Shoddy Credit Ratings
Why They Happen? Why They are Tolerated?
Posted Feb 17, 2013
A recent report of the Federal Trade Commission called attention to disturbing practices in the credit rating business. Among the findings: “nearly 26 percent of consumers . . . found at least one potentially material mistake on at least one of the three credit reports, and 20.6 percent had changes made after attention was drawn to the errors. ‘One out of five Americans has an error on their credit report,’ FTC Chairman Jon Leibowitz told 60 Minutes in a report that aired Sunday night.”
Daniel Gross, in The Daily Beast, explained how this has come about: “Lending has evolved from an intensely personal business—one in which the lender would personally assess the creditworthiness of a borrower—into an automated, purely data-driven industry.” The computer generated score that banks now rely on “is created by thousands of data providers furnishing information electronically to the computer systems maintained by the credit bureaus. Of course, these systems are compiled and maintained by humans, which means errors can easily be introduced. A wrong keystroke, an incorrect Social Security number, or simply a poorly designed software system can alter an individual’s rating.”
The process has been automated and dehumanized. But the real problem is that the person whose score is calculated is not actually a customer. As Gross points out, the credit bureaus do “sell credit reports and credit monitoring systems to individuals. But the bread and butter of the business is selling the data to banks, credit-card companies, and mortgage firms. In other words, they sell the information on a wholesale basis to other businesses. And as a result, they are not really set up to deal with consumers as individuals.”
In other words, the normal pressures of competition and accountability that motivate businesses to serve their customers are lacking when it comes to the subjects of their reports. Indeed, since the customers are banks, the faster and cheaper the credit rating service provided the greater the profitability. And the errors don’t materially affect the banks. In most cases they will never get to know about them. (See, “Why Consumers’ Credit Reports Contain Errors.”)
We tend to take it for granted that greater care is taken in such matters because, at one point, greater care was actually taken. Bankers used to be embarrassed and upset when their customers found mistakes in their accounts. But who really cares when attention to banking customers has been relegated to “relationship managers,” whose main job is to sell more “products”? And when the aggrieved subject of an inaccurate report eventually gets someone on the phone who replies “I do apologize for that” in a crisp and efficient tone, you know they are reading from a script.
Perhaps if the Consumer Protection Agency gets off the ground there will be more motivation to attend to accuracy. To be sure, the motivation will not be to serve and protect customers so much as to avoid punishment. But that may be enough – and as much as we can expect in the age of investor capitalism.