Yes, the whole Occupy Wall Street thing seems to be losing a bit of steam, but did you hear about the changes the organization’s Alternative Banking Group proposed we make to our nation’s credit reporting system? They want a major overhaul, one that shifts credit scoring duties to the federal government, and they have issued a list of 10 recommendations for how this should be brought about. I’ll give you the highlights: full transparency is needed in regard to how credit scores are calculated, consumers should have free and unlimited access to their credit reports, conflicts of interest related to credit scoring bodies should be eliminated, and we should make sure that credit reporting practices are not somehow racist, sexist, etc. So, do they have a point?
Certainly, the credit scoring system needs to be fixed, but not necessarily in the manner recommended by the Occupy Wall Street Alternative Banking Group. You see, the group is dead on when it says that the new Regulation V (Fair Credit Reporting Act) is inadequate in that it merely transfers the authority to regulate the collection and use of consumer credit reporting data between federal agencies (from several different agencies to the Consumer Financial Protection Bureau). However, the Occupiers are off-base in suggesting that we centralize credit scoring and make the underlying formulas public. This would only make it easier for people to game the system, which would make existing credit scores less useful to banks and lead more of them to create their own proprietary scores that consumers would have no way of accessing.
What we need are changes that fix those things about the current system which are broken without creating new issues in the process. That’s why we have drafted our own would-be letter to the CFPB in order to express our recommendations for fixing credit scoring in the U.S. It’d go something like this:
“March 20, 2012
Richard Cordray, Director
Bureau of Consumer Financial Protection
1500 Pennsylvania Avenue N.W.
Washington, DC 20220
Re: Fair Credit Reporting (Regulation V)
Docket No. CFPB-2011-0029; RIN 3170-AA06
Dear Mr. Cordray:
We write this letter not to endorse the proposals made by the Occupy Wall Street Alternative Banking Group in relation to our nation’s credit scoring system, but rather to agree with their ultimate conclusion – that credit scoring improvements must be made – and to offer alternative suggestions for what those improvements should be.
The Alternative Banking Group (ABG) was right to point out that Regulation V is nothing more than a procedural law as well as to contend that the Consumer Financial Protection Bureau must make use of the resulting transfer of power to provide for significant, substantive improvements to our nation’s credit reporting system. The system’s primary issue derives from the inherent conflict of interest between what is best for consumers and what is best for credit bureaus. This conflict not only makes it difficult for consumers to get the information they need to improve their financial situations, but also prevents innovation and positive growth within the industry.
You see, credit bureaus are not incentivized to look after the interests of consumers by providing multiple access points to their data as well as different interpretations of it. Instead, the only data available to consumers from the credit bureaus is that which makes the bureaus the most money.
Credit bureaus are essentially playing favorites, using our data as bait. For example, Experian sells a FICO score based on their data to banks, but consumers themselves cannot get their hands on these scores because Experian is trying to drive FICO out of business. Many bureaus also either refuse to sell data to other companies or over-price it in order to prevent innovation that would be helpful to consumers but damaging to their financials.
Who do these sorts of tactics help? Not your average consumer, that’s for sure. That is why you, Mr. Cordray, and the Consumer Financial Protection Bureau must infuse free market principles into what is now a top-heavy industry in order to level the playing field and create a market in which multiple companies compete to create better credit scores, better credit simulators, and other credit products not yet invented that will enable consumers to make better decisions.
You do that by simply mandating that credit bureaus sell any credit report or credit score data to any eligible company for the same price they currently charge their largest clients. No more playing favorites or preventing consumers from accessing their data in the format of their choosing.
It is our hope that you both take this recommendation under careful consideration and create an open dialogue for discussion of the best ways to improve our credit system. You can’t truly serve consumers without first hearing their wants and needs, after all.
Hmm, I kind of like that. You know what? I think I might actually send it after all. I’ll keep you guys posted…better yet, just watch the news!