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Clearing Up Misconceptions About New Consumer Data Laws

In recent weeks, news outlets have promised that millions of Americans will see their credit scores rise.

These headlines came as TransUnion, Equifax and Experian all announced that they would remove tax-lien and civil judgment data from credit reports starting July 1st. However, it’s unlikely that many with poor credit will ascend to a “good” or “excellent” status. In this article, we provide context for the reporting agencies' decision and we correct misconceptions about its impact on consumers.

The Consumer Financial Protection Bureau Issues a Statement

In March of this year, the CFPB released a scathing review of consumer reporting companies. “They lacked quality control policies and procedures to test compiled consumer reports for accuracy,” remarked the bureau. Additionally, the report concluded that the major agencies “had inconsistent practices for vetting furnishers and providing data quality feedback to them.”

This assessment confirms the frustrations of many consumers over the years. The CFPB has received 185,700 credit-reporting complaints since July of 2011. “Incorrect information on credit report” represents a staggering 76% of this total. “I have filed a dispute with Equifax,” complains one consumer. The same person shared the “The tax lien on my credit report is incorrect due to a fraud committed by an unknown individual. IRS already corrected this information.”

Finally, criticism from consumers and the CFPB has earned attention from the Consumer Data Industry Association (CDIA), a trade group representing the three top report agencies.

Reporting Agencies Make a Change

In a March 13th press release the CDIA remarked, “Equifax, Experian, and TransUnion have developed enhanced public record data standards for the collection and timely updating of civil judgments and tax liens." However, this statement doesn't mean agencies will remove all tax lien and civil judgment data.

The new provision will only apply to instances where the lien or judgment is missing three pieces of consumer data: the person's name, address, and a key identifier, either a social security number or date of birth. Additionally, this information must be current per court records as of the last 90 days. Otherwise, if the lien or judgment includes all this information, it will stay on your report. This misunderstanding has led many to believe all reports will be cleared when in fact some liens and judgments will remain. “The new standards will apply to new and existing public record data," explains the CDIA. Therefore, the change is retroactive and will stay in place in the future.

How Many People Will Be Affected?

The CDIA expects that the change will have the greatest effect on those with civil judgments on their credit reports. The association expects only half of those with tax-lien data to see the data removed. Therefore, large groups of consumers anticipating boosted scores may be disappointed. The basis of the new isn't a belief that tax liens and civil judgments are irrelevant to reporting agencies. Rather, the measure seeks to ensure that only correctly reported infractions remain.

Some lenders may be concerned with their ability to gauge risk in the future. For example, a consumer responsible for a valid lien or judgment may see the data disappear just due to incomplete reporting data. For the lender, this is misleading. “Just because the lien or judgment information has been removed and someone's score has improved doesn't mean they'll magically become a better credit risk," remarked a former Experian executive.

FICO has issued estimates that 12 million consumers will see their scores improve. However, “Roughly 11 million of these consumers will see only a slight score increase of less than 20 points,” remarked FICO.

The bottom line: Not all tax liens and civil judgments will dissolve, and those that do will yield only nominal increases to scores.

Justin Song

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.

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