A bad deal for consumers: Lenders
hide data to hoard 'best' customers
By Lucy Lazarony • Bankrate.com

Having trouble landing that mortgage or a lower rate credit card deal? It may not be something you've done, but something your creditors aren't doing.

After years of openly sharing customer credit information with the credit bureaus, some lenders are holding back. Some major credit card companies are keeping credit line and balance information to themselves. And many subprime lenders, whose loans go to customers with less-than-perfect credit, aren't reporting when those consumers clean up their acts and start paying on time.

"It's a disturbing trend," says Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group. "The banks and their lobbyists talk about the free flow of information like it was in the Constitution or something, and here they are withholding information. It's extremely troubling."

And consumers are paying the price.

Captive consumers hidden away
Holding back credit information helps banks "hide" customers from competing lenders that may offer better deals. It also skews credit scores, which means consumers may be refused credit or get stuck paying high interest rates.

"It really stinks," says Linda Sherry, editorial director of Consumer Action, a San Francisco, Calif.-based consumer advocacy group. "They want to hold customers captive. They don't want customers who are building up a credit rating to go out and get better offers ... It's a greedy kind of move."

People who already paying through the nose for credit -- folks in the subprime market who are building up credit or working to rebuild damaged credit -- may be hurt the most by this trend.

Typically, it takes a year or so of on-time credit payments for people to build up enough credit and 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.

"The credit report is very vital to people moving up in the world," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. "How do you expect people to build up a good credit rating if the good stuff is not being reported?"

Borrowers missed the boat
The National Community Reinvestment Coalition has a related question: How do you expect people to land a better credit deal? The Washington, D.C.-based nonprofit group believes many minority and subprime borrowers are missing out on the recent boom in home refinancing because of their lenders' stinginess with information.

"With the lowest interest rates in years, 1998 was the year to refinance your mortgage. Minorities and working people were not able to take advantage of bargain interest rates due to the deceptive practices of subprime, credit card and other high-interest lenders," said John Taylor, president of the NCRC, in a July press release.

Folks with a long history of paying their bills on time also may be paying more than they should for credit if their credit card companies are withholding any account information from credit bureaus.

Lenders use consumer credit information from credit bureaus when calculating credit scores and deciding who qualifies for credit and at what interest rate. They also use this information when targeting consumers with new credit offers.

Say a lender checks a consumer's credit report and sees a credit card with a $10,000 line. The lender may send out an offer to that consumer for a card with $12,000 credit or one with a lower interest rate.

"Everybody's trying to steal each other's accounts," says David Gibbons, deputy U.S. Comptroller of the Currency. "That's what prompted people in the credit card area to stop reporting."

Closing the door on information
Discover stopped reporting credit line information two years ago. Several large issuers jumped on the bandwagon in early 1999, including First USA and Household Credit Services.

"We didn't want to find ourselves as the only one submitting that information because we would be at a competitive disadvantage," says Craig Streem, vice president of investor relations at Household.

John D. Hawke, the Comptroller of the Currency, spoke out against this practice in May and called for full disclosure of credit information. Earlier this summer, Gibbons said lenders accounting for 50 percent of the U.S. credit card market were withholding information from credit bureaus.

Feeling the heat from banking regulators, card issuers are seeking to resolve the problem themselves behind the scenes.

Some reporting resumed
Both First USA and Household have started reporting credit line information again. Fleet declined to comment. Citibank did not return repeated phone calls. MBNA, Providian, Chase Manhattan and Bank of America all say they support the full disclosure of credit information.

"The major credit card issuers that are involved in this reporting issue are trying to solve the problems themselves," Gibbons says. "We're sort of waiting and seeing if a credit card industry can come up with a solution."

The U.S. Congress is also eyeing card issuers carefully.

"This is something we're definitely looking at," says Amy Simmons, a spokeswoman for the ranking minority member of the U.S. House Committee on Banking and Financial Services, Rep. John J. LaFalce (D-N.Y.).

"In the meantime we urge credit card issuers to conduct their business truthfully and in the interest of consumers. Those who fail to do so only invite Congressional scrutiny."

Outside the regulators' authority
The holding-back trend among subprime lenders may be tougher to resolve. Gibbons said a fair number of subprime lenders are not reporting and may have never reported their customers' payment history information to credit bureaus. The trouble is many of these subprime lenders are non-banks and do not fall under the jurisdiction of banking regulators.

The OCC and other banking regulators continue to track the trend and are trying to determine what if anything can be done. They urge banks involved with subprime lending to fully report credit information to credit bureaus.

In the meantime, "It's up to the consumer to help protect themselves. Be a smart consumer. Be a knowledgeable shopper," says Craig Watts, consumer affairs manager for Fair, Isaac & Co. in San Rafael, Calif., the company that creates the most widely used credit scoring system. "If consumers get on the bandwagon, they might make a difference."

-- Posted: Sept. 3, 1999