- 50th Anniversary
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- Donahue Lecture Series
Today, it is common for employers to look at job applicants’ credit history before making hiring decisions. Even a cursory look at a popular job listing website reveals that employers require credit checks for jobs as diverse as doing maintenance work, offering telephone technical support, assisting in an office, working as a delivery driver, selling insurance, laboring as a home-care aide, supervising a stockroom, and scooping frozen yogurt. The Society for Human Resources Management (SHRM) surveyed its members in 2010 and concluded that 60% of them check an employee’s credit history when hiring for some or all positions. Yet despite the prevalence of employment credit checks, researchers, policymakers, and employers understand little about what credit checks reveal to employers, their consequences for job applicants, or their overall impact on our society. This Article, drawing on new data from Dēmos’s 2012 National Survey on Credit Card Debt in Low- and Middle- Income Households, addresses these questions and finds substantial evidence that employment credit checks constitute an illegitimate barrier to employment. . .
Empirical data, qualitative analysis, and case studies document the prevalence of medical debt in America. However, the influence of medical debt on credit reports and scores has not been thoroughly examined. We do know that medical payment data are not uniformly reported to consumer reporting agencies. Unlike other credit-report information, the type of entity furnishing the data often determines whether medical-bill data are used in a credit score. We also know that medical-billing errors are commonplace and that medical collections frequently involve disputes with insurance companies over liability for the accounts. Such distinctive problems⎯together with the unique conditions under which medical debt is incurred⎯raise concerns about the predictive value of medical payment data in assessing credit risk.
Our current credit-scoring systems have a disparate impact on people and communities of color. These systems are rooted in our long history of housing discrimination and the dual credit market that resulted from it. Moreover, many credit-scoring mechanisms include factors that do not just assess the risk characteristics of the borrower; they also reflect the riskiness of the environment in which a consumer is utilizing credit, as well as the riskiness of the types of products a consumer uses. . .
The significant increase in the number of consumer transactions, along with the expansion of information technology, has created massive amounts of detailed information on an individual’s credit history. Consumer credit reporting agencies (CRAs) play an important role in this financial information market.
Although the credit-reporting system has significant economic benefits, CRAs have a tarnished reputation as far as consumer protection is concerned. While making their business out of gathering, compiling, and analyzing consumers’ information, CRAs generally do not have privity of contract with those very same consumers. Thus, the CRAs have little or no incentive to protect consumers’ privacy and ensure the accuracy of every single credit report. Such lack of incentive has resulted in numerous consumer problems, including inaccuracies in credit reports and erroneous credit scores; infringement of consumers’ right to privacy; contribution to the prevalence of identity theft; and the creation of a fertile ground for consumer manipulation through targeted marketing lists.
This Article suggests that the current regulatory system has been captivated by the misconception of the consumer as a homo economicus. Existing regulations have given consumers a significant role in facilitating the production of more accurate credit, envisioning rational, vigilant, and alert consumers who regularly monitor their credit reports, dispute errors, and opt out from marketing lists. Studies have shown, however, that consumers’ rationality in decision-making is in fact doubtful, and so too is the justification of imposing monitoring responsibilities on consumers.
This Article challenges the economic-regulatory approach through the behavioral-economic approach—a relatively new model that aspires to explain consumers’ biases and cognitive limitations, which are absent in the standard economic framework. This Article explores two potential consumer protection mechanisms, drawn from the behavioral-economic framework: applying psychological tools, such as disclosure and framing, for a better-designed system; and enhancing consumer financial literacy.
This Article explores the new world of financial decision-making, which draws on a range of Internet techniques. While some practices are regulated as traditional credit reports under the Fair Credit Reporting Act (FCRA), 15 U.S.C. §§ 1681–1681x, credit bureaus and other financial firms are expanding into currently unregulated areas, including online marketing and sales. Does the FCRA need to be updated to address the growing use of real-time database scoring and decision-making on the Internet? Where is the line drawn between when an online, real-time decision-making score is used simply to serve as advertising for a financial product or to make a decision about establishing a consumer’s eligibility for credit? When companies use a consumer’s online profile for establishing his or her eligibility for credit, does it become a consumer report? As financial firms use powerful digital tools to precisely identify and market to potential customers in real time, are they compiling prescreened lists actionable under the FCRA?
Credit scores have become an integral component of the credit landscape. As that landscape shifts, credit-score algorithms should adapt to changes in consumer behavior that are reflected in the information that creditors share with credit-reporting agencies. In addition to adjusting the algorithm’s mix of characteristics and associated score weights over time, model developers should also evolve the predictive characteristics⎯those building blocks of the score algorithm⎯in order to account both for changes in the ways consumers seek and use credit, and for the introduction of new financial products. Through such advances, scientists can develop increasingly predictive scores based on credit information, and they can develop more sophisticated logic that recognizes consumers who manage credit responsibly. This Article discusses three different research studies. The first study focuses on changes made while redeveloping an earlier generation of the FICO Score algorithm. FICO scientists introduced logic to improve the way the algorithm evaluated creditinquiry information, making it more appropriate to consumers who were rate shopping for the best loan. The second research study discusses how creditutilization calculations were modified to account for flexible spending accounts⎯a new type of credit card that possesses both a charge and a revolve feature. This enhancement was incorporated into the current suite of FICO Scores. The final research study examines whether, in future versions of the FICO Score algorithm, mortgage short sales should penalize scores less than foreclosures do. . .
The integration of European Union (EU) credit markets is crucial for the efficient functioning of the EU financial system, for the EU economy as a whole, and for the full achievement of the four freedoms guaranteed by the EU’s internal market.1 Neither the consumer nor the mortgage-credit markets are an exception to this need for integration, and EU policymakers are paying increased attention to them. Concurrently, the market for loans available to consumers—both consumer loans and mortgage-credit loans—has grown rapidly in the last decade across the EU and is becoming increasingly sophisticated. However, the development of retail and mortgage-credit markets has increasingly left European consumers in debt. This growth of consumer indebtedness is becoming a concern for national and EU policymakers alike. . .
A lack of credit or the inability to build a credit history has the ability to destroy an individual’s chance at upward financial mobility. Today, a person without good credit gets penalized in almost every aspect of his or her financial existence. The penalties include higher interest rates because these individuals represent an increased risk when borrowing, as well as increased insurance rates, less access to rental housing, and the potential of lost employment opportunities. Worse yet, some will be punished by the inability to even obtain insurance or put a roof over their heads. Without a good credit history, the opportunity to improve one’s personal financial standing becomes daunting at best, and sadly, impossible for all too many income-challenged Americans.
Most consumers have brought about their credit problems by their own actions, including nonpayment of their obligations, and it is prudent to document this information for future prospective creditors as a way to protect the system for all Americans. Some consumers, however, are victims of errors in a system seemingly designed to hinder their efforts to make corrections. As you will read in the symposium articles, many consumer advocates believe the system is set up to hold back certain consumers from advancement. These advocates believe the credit scoring system is biased and filled with errors. They believe that the credit reporting system itself is biased by design, promotes disparate impact, and only provides fair representation to those who already have credit. There are certainly elements of the current credit reporting system that prompt debate, especially aspects related to the recent evolution of the system in place today, and we will address these issues. . .