Federal consumer watchdog to oversee credit reporting industry

The new federal agency in charge of protecting consumers from predatory or misleading lending practices on the part of financial institutions is once again broadening its purview to include the companies that handle credit reporting.

The credit reporting industry plays a significant role in many aspects of Americans' lives, often without them realizing it. Because of this, the federal Consumer Financial Protection Bureau is stepping in to more closely regulate the companies that maintain borrowers' credit profiles, the agency recently announced. Credit reporting is used in not only determining whether a prospective borrower will be able to qualify for a particular loan or credit card they may be seeking, but also the interest rates and other terms that will come with that financing. Therefore, a borrower's credit rating ends up affecting their finances significantly throughout their lives.

"Credit reporting is at the heart of our lending systems and enables many of us to get credit, afford a home, or get an education," said CFPB director Richard Cordray. "Supervising this market will help ensure that it works properly for consumers, lenders, and the wider economy. There is much at stake in making sure it is both fair and effective."

Most consumers are aware of the nation's three largest credit reporting companies: Experian, Equifax and TransUnion, the report said. But there are roughly 400 such companies across the country. They specialize in everything from creating the comprehensive consumer credit reports that gain the most attention, to merging these files to create more complete data, or even collecting borrower information pertinent only to certain types of credit, such as payday loans.

However, the CFPB will not regulate every company in the industry, the report said. It will only be able to supervise credit reporting agencies that have more than $7 million in annual receipts, the so-called "larger participants," which constitutes only about 30 of the 400 or so firms in the industry. Meanwhile, those 30 companies' receipts make up roughly 94 percent of all seen in their field, and the three largest companies alone issue more than 3 billion credit reports annually on more than 200 million Americans, on average.

New regulation a big change from previous years
In the past, the only federal agencies that had the ability to supervise the credit reporting industry were those involved in law enforcement, the report said. Further, no one agency had the ability to write rules regulating the credit reporting industry. But the CFPB taking over supervision of the largest companies changes that, and allows for consumers to gain better protection through the agency's policy of reviewing compliance, conducting on-site inspections, interviewing personnel and collecting reports about company practices.

The wheels for this new regulation effort were put in motion in February, when the CFPB issued a rule proposal to give it oversight of both the credit reporting and debt collections industries, the report said. It will gain full regulatory power over the former industry on September 30 of this year and begin examining the companies it oversees shortly afterward. The exact terms of what constitutes a larger participant will be finalized in autumn, but will revisit those rules again down the road.

The agency was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes it to oversee certain types of non-bank companies such as those associated with residential mortgage, payday and private student loan lending, the report said. As such, the CFPB has significantly broadened the number of companies it regulates since Cordray took office around the start of the year. When the agency first gained full regulatory power, it largely examined only consumer credit cards, but has since expanded operations to look into mortgage servicing and payday lenders, as well as making more concerted efforts to begin issuing clearer loan disclosure forms. Further, it has also created a database for consumer credit card complaints and plans to open similar systems for other lines of credit as well.

Because so much of your finances are wrapped up in your credit score, it is vitally important that you know how to handle this aspect of your life. Taking simple steps such as ordering a copy of your credit report and keeping close tabs on your credit card use and payments will help you to avoid any problematic issues that may end up lowering your rating. And because the costs associated with all types of borrowing are typically related directly to this rating, it may be wise to attempt to raise your credit score before applying so that you're getting the best possible rates and fees available to you.

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