Americans living in predominantly black neighborhoods in the United States are twice as likely to dispute an error on their credit report than residents of predominantly white neighborhoods, according to federal regulators. And the prevalence of such errors could harm some households whose finances were affected during the COVID-19 pandemic.
So concludes the Consumer Financial Protection Bureau in a report that one analyst says could lead to legal problems for the three major credit bureaus or renew efforts by lawmakers to tighten rules on businesses.
The CFPB “tells Congress and advocacy groups that it thinks there are racial factors at play when it comes to credit bureau errors,” Jaret Seiberg, analyst at the Cowen Washington Research Group, said in a research note. He also expects the agency to investigate credit reporting agencies, which could lead to enforcement action.
The bureau did not elaborate on why communities of color have more error litigation activity on their credit reports, but CFPB director Rohit Chopra called the trend “far too prevalent.”
In its analysis, the CFPB looked at roughly 5 million credit reports and then determined the impact of litigation on auto loans, student loans, and credit card accounts consumers opened between 2012 and 2019.
The result: Consumers in black neighborhoods had the highest litigation rate at 2.8% for auto loans, 2.4% for student loans, and 4.7% for credit card accounts. This compares to 0.8%, 0.9% and 2.5%, respectively, for predominantly white communities. Hispanic neighborhoods had the second highest dispute rate at 1.3%, 1.3% and 2.7%, respectively.
Common credit report errors that are difficult to correct
A 2015 Federal Trade Commission study found that one in five Americans had an error on their credit report. Black and Hispanic consumers tend to have lower credit scores than their white counterparts, studies have also shown.
The CFPB’s findings show that credit report errors have a disproportionate impact on black and Hispanic households, said Chi Chi Wu, an attorney at the National Consumer Law Center who focuses on consumer credit issues.
“What this study shows is that if we improve the accuracy of credit reports, the benefit will help black and Latin consumers even more,” she told CBS MoneyWatch.
The major credit bureaus – Equifax, Experian and TransUnion – have reviewed their practices in recent years, including the frequency of errors and the difficulty consumers report in getting businesses to correct their credit records. The CFPB received more than 542,000 credit report complaints last year, more than double the number in 2019.
Common errors cited included having an incorrect home address for the consumer, marking an account as open even though it has been closed, and having a bad balance on an open account.
Equifax, Experian and TransUnion did not respond to requests for comment and instead referred questions to its business group, the Consumer Data Industry Association. The association said that internally it does not see the high volume of consumer complaints the CFBP has referred to.
“We do not believe that the complaints in the CFPB database accurately reflect consumers’ experiences with credit reporting agencies,” the association said in a statement to CBS MoneyWatch. âAccuracy is the lifeblood of the credit reporting industry and getting consumer-friendly credit reports is our most important job. “
The Biden administration has proposed creating a government-run credit rating agency hosted by the CFPB, although federal lawmakers are divided on the idea, according to American Banker.
Wu supports legislation that requires credit bureaus to ensure that people’s reports are accurate. The Protect Your Credit Score Act, which requires better reporting on credit accounts, was passed in the House but died in the Senate in 2020, she noted.
In its report, the CFPB did not say whether the disputed articles by consumers were really inaccurate information, but a higher rate of disputes among blacks and Hispanics “indicates they have more errors,” said Wu said.
The association rejected the CFPB’s findings on black and Hispanic communities and said the credit report disputes had no ethnic bias because the data “does not contain race, gender, marital status or other types of demographic information “.
“The CFPB report undermines and neglects the work that credit bureaus are doing to expand access to credit in minority and underserved communities,” the association said in its statement.