WASHINGTON D. C. – "This morning, we take up one of the most important issues, if not the most important, associated with the FCRA: the accuracy of the information contained in consumer credit reports."
"Changes in our financial services industries have made accuracy more important than ever. Credit report information is increasingly used as the key determinant of the cost of credit or insurance."
"By way of risk-based pricing, gone are the days when lenders merely lumped borrowers into the "qualified" or "unqualified" category. The use of risk-based pricing allows lenders to extend credit to a broader range of borrowers predicated on the assumption that borrowers receive credit terms which are commensurate with the credit risk they pose."
"As a result, credit report information has a direct impact on the amount and the interest rates at which credit is offered."
"With respect to large credit transactions, such as mortgages, rate differences can translate into hundreds of thousands of dollars over the course of a loan."
"Even in smaller dollar credit transactions, such as credit cards, rate differences can mean large amounts of money. Furthermore, with the practice of credit card companies reviewing credit reports and adjusting rates in real time becoming more prevalent, the application of risk based pricing to consumer finances is practically an every day event. Let me try to further illustrate these points:"
"This first chart provides some rough indication as to the effects that particular entries on a credit report can have on a person's credit score or credit worthiness. As is indicated, some entries, such as a bankruptcy filing can greatly reduce a person's credit worthiness."
"There is nothing wrong with this: consumers who have failed to pay their debts DO pose a considerable risk to creditors."
"But what if a bad rating is based on inaccurate information? What if you had never been bankrupt and such an item appeared on your credit report?"
"The second chart highlights the spreads in interest rates that people with differing credit scores would pay for some sample products. As the chart shows, the differences are very real."
"So are the financial consequences. Consider the cost differences for a $200,000, 30-year fixed mortgage: a borrower classified as a 'marginal' risk pays almost $90,000 more in interest than someone with an "excellent" credit rating. Someone classified as a "poor" credit risk would pay $124,000 more in interest than the person with "excellent" credit."
"Credit rating matters for other transactions as well. Someone financing a $24,000 new car with a "marginal" rating can expect to pay 127% more in interest (about $3,300) than a person with excellent credit. Someone with "poor" credit can expect to pay 255% more in interest (about $6,700). Again, what if the information that leads to a bad credit rating is inaccurate?"
"With the rewards for good credit so meaningful, and the penalties for bad credit so severe, it is absolutely critical that credit reports accurately portray consumers' true credit histories."
"Thus, the focus of today's hearing - examining the FCRA and the operation of our credit markets to determine whether or not the present system provides optimum accuracy."
"With a system as large and complex as ours, involving the transfer of billions of pieces of information, it is almost a certainty that there are going to be some errors which occur. On the other hand, the credit reporting agencies are paid to properly handle the data."
"And furnishers, who also happen to be the largest consumers of credit report information, take advantage of the efficiencies provided by the system. Both derive significant benefits from this system. Both also have a significant responsibility to get things right."
"So let us consider: how and why do errors occur in credit reporting? Can more be done to prevent errors in the first place? If some errors are not preventable, does the system enable them to be quickly recognized? Who most efficiently recognizes them? Once recognized, does the system work to ensure that errors are quickly corrected?"
"I look forward to a examining these questions with the witnesses."