How Bloom is Enabling Credit Reporting Clients to Save Consumers Billions in Undue Interest
U.S. consumers are potentially paying $56 million per day in undue interest because of errors on their credit reports
Credit decisions require accurate data to appropriately price for risk and safely extend credit. Yet, more than one-third (34%) of consumers have at least one error on their credit report, according to a recent Consumer Reports study. These errors can range from minor issues such as a misspelled name or incorrect address to more severe errors that can negatively impact credit access or lead to higher borrowing costs.
It is not uncommon for errors to occur in credit reports, and this can be attributed to the process of furnishment, whereby lenders and creditors transmit data to credit bureaus using a burdensome, 25-year-old file format called Metro 2. Each credit account is broken down into a line of data (commonly referred to as a tradeline) consisting of several data fields such as the account holder’s name, account type, and status. With millions of tradelines and numerous data fields for each, mistakes are bound to occur. The complex nature of the process underscores the need for enhanced accuracy and oversight to minimize errors and ensure that consumers’ credit information is reliable and up-to-date.
Credit Data Accuracy Has Implications for the Entire Industry
Credit report errors not only impact consumers but also have negative consequences for credit bureaus, creditors, and lenders. For instance, credit bureaus face scrutiny and potential fines from regulatory bodies such as the Consumer Financial Protection Bureau (CFPB) for failing to promptly update inaccurate data on credit reports. Similarly, creditors and lenders face trouble if they fail to comply with credit reporting obligations, which could lead to missed business opportunities and financial losses resulting from loans that were erroneously denied due to inaccurate reporting. The process of managing disputes also costs everyone involved time and money.
Under the Fair Credit Reporting Act (FCRA) consumers have various options to dispute incorrect information on their credit reports. Generally, consumers report errors directly to one of the major credit bureaus, who then forwards the dispute to the lender or agent that furnished the data. This furnisher is then required to conduct a timely and reasonable investigation into the matter. Once the investigation is completed, the furnisher must report the results back to the credit bureaus.
Consumers are disputing errors on their credit reports more than ever: roughly 336 million items have been disputed across the three major bureaus from 2019-2021. What’s more, the average dispute isn’t reported by the consumer for over two years after the disputed account was opened.
Aside from the initial cost of conducting these onerous investigations — which could require furnishers to review large volumes of data — furnishers can face penalties from the CFPB. Just last year, the CFPB penalized an auto finance company, and for the first time in history, required customer redress to those impacted by the credit furnishing errors.
How Much Do Credit Data Errors Cost?
Apart from fatal reject errors that result from improper formatting, consumer credit profiles may also contain irrelevant or illogical data that can have a significant impact on the consumer. For instance, TransUnion currently maintains over 3.1 billion tradelines for more than 236 million active credit profiles in the United States. Errors in this vast amount of data can quickly become prohibitively expensive for both furnishers and consumers, leading to unintended consequences such as higher interest rates and difficulty accessing affordable credit.
|Unique US consumers with reported tradelines||236 million|
|Estimated % of US consumers with credit-damaging errors||5.00%1|
|Total consumer impact:||11.8 million|
Breakdown of US consumers with potential credit reporting errors that are negatively impacting their credit
According to the Federal Trade Commission (FTC), approximately 5% of credit reporting errors can lead to consumers receiving less favorable credit terms. With over 235 million adults in the United States having credit reports, this means that as many as 11.8 million people could potentially be affected by credit-damaging errors. Left unchecked, these errors could result in substantial costs for consumers by causing lenders to overprice loans or even deny credit altogether.
Even a minor error in a consumer’s credit report can compound undue interest over time and result in substantial overpayments across various types of loans. An illustrative example below considers how these 11.8 million consumers may be affected by such errors, collectively overpaying by as much as $122.5 billion over a six-year period, which averages out to an astonishing $56 million per day.
|Loan Type||Avg. Loan Amount||Illustrative Undue Interest %||Illustrative Undue Interest $|
|Personal unsecured||$10,000||3.00%||$5.3 billion2|
|Total impact:||$122.5 billion|
Illustrative examples of undue interest expense incurred by US consumers due to errors that are negatively impacting their credit
2 Assumes a weighted average loan life of 1.5 years
3 Assumes a weighted average loan life of 2.5 years
4 Assumes a weighted average loan life of 6.0 years
Bloom Validation Significantly Reduces Errors Leading to Disputes and Missed Opportunities
At Bloom Credit, we recognize that accurate and reliable data validation is essential for the health of the credit reporting industry as a whole, and could help resolve over $30 billion in undue interest expense incurred by US consumers in Table 2 above. That’s why we have developed a fine-tuned approach that applies rigorous logic to identify errors before they are reported to credit bureaus. We believe that this approach should be an industry standard, given the significant costs and risks associated with credit reporting errors.
Our proven validation method has consistently outperformed the industry average by 50%, with just 0.07% of records resulting in fatal reject errors. By working closely with furnishers to identify and correct formatting errors, we help them save time and money while also reducing the risk of costly mistakes. Moreover, we go beyond simple formatting checks to review historical payment data and other relevant factors to ensure that the data being reported is logical and accurate. Our approach has helped us identify and correct an average of 1.25% validation errors each time we conduct a furnishment, leading to more reliable credit reports and better outcomes for consumers and lenders alike.
Bird’s Eye View of the Bloom Process
“Garbage in, garbage out” is a major problem for furnishers that deal with hundreds of thousands, if not millions, of tradelines. It’s time-intensive work. Bloom Credit’s furnishment API provides multi-bureau consumer and business credit data reporting with accuracy and consistency. Our SaaS offering makes it easy to navigate the complexities of furnishing credit data and our validation services ensure that the data you furnish is recent and accurate.
Bloom works with our client’s source system to translate data according to the appropriate account status, special comment and compliance codes before handing it back to the client. Using our proprietary logic, we can identify validation and rectify errors before data is sent to the bureaus.
In addition to validating errors, eliminating junk data, and ensuring proper formatting, Bloom’s logic evaluates the progression of accounts to ensure that current records are consistent with historical data. For instance, if a statement shows that a consumer is 60 days delinquent on a loan opened 30 days ago, our system flags the discrepancy and alerts the lender or furnisher to verify the information before reporting it to the bureaus. This proactive approach not only reduces costly disputes but also protects consumers from inaccurate information on their credit reports.
With Bloom, furnishers need not resubmit outdated files to the bureaus. We routinely re-sync historical data monthly to ensure that it is always up-to-date. Furnishers can effortlessly update the existing record, which is then automatically refreshed during the monthly re-sync process.
The CFPB has recently stepped up efforts to ensure consumers are being treated fairly when it comes to credit data and reporting, especially when it comes to assuring validations are logical and eliminating nonsensical data.
“When a credit report accuses someone of defaulting on a loan before they were born, this is nonsensical, junk data that should have never shown up in the first place,” said CFPB Director Rohit Chopra. “Consumer reporting companies have a clear obligation to use better procedures to screen for and eliminate conflicting information, or information that cannot be true.”
Bloom’s furnishment API not only helps furnishers comply with their FCRA obligations, but it also addresses the snowballing costs associated with bad data for both lenders and bureaus. By providing tri-bureau translation and reporting, compliant reporting, and access to industry veterans, our API streamlines credit reporting in the 21st century and sets a new standard for accuracy and care in the industry.
For more information about Bloom’s Furnishment Solution, including a potential audit of your existing credit reporting files, contact us.