JANUARY 2005

FACT Act Costs Passed on to Lenders

On December 1, 2004 the major U.S. credit bureaus began providing free annual credit reports to residents of the western states, as mandated by the Fair and Accurate Credit Transaction Act (FACT Act) passed in late 2003. Regulators agreed to allow the bureaus to roll out the new service in phases through the remainder of 2005, beginning with the west coast, in order to reduce "peak-load" problems associated with the anticipated flood of requests. By September 1, 2005, the service will be available to all U.S. consumers.

During legislative hearings leading up to passage of the FACT Act, both bureaus and lenders argued that making a free credit report available to every U.S. consumer each year would impose enormous additional costs on the industry, not only through the logistics of providing and tracking reports delivered, but also from handling the inevitable customer service inquiries associated with report disclosures. Last April, the CEO of one of the three major bureaus, Thomas Chapman of Equifax, called the FACT Act provision "the first time a business has been required by Congress to provide its products and services without receiving any compensation whatsoever."

Not surprisingly, the bureaus are attempting to pass on these extra costs to the primary purchasers of credit reports, the lending industry. The American Banker reports that both Equifax and Trans Union have begun charging lenders a flat "regulatory recovery fee" of 11 cents per credit report ordered. The third major credit bureau, Experian, is charging a sliding supplemental fee starting at 8 cents per report. An Equifax spokesman, David Rubinger said "None of the [banks] were pleased, but many of them understand the circumstances."

In addition, the FACT Act requires creditors to tell customers their credit score, and the basic factors that influence the score. The bureaus have offered to provide this service to consumers, on the lender's behalf, for a fee. Other provisions of the FACT Act will certainly impose additional costs on lenders once the final regulations are in place. New requirements force lenders to become more actively involved in dispute resolution, which will raise compliance and investigation costs for those lenders that report negative information to the bureaus. Given the proliferation of free credit reports, most lenders expect a sharp increase in the volume of disputes as consumers examine, perhaps for the first time, their own credit reports. Nessa Feddis, senior federal counsel to the American Bankers Association, told the American Banker, "If you're not on the compliance side, you don't understand what goes into this. For financial institutions, this is a big deal."