Consumer Financial Protection Bureau to Supervise Credit Bureaus

The Consumer Financial Protection Bureau recently adopted a rule to begin supervising larger consumer reporting agencies, which include what are commonly known as credit bureaus and credit reporting companies. The rule will become effective September 30, 2012.

CFPB Director Richard Cordray said: 

     “Credit Reporting is at the heart of our lending systems and enables many of us to get credit, 

      afford a home, or get an education. Supervising this market will help ensure that it works 

      properly for consumers, lenders, and the wider economy. There is much at stake in making 

      sure it is both fair and effective.”

According to a press release by CFPB, "credit reporting agencies are private businesses that track a consumer's credit history and other consumer transactions." These companies play a major in the consumer financial services marketplace and in the lives of consumers. Consumer reports are used for many things such as determining eligibility for credit and the interest rates that consumers pay for credit.

The Dodd- Frank Wall Street Reform and Consumer Protection Act gives the CFPB authority to supervise nonbanks in the specific markets of residential mortgage, payday, and private education lending. Previously, consumer reporting at the federal level was only subject to law enforcement authority. No single federal government agency could see the whole picture and adequately monitor what was happening with consumer reporting agencies. This new rules allows the CFPB to supervise the larger consumer reporting agencies as well as write rules and enforce the law as needed.

To supervise credit reporting, the CFPB will use the same approach it uses in supervising banks. The  credit bureaus will be subject to review of compliance systems and procedures, on-site examinations, and discussions with relevant personnel.

To view the full rule, click here.

The Credit Divide

There is an emerging theme of the economic recovery in the United States: Americans are divided not by income or wealth but by their access to credit. Many people have been left with damaged credit as a result of plunging home prices, lost jobs, overspending, or bad luck. In the article “Fed Wrestles With How Best To Bridge U.S. Credit Divide,” The Wall Street Journal reported on the credit divide that is hobbling economic recovery.

In theory, the low interest rates we currently have should encourage household spending, business investment, and hiring, while reducing the burden of past debts. However, there is still a gap in who has access to credit. Banks remain reluctant to extend credit to households with any hint of financial problems. Many with lower incomes or blemished credit histories are finding it difficult and costly, and sometimes impossible, to refinance their mortgages or get new loans.

In addition, interest rates have fallen more for people with good credit than for people with bad credit. Interest rates on a 30 year mortgage for households with a credit score of 750 or higher are 3.53%, but for households with credit scores around 650 the interest rate is 4.04%.

Many people with good credit are taking advantage of this cheap money. But those who can afford to borrow money are not spending the money- they are investing it. Financially secure households can already consume as much as they want, so they are more likely to save or invest the money they borrow. As a result,  the low interest rates have not triggered broad waves of spending, refinancing, and new borrowing.

The following graphics come from the Wall Street Journal and illustrate the credit divide.

To read the full article, click here.

Let us know what you think about the credit divide. Have you struggled to borrow money because of it? What do you think will be the long term effects of the credit divide?