As with so many things in life, credit reporting is something that if done must be done precisely. Errors impact not only the credit reporting system and business decision making but it also impacts real people. A recent consent order pointed out how even innocent errors can harm individuals and violate the law.
The use of the credit reporting system is vital in the consumer finance realm. The information obtained from credit reports is invaluable both in the extension of credit and the administration of credit. The collection process is assisted by creditors or collectors reporting the ongoing status of the accounts. In all these circumstances, the most important obligation of a furnisher of credit information or a user of credit reports is to be accurate in all their interactions with the system.
This point has recently been driven home by the Bureau of Consumer Financial Protection (“BCFP”) in a consent order with State Farm Bank (‘State Farm”). https://files.consumerfinance.gov/f/documents/bcfp_state-farm-bank_consent-order.pdf. Following an examination, the BCFP determined that there were repeated clerical errors in both the ordering of credit reports on the wrong consumer and in submitting inaccurate information on consumers. The BCFP also determined that State Farm failed to correct this inaccurate information and also failed to have sufficient policies and procedures to prevent these errors and lacked sufficient internal audit functions to catch these errors. While State Farm did have the right titles for their policies, the policies and procedures were deemed to be so generic that they could not assure correct conduct by those responsible for reporting.
It is important to note that none of the errors made by State Farm were alleged to be intentional. This simply was a case where clerical input errors led to actionable violations of the law. Violating the FCRA does not require intent; instead, the cornerstone of the entire credit reporting system depends on complete accuracy of all individuals who furnish data to the system.
The lesson for all participants in the consumer finance industry is that there is no substitute for strong, specific policies and procedures which work to ensure the accuracy of the reporting system, including the correction of errors. The BCFP also is insistent on a developed mechanism of reviewing the effectiveness of policies and procedures which needs to be reported to management.
While smaller participants rightly are concerned with the cost of internal audit departments, they should focus not so much on the title of the function as on independent managerial review of processes so that there can be management assurance that credit reporting is done correctly. Even if there is not a distinct “independent audit” department, there needs to be independent review to validate that the credit reporting functions are correct.
The State Farm consent decree is an important reminder that regulators have a legitimate expectation that credit reporting be conducted accurately. Any error — even those which are inadvertent — must be immediately corrected and all policies and procedures should be specifically designed to avoid the prospect of human failings hurting consumers.