They also frequently help home loan applicants correct inaccuracies in the national bureau files.

The allegations brought by the independent agencies spotlight aspects of the American credit system that most consumers know little about. Although credit file information vitally affects the interest rates that homeowners pay on their mortgages, auto loans and other credit, the American system of collecting credit data is voluntary and lightly supervised by governments at any level.

The three big national bureaus depend on millions of credit account grantors, debt collectors, banks and public agencies to make information available to them regularly on the more than 200 million American consumers they track.

The suppliers of information sometimes send consumer account data to all three national bureaus. Sometimes they report to just one or two. Some lenders report to none of the three. No law requires them or anyone to supply information to any of the bureaus.

Consumer group studies in recent years have documented serious problems with the accuracy of the raw data in the private national bureaus' files. A 2002 study of more than 500,000 randomly selected credit files by the Consumer Federation of America and the National Credit Reporting Association found that nearly 80 percent were missing at least one revolving credit account in good standing, one-third omitted a mortgage account that had never been paid late, and 43 percent had conflicting information about late payments.

Accurate information in the bureau files is critical to a consumer's credit score.

The Consumer Federation study found that because the three national bureaus often have widely varying information in their files about millions of consumers, credit scores can vary significantly - 40 to 100 points and more - from one bureau to another. Score variations that large can cost homebuyers tens of thousands of dollars in higher mortgage payments.

With so much riding on credit scores in the increasingly automated home loan market, mortgage brokers and banks have turned to local, independent credit agencies to get erroneous information purged or corrected quickly. The independent agencies have small, highly trained staffs that know how to contact debt collectors, department stores, health-care billing departments and other creditors to correct bad data in the national bureau files within two to four days on average.

The plaintiffs in the two suits charge that the national bureaus seek to eliminate the local, independent agencies so that they can exert full monopoly control over the pricing and availability of credit reports, scoring and re-scoring directly or through their own affiliated agencies.

If they succeed, says Terry Clemans, executive director of the National Credit Reporting Association, mortgage applicants will lose "a safety net" between them and potentially bad data in the three national bureau files.

Ken Harney's e-mail address is kharney@winstarmail.com.

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