Bankers’ Hours column: Credit firms big on power, low on responsibility
“With great power comes great responsibility.”
The suits at Equifax may have been out for popcorn when Uncle Ben Parker’s dying words were spoken to Peter Parker (aka Spider-Man).
There’s no question about the power possessed by Equifax, the credit reporting behemoth, and some of its kin, such as Experian and TransUnion. The responsibility part is, well, a bit more questionable.
By now we all know about the mother of all hacks at Equifax that exposed sensitive personal information on the millions of people in the corporation’s data base. And this isn’t about the event: Since humans swung down from trees and started the long walk across the African veldt, the outlaws have been just a step or two ahead of the white hats. Which means that the security of governments, corporations and individuals will have their cyber-security systems penetrated. It’s a fact of life in a digital age, and we’ll just have to live with it.
But, if I’m hacked, it doesn’t affect my neighbor. When a major credit reporting agency’s security is breached, it virtually affects us all.
No entity on earth, including the sovereign governments of super powers, has more intrinsic power than the three major credit info providers, because every one of us is assigned a credit score that materially affects our life and livelihood.
When I first got into the business of mortgage lending back in the early 60s, credit bureaus were pretty important, because every mortgage loan required a credit report. Back then, most of them were cooperatives formed by users, such as banks, finance companies and retailers, to provide public information about prospective borrowers. They were nonprofit operations that collected public filings, such as liens and court suits, as well as actions filed by collection agencies. When a report was requested by a business, creditors for the prospective borrower were contacted to determine the manner of payment, i.e. “as agree,” “late” or “charge off.” There were no credit scores.
These agencies were completely unregulated, and answered to practically no one, so they could do pretty much as they pleased. In those days, consumers were not permitted access to their file at a credit bureau. A business client of the bureau could be terminated if it disclosed information to a borrower from that person’s credit report.
A consumer who sought to correct errors in his report (few women could borrow money in those days) had no recourse other than the good will and mercy of the agency. If you were rich, you could take a credit bureau to court but, surprisingly, courts often sided with the agency. Not surprisingly, lives and careers were destroyed, as always happens when responsibility is absent from unchecked power.
In certain parts of the country, ethnic designations were highlighted to show lenders that a prospective borrower was of a certain race. Subjective comments often appeared in reports, such as “deadbeat.”
In the early ’90s credit scoring appeared, which assigned values to elements of an individual’s borrowing, payment and debt profiles, and the process has been continually fine-tuned. This was a major step, because it meant that, even if the method wasn’t perfect, everyone was treated equally. In 1999, the Gramm-Leach-Bliley Financial Modernization Act was passed. An important part of it was the Privacy Rule, which mandated that banks and other businesses inform consumers as to how confidential information is used and protected.
Other laws, such as the Fair Credit Reporting Act, gave people the right to view their archived credit history, and provided procedures to correct errors.
All were well meaning, mostly necessary, but by now, we all know that in our cyber culture there is no privacy. What little exists can be irretrievably compromised by a hack as extensive as the one at Equifax.
The great power of the reporting agencies essentially comes from the credit scoring concept. It was such a good idea that it’s become the key, often the only, element in granting credit. In this column we’ve mentioned more than once that, leading up to the Financial Crisis, home loans were granted to people who had no hope of paying them back, but who had good credit scores. In fact, a study just came out confirming that much of the housing crisis was caused by people with good credit flipping houses (that is buying them, falsely stating that they intended to occupy them, with the intent to immediately resell at, hopefully, a profit). To anyone in the eye of the Category Five chaos that was the Great Meltdown, the study is redundant; it was perfectly obvious.
Today’s reporting companies are no longer cooperatives; they’re extremely profitable enterprises. They purvey the one essential information of granting credit, and that info is just a click away from a lender.
So, they must step up and heed Ben Parker.
Unfortunately, it looks like they haven’t dialed up “Spider-Man” on Netflix yet. After the hack was discovered, the occupants of the corner offices at Equifax managed to sell big blocks of stock before the price tanked.
Why are we not surprised?
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.