Lenders defy credit-reporting crackdown, hoarding data that could save you money
By Lucy Lazarony • Bankrate.com

Regulators have turned up the heat. Credit bureaus have beefed up their policies. Federal legislation has been proposed. And some lenders still won't share information about customers with the credit bureaus.

"It's a serious problem," says Matthew Lee, executive director of Inner City Public Interest Law Center. "It's really irresponsible for companies not to report the data."

Some major credit card companies are refusing to disclose credit line and balance information, fearing competitors will pillage their customer list for prospects. And many subprime lenders, whose customers are working to build or rebuild credit, aren't reporting on-time payments.

Cramping consumer credit
Holding back credit information allows lenders to shield their best customers from competing lenders that may offer better deals. It also skews credit scores, which means consumers who deserve better may be refused credit or forced to continue paying high interest rates.

Folks with little or blemished credit are hurt most by this trend.

Typically it takes a year or so of on-time credit payments for people to build up enough credit to qualify for lower rates on credit cards and loans.

When lenders fail to report on-time payment history, all that good behavior is for naught. No one but their current lenders -- who are apt to keep charging high interest rates -- know about it.

"You've pulled yourself up. You're making all your payments. If your good payment history is not reported, you're stuck and you have no idea," says Frank Torres, legislative counsel for Consumers Union.

So folks who are already paying the highest interest rates around could continue to do so indefinitely.

"It's a practice that clearly injures people. This is a vulnerable population that I think believes if they pay back these loans they're getting somewhere," Lee says. "This is a predatory practice. You really are confining someone."

How bad can it get?
Valerie Coffin, a national researcher for Association of Community Organizations for Reform Now, points to the case of a Baltimore woman.

After more than a year of on-time mortgage payments, she wanted to refinance her loan so she could do some home repairs. The trouble was her subprime lender had not reported her mortgage or any of her subsequent payments to the credit bureaus. Her lender, the very company who handled her mortgage, allowed her to refinance, but not before jacking up the interest rate. A key reason was her lack of credit.

"They didn't report it and they partially blamed that for giving her a higher rate," Coffin says. "That poor woman, right now, is facing foreclosure."

Leashing the predators
A joint bill introduced on April 12 by Sen. Paul S. Sarbanes, D-Md., and Rep. John J. LaFalce, D-N.Y., aims to end this and other abuses associated with predatory lending.

The bill, titled "Predatory Lending Consumer Protection Act of 2000," would require mortgage lenders to report the complete payment history of customers to a credit bureau each quarter.

"Predatory lending practices represent a frontal assault on homeowners all over America," Sarbanes says. "The predatory lending industry plays on the hopes and dreams of homeownership to cynically cheat the people of this nation."

The whole issue of lenders trying to hold on to customers by holding back credit information first came to light last spring. John D. Hawke, comptroller of the currency, spoke out against this practice in May and called for full disclosure of credit information.

At the time it was estimated that lenders accounting for 50 percent of the U.S. credit card market were withholding information from credit bureaus. Little has changed.

"That's still accurate. That's still the game," says David Gibbons, deputy comptroller of the currency.

"A couple of players in the business have chosen to report again. And a couple of others are not. They've decided to go the other way."

The news is not much better among subprime lenders. Research done by Bankrate.com in October showed that three of the top 10 subprime lenders in the United States report either none or just some of their customer loans to the credit bureau.

Experts see little progress despite a slew of urgings and warnings from regulators and consumer advocates. The problem seems to be that lenders have more to gain by holding back credit information than from disclosing it.

"If you're a subprime lender and you have someone whose always made on-time payments, that's a very valuable account," says Lewis Mandell, dean of the School of Management at the State University of New York at Buffalo. "They're as valuable as a prime customer and you're charging a subprime rate."

Lee puts it bluntly.

"You make more money gouging -- that's the problem," Lee says. "For strictly economic reasons, even with guidance and speeches by regulators, they're still not going to do it."

Holdback domino effect
It's a similar story with credit card companies. Big credit card companies, such as Discover and American Express, are better off holding back credit line information than sharing it. It helps them hold on to their best customers and keeps competitors away. Here's how.

Say a lender checks a consumer's credit report and sees an American Express account with a $10,000 credit line. The lender may send out an offer to that consumer for a card with $15,000 of credit or one with a lower interest rate.

"We don't want to make it easy for our competition to try to steal our customers," says Gail Wasserman, vice president of public affairs at American Express.

Once one credit card company starts holding back information, others follow.

"What happens is two credit grantors decide not to report credit line information. Two becomes four. Four becomes eight ... Someone else says 'I won't report balance,' " says Tony Jones, vice president of sales and services at Experian, a major credit bureau.

"We really start to disadvantage the consumer. The file gets weaker and weaker."

Holes in consumer credit files affect credit scores. Some people may end up paying more for credit than they should because their credit score is lower than it should be.

"The underlying component is the data. If we don't have data, we don't have stable scores," Jones says.

Plus, as much as lenders hate the idea of competitors wooing their best customers -- consumers may come away with better deals.

"Reporting positive history opens up customers to competitors -- that's good for consumers," Torres says. "They sell everything else about you but they don't give this up. I think that frustrates a lot of people."

Industry efforts largely ignored
So far industry efforts to address this problem have had little impact.

The Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, Office of Thrift Supervision and the National Credit Union Administration sent an interagency letter warning banks, thrifts and credit unions of the trend in January.

Freddie Mac and Fannie Mae, two secondary marketing agencies that buy loans from mortgage lenders after they're made, are refusing to do business with lenders that hold back information from credit bureaus. However, very few of the loans that they buy are from subprime lenders.

The country's three major credit bureaus, Equifax, Trans Union, and Experian have also taken action by beefing up their marketing policies.

Lenders that report none of their customers' credit information have been blocked from using a credit bureau's marketing services for some time. Now lenders that withhold any aspect of credit information will feel the pinch.

Under the new policies, a credit card company that won't disclose credit line information on its own customers can't view the credit line information of other companies' customers. Ditto for subprime lenders who fail to report payment history information.

"It's kind of like you get what you give," says Colleen Martin, a spokeswoman for TransUnion.

Whether these changes will nudge more lenders toward full credit reporting is hard to say.

Since implementing its policies in January, more than 20 lenders have moved to full file reporting, says Rob Hogan, senior vice president of operations at Equifax.

Experian reports that a large credit card issuer started reporting credit line information again earlier this spring.

"We've had people come back who went over to the dark side," Jones says. "They've come back to the light. So there is some good news."

But some experts believe companies that are entrenched and prospering in the "dark side" aren't likely to budge. These companies can live without peeking at credit lines or payment histories of competitors' customers.

The nation's largest credit card companies, with their vast marketing and risk analysis departments, aren't likely to change the way they do business because credit bureaus have tightened their marketing guidelines.

"They can buy information or compile information on their own that's going to be just as good ... They're that sophisticated," Mandell says.

As for the subprime mortgage lenders, they, too, can land new customers without the help of credit bureau data. They get plenty of walk-in business and they can hire a mortgage list company to track down credit-needy customers.

"It may have some effect but it won't address the full weight of the problem," Coffin says.

"We don't believe in industry self-regulation. They've been saying they'll self-regulate for years and abuse has persisted and even increased. We'll definitely pursue legislative action."

Legal action lagging
Unfortunately that action may take awhile. The Sarbanes-LaFalce bill has a long way to go before it becomes law, and whether the credit reporting aspect of the bill survives is anyone's call.

But it may be telling to note that even a spokeswoman for LaFalce, the ranking minority member of the U.S. House Committee on Banking and Financial Services, says industry attempts at self-regulation need more time to take effect.

In the meantime, consumer advocates and regulators continue to urge lenders to come clean with credit information.

"We're still here as regulators encouraging full file reporting. That would be the best solution," Gibbons says.

As Mandell points out: "The more information that's out there, the more efficiently the system functions, the cheaper the credit will be for you and me."

Consumers are urged to check their credit reports to make sure creditors are reporting positive credit information. Torres suggests people keep records of their on-time payments as a safeguard.

"Sometimes the burden is just on the consumer."

-- Posted: April 28, 2000