Here’s What’s Missing From Dodd-Frank Reforms

Mar 14, 2018
Finance

SMITH BRAIN TRUST – Your credit report might not be as accurate as you think. About 20 percent of Americans have at least one material error on their credit histories, according to a recent regulatory review.

It’s a revealing statistic – and a worrying one, says the Smith School’s Clifford Rossi. And it’s part of the reason, he says, why Congress should consider drawing the credit-reporting agencies into its scope as it looks to amend the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rossi says the credit-reporting agencies have been flying “way, way under the regulatory radar for too long.” The massive data breach at Equifax, revealed last year, and the frequency of credit history errors together highlight the importance of applying tougher regulatory scrutiny to the credit-reporting agencies – as well as the models they use to generate consumer credit scores.

The Senate is expected to vote this week to approve a sweeping bipartisan bill largely aimed at rolling back banking regulations imposed by Dodd-Frank.

Tucked into that Senate bill is a provision that would allow Americans to have their credit frozen for free. The provision comes six months after the Equifax data breach that exposed the personal details of nearly 150 million Americans.

Experts recommend that consumers impose a credit freeze as a way of protecting themselves from identity theft. Such a freeze doesn’t protect personal data from being stolen, but it does stop an identity thief from being able to open new lines of credit using the stolen data. However, in most states imposing and lifting the freezes comes with a fee.

Rossi, who is Professor of the Practice and Executive-in-Residence at the University of Maryland's Robert H. Smith School of Business, says the provision is a good step, but it doesn’t go quite far enough.

“I think we have underestimated the importance of these credit-reporting agencies for too long,” Rossi says. “Every consumer loan that I can think of is predicated on some kind of FICO or other score.”

It’s time, he says, that the consumer credit reporting agencies and Fair Isaac Corp. face the kind of scrutiny that banks now face in terms of the credit scores developed from consumer credit data. He suggests that the Consumer Finance Protection Bureau, which was granted its authority by Dodd-Frank, take a stronger role in overseeing these models. Supporting this argument is a 2013 study by the Federal Trade Commission highlighting that 25 percent of consumers reported an error on their credit report that could affect their credit score.

“They should be looking under the rug at data these companies are collecting and making sure that everything is legit,” Rossi says. “They should be looking at how these companies are building their credit models and be validating them with the same level of rigor that the safety and soundness regulatory agencies apply to the banks.”

Financial institutions face far greater scrutiny for the credit models they build or obtain from vendors, for the way they manage risk, and so on.

Among the many things exposed in the Equifax breach, he says, is how loosely the three agencies are monitored by the government.

“If we are going to rely so heavily on these credit-reporting agencies, then these agencies and their methods should see the light of day,” Rossi says.

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About the Expert(s)

Clifford Rossi

Clifford Rossi is an executive-in-residence and professor of the practice at the Robert H. Smith School of Business, University of Maryland. Prior to entering academia, Rossi had nearly 25 years' experience in banking and government, having held senior executive roles in risk management at several of the largest financial services companies. His most recent position was managing director and chief risk officer for Citigroup's Consumer Lending Group where he was responsible for overseeing the risk of a $300+B global portfolio of mortgage, home equity, student loans, and auto loans with 700 employees under his direction. While there he was intimately involved in Citi's TARP and stress test activities. He also served as the chief credit officer at Washington Mutual (WaMu) and as managing director and chief risk officer at Countrywide Bank.

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