Not too long ago, the credit world was much different than it is today. Credit bureaus operated in near secrecy, gathering information in ways that may surprise you. For instance, did you know that Retailer’s Credit (now Equifax) received information about you gathered by the Welcome Wagon hostess? Your credit worthiness may very well have been based on things such as the quality of your home furnishings and the Welcome Wagon hostess’ opinion of your character.
For the consumer, trying to see what was in your report was nearly impossible. It could be full of errors and inaccurate information and you’d never know! Let’s face it, even if you knew about it you couldn’t get it corrected. Even today, many customers we work with are surprised when we offer to send them their report so they can review it.
Lending decisions in the past were made partly on the content of that report, but mostly on the whim of the underwriter at the bank you were applying at. This process was very subjective and not very fair. If you didn’t “look right” or were stereotyped by ethnicity, neighborhood, or profession, you may have been denied credit solely on that information alone.
This started to change slightly in the 1960’s when credit cards became popular. There was no way to personally interview an applicant who lived states away from the issuing bank, and as we pointed out previously, the information in the credit reports that were available was not very reliable. Many disastrous lending decisions were made using the information in those reports.
During this same period Congress had begun investigating discrimination in housing loans and the practices of collection agents. The result was the FCRA, enacted in 1971 and later the FDCPA in 1977. The FCRA literally forced Credit Reporting Agencies (CRA’s) to clean up their act. As the data in consumer reports became more standardized and more accurate, lenders began to rely more on the reports and less on the underwriters’ subjective opinions.
Lenders then began to develop their own automated risk-scoring, but the results were inconsistent and inaccurate. They often still factored in things like age, gender, race, familial status, etc. The system was headed in the right direction, but still broken.
Fair Isaac and company capitalized on this new movement and on the push to reform mortgage lending by compiling their risk model scoring. Finally released in the 1980’s, it was touted as an impartial, consistent way to evaluate credit applications and was developed to take the prejudice and instinct out of the equation.
Given that Congress was pressuring lenders to eliminate discriminatory lending practices, FICO seemed like the answer to their dilemma. They jumped on it and have never really looked back. Most lenders employ their own internal risk calculation, of which FICO is only a portion.
FICO has been accused over the years of factoring race, age, and gender into their equations, but the most common complaint is that of zip-code discrimination. In a historical sense, however, FICO did wonders to level the playing field. Not until very recent years could a consumer see their credit score – a remnant of that old secrecy pact. California’s SB1607 was the first law to mandate consumer disclosure of scores in 2000!
We would not need credit had it not been for Edwin.
Years ago in the early days of our country settlers moved to various parts of the country. As the population grew, they set up businesses, normally a general store, a tavern, and later – a bank. General stores at the time would often extend credit to the community, people purchasing what they needed while the store keeper kept track with a pencil and paper. As those people brought their goods to market to sell, they’d return to pay off the store keeper.
Everyone except Edwin, that is:
At some point, now lost to history, the merchants in some town all gathered for a morning coffee klatch to discuss business. The owner of the general store mentioned Edwin and how he hadn’t paid off his bill last month. The livery owner chimed in with a similar experience. The other store owner’s hadn’t dealt with Edwin yet, but they’d make a note that Ed was to be cash-only should he stop into their establishment. Edwin then became the first settler to officially have bad credit.
The shop keepers began to see value in sharing information and agreed to keep notes on who they were having trouble with. Additionally, they agreed to meet every so often and share that information. Eventually the list grew longer and needed to be written down. Thus, the first credit report was born.
The origins of credit reporting were keeping track of negative experiences only; those who paid late or did not pay at all, a tradition that stuck with credit reporting for years and still has a strong influence on it credit reporting today. As the settlements grew into cities, these informal meetings became more organized, eventually taking the name “Mutual Protection Societies.” Mutual Protection Societies was the forerunner of CRA’s as we know them today, organized to keep track of people who had burned a merchant.
Time progressed and people like Edwin became more mobile. It wasn’t hard for someone with a bad reputation to pick up and move to the next town. To combat this, the Mutual Protection Societies began to join together and cover larger territories. Now if Edwin wanted to escape his past he had to move to an entirely different geographic area.
One of the large Mutual Protection Societies was Retailers Credit in Texas, which covered the southern part of the country keeping information on consumers in “files” which consisted of a ledger sheet in a file carrying the consumer’s name. Retailers Credit eventually changed their name t o Equifax and began branching out to the west.
The Union Tank Car Company of Chicago, a railroad leasing company, purchased the Credit Bureau of Cook County in the late 1960’s and it’s approximate 4 million ledger-card files contained in 400 seven-drawer filing cabinets. Thus, TransUnion was born and was the first to pioneer tape-based data storage allowing it to branch out and cover larger territories without the need for branch offices.
Meanwhile, TRW, formerly Thompson Ramo Wooldridge Inc., had jumped into the credit reporting business. TRW was the first to provide credit data on demand by electronic, real-time means. This propelled TRW to the top of the heap, becoming the largest repository of credit information in the world. Edwin’s days of hiding from his past were over. TRW had the ability to store data on anyone regardless of geography and provide it to anyone, anywhere, within a matter of hours.
TransUnion stuck mostly with it’s original mission of keeping credit-related data only while Equifax, and to a lesser extent, TRW had compiled additional personal data and opinion, character reports, as well as commentaries from neighbors and insurance agents. Talk about an unregulated industry gone wild! It was truly a “consumer report” that Equifax provided, containing much more than mere payment history.
Secrecy was tightly kept, lenders were not allowed to disclose the content of a consumer’s file to the consumer. Violators were dealt with harshly, resulting in a denial of access to any further reports and occasionally lawsuits over confidential trade information rights. The CRA’s refused to make consumer disclosures. You did not know what was in your file and could not correct any errors. The CRA’s were an industry without regulation and consumers began to fear them, realizing the unchecked power that they were amassing.
As previously mentioned, Congress stepped in with the FCRA in 1971, regulating and standardizing the information in consumer reports. Consumers were finally allowed to see their reports and dispute errors therein. As light was shed on the CRA’s practices, they began to clean up their formerly secretive and sometimes abusive acts.
Ever wonder why creditors are allowed to see other inquiries made for your credit report? In the early to mid 1970’s there was a television commercial selling a “get rich quick in real estate” package. To get rich quick, a customer would apply for 10-20 credit cards all at once. Since inquiries were not reported publicly lenders had no way of knowing that their customer had applied all over town. Someone with an income capable of supporting $5,000 in credit could grab $60,000 in credit in a day. They could then cash out the cards, buy a piece of property, sell it quickly (flip) and pay off the cards. They could repeat this process until they ran into a property that did not sell. No joke!!
The huge default that followed got the attention of lenders who pushed for the right to see inquiries on credit reports to prevent such exposure. That marked the end of the television commercial and instituted the practice of inquiries being taken into consideration in lender’s internal risk model scoring.
Lending A Hand
The Wynn Team