Last week, the Consumer Financial Protection Bureau (CFPB) announced the actions it had taken against two credit reporting agencies and their subsidiaries for deceptive advertising practices with credit scores and related subscription programs. The CFPB announcement explained:
"TransUnion, since at least July 2011, and Equifax, between July 2011 and March 2014, violated the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act by: 1) Deceiving consumers about the value of the credit scores they sold: In their advertising, TransUnion and Equifax falsely represented that the credit scores they marketed and provided to consumers were the same scores lenders typically use to make credit decisions. In fact, the scores sold by TransUnion and Equifax were not typically used by lenders to make those decisions; 2) Deceiving consumers into enrolling in subscription programs: In their advertising, TransUnion and Equifax falsely claimed that their credit scores and credit-related products were free or, in the case of TransUnion, cost only “$1.” In reality, consumers who signed up received a free trial of seven or 30 days, after which they were automatically enrolled in a subscription program. Unless they cancelled during the trial period, consumers were charged a recurring fee – usually $16 or more per month. This billing structure, known as a “negative option,” was not clearly and conspicuously disclosed to consumers."
Credit scores are numerical summaries designed to predict consumer repayment behavior and while using credit. Those numeric summaries attempt to indicate a consumer's credit worthiness based up like their bill-paying history: the number and type of credit accounts, the total amount of debt, if the credit accounts are maxed out, the age of that debt, whether bills are paid on time, collection activities by lenders to get paid, and the age of the consumer's accounts.
It is important for consumers to know that lenders rely in part on credit scores when deciding whether to extend credit to consumers and how much credit to extend. Plus, there are several branded credit scores in the marketplace. So, no single credit score is used by all lenders, and lenders may use one or more branded credit scores when making lending decisions. Also, the credit scores sold to consumers by TransUnion:
"... are based on a model from VantageScore Solutions, LLC. Although TransUnion has marketed VantageScores to lenders and other commercial users, VantageScores are not typically used for credit decisions."
Generally, the higher a credit score, the less risky that consumer is to lenders. The U.S. Federal Trade Commission (FTC) has a helpful site that explains credit scores and provides answers to common questions by consumers.
The CFPB actions require Equifax and TransUnion to pay fines totaling $5.5 million to the CFPB, and to pay more than $17.6 million in restitution to affected consumers.TransUnion's share of the fines is $3 million, and Equifax's share is $2.5 million. Other terms of the enforcement action:
"TransUnion and Equifax must clearly inform consumers about the nature of the scores they are selling to consumers... Before enrolling a consumer in any credit-related product with a negative option feature, TransUnion and Equifax must obtain the consumer’s consent. TransUnion and Equifax must give consumers a simple, easy-to-understand way to cancel the purchase of any credit-related product, and stop billing and collecting payments for any recurring charge when a consumer cancels."
"Negative option" is when a free trial automatically converts to a monthly paid subscription if the fails to cancel during the free trial period. Historically, the three major credit reporting agencies have offshore outsourced call center operations. So, it will be interesting to see how many of these jobs return to the United States given the policy positions of the incoming President and his administration. And, the industry has come under scrutiny for failing to fix errors in the credit reports they sell.
The industry has had some spectacular information security failures. A May 2016 breach at Equifax exposed the sensitive personal information of more than 430,000 employees of its Kroger supermarkets client. In 2012, Equifax and some of its customers paid $1.6 million to settle allegations by the FTC about the improper sales of customer lists from January 2008 and to early 2010.
The CFPB began supervision of the credit reporting industry in 2012. CFPB Director Richard Cordray said about this recent enforcement action:
"TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises... Credit scores are central to a consumer’s financial life and people deserve honest and accurate information about them."
Kudos to the CFPB for this enforcement action.