In comments to the Federal Trade Commission and Consumer Financial Protection Bureau’s request for comments on accuracy in consumer reporting, the Policy & Economic Research Council (PERC) called for legislation requiring mobile network operators (MNOs including AT&T, Sprint, T-Mobile, US Cellular, and Verizon Wireless) to report credit and payment data to credit bureaus.
Each year, MNOs lend tens of billions of dollars to their customers. They pull credit reports to make eligibility determinations—Does the customer qualify for financing? If so, for how many handsets? For which plans is the customer eligible (e.g. international calling or just domestic)?—and they report late payment data and collections to nationwide credit bureaus (Equifax/NCTUE, Experian, and TransUnion) but not on-time payment data for handset financing and monthly phone service.
“The world of banking is very different in 2020 than it was in 1970 when the FCRA was enacted,” said PERC President and CEO Dr. Michael Turner. “It’s time for the rules and regulations to reflect reality in our economy.”
While most MNOs do not charge an explicit interest rate for financing, they make money in other ways linked to the handset financing or leasing. For instance, customers are charged full retail price for the handset and locked into two-year contracts. Customers who break the contract must pay the full outstanding balance on the handset, along with any other early termination fees. Similarly for those who received a discounted handset price but switch to lower cost plans before two-years is up—the higher handset price applies. Even for those who lease a handset, if they switch to a lower plan or break their contract the full retail price applies and they forfeit the phone.
“This is an area of lending that is opaque and needs to be more closely examined,” said PERC’s Director of Research, Patrick Walker. “There is a lack of comprehensive data in this space, and rigorous analysis is required to better understand how much consumers are really paying when they agree to handset financing.”
To increase transparency around this rapidly growing form of consumer credit, and to ensure consumers enjoy the full range of rights and protections as those afforded borrowers in more traditional forms of credit, PERC advocates that handset financing, leasing, and wireless service payment data all be fully reported to national credit bureaus.
“This is a textbook market failure,” added Dr. Turner. “There are an estimated 43 million Credit Invisibles in the US who are denied access to affordable sources of mainstream credit in large part owing to a lack of predictive payment data in credit bureaus. MNOs use credit reports, report harmful negative data, extend billions of dollars of credit each year, and rely on public airwaves for their business model providing essential services. They could easily help eliminate the scourge of Credit Invisibility by fully reporting payment and handset financing data but they will not.”
PERC asserts that MNOs have been asked by credit bureaus to fully report for more than 20 years. “They won’t do it voluntarily because they fear it will make their oligopolistic market more competitive,” added Patrick Walker. “It appears that MNOs are leveraging control of data to reduce competitive pressures and fatten their bottom lines. The big losers are US consumers and the overall economy.”
Credit invisibility, a phenomenon affecting 1 out of every 4 to 5 Americans, is the inaccessibility of affordable credit due to a lack of data or insufficient data. In our digital age, all mainstream lenders have systems that automatically underwrite loans, so a lack of information on a borrower’s likelihood of repaying is equated to being high-risk. This is further complicated by how it takes banks loaning out money to get this data in the first place, in a credit catch-22.
PERC’s almost two decades of research has focused on the responsible use of data to expand financial inclusion. One of their main findings has been that proven payment data (utility, telecommunications, and rental data) makes credit scoring models that predict likelihood of default and gives more Americans credit reports. While some Americans may not have cars or credit cards, almost all Americans have utility and telecommunications bills. Those who do not have mortgages pay rent. Increasing the number of Americans who can be scored accurately allows more Americans to access affordable credit and get on a path to asset building and wealth creation. Credit invisibility disproportionately affects those already under-served.
Dr. Turner said, “The current American financial system has been broken for a long time. Negative data from utility and telecommunications companies are reported. Evictions make it onto your credit report. But positive data, such as on-time payments, are not included, thus making credit reporting into a kind of blacklist. Companies should not be able to pull credit reports or report negative data without also reporting positive data. Mandatory reporting would make the system fairer and more inclusive.”
The FTC & CFPB hosted a joint workshop on accuracy in consumer reporting on Dec. 10th, 2019 in Washington, DC. Dr. Turner was a panelist on the “Current Accuracy Topics for Traditional Credit Reporting” panel. In 2011, PERC released its report on credit data accuracy that found a 1-2% rate for errors that would result in less favorable terms and conditions of credit (for example, a higher interest rate). This was statistically identical to the FTC’s own findings in their 2013 report.
“Completeness is part of the definition of accuracy,” Dr. Turner added. “If mobile network operators use credit reports for decisioning, and report negative data such as late payments and defaults, but not report all the on-time payments consumers make, you have an incomplete and therefore inaccurate profile of a consumer. This data must be reported.”
The comments also called for more new research on the accuracy of credit reports since many changes, such as IT advances and the National Consumer Assistance Plan, have taken place since the initial PERC and FTC studies were conducted. This research should, ideally, also examine the dispute process and consumer satisfaction. And since data from the CFPB’s consumer complaint portal is frequently cited as a justification for new policies around credit information sharing, PERC also recommended that a report be undertaken examining the nature of complaints submitted to the CFPB’s portal. This should carefully explore: (1) the types of complaints; (2) whether they are actually complaints or are something else; (3) the source of the complaints (e.g. consumer vs. credit clinics); and (4) what inferences can and cannot be drawn from this data, such as comparisons of overall complaint volumes among different types of institutions.