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Credit Reports Would Be Overhauled Under a New Bill

By AnnaMaria Andriotis, The Wall Street Journal

A new bill in Congress seeks to overhaul the consumer credit-reporting system by lessening the period over which loan defaults and bankruptcies are included in credit reports.

The bill’s introduction comes a month after Fair Isaac Corp. announced it would tweak its widely used FICO credit score to no longer penalize consumers for past failure to pay a bill if the bill has been paid or settled with a collection agency.

Both moves aim to increase access to new credit for some people who have had financial problems in the past.

The Fair Credit Reporting Improvement Act of 2014, introduced Wednesday by Rep. Maxine Waters (D., Calif.) calls for large-scale revisions to the information in consumers’ credit reports, including the removal of certain foreclosures and short sales. A short sale is when a home is sold for less than the borrower owes on the mortgage and any other loans on the house.

Federal law governs what debt and payment information can be included in credit reports and for how long. This information ultimately determines consumers’ credit scores. Lenders use both scores and reports to determine whether to extend credit to applicants.

Lenders have said they need extensive information on consumers’ debt histories to make fully informed decisions about the likelihood of potential borrowers repaying loans. The changes in the Waters bill “would result in gaping holes in the ability of credit reports to truthfully memorialize [borrowers'] credit practices,” said John Ulzheimer, president of consumer education at, a credit-management site, and a former manager at Fair Isaac , whose FICO score is used in most lending decisions. “This would turn someone who has a horrible credit score to someone who has almost a perfect credit score…[and] lenders [would] make decisions without all the facts.”

The more limited changes announced by Fair Isaac for a new version of its FICO score are intended to increase borrowers’ scores and make it easier for many to receive loans. Revisions include a reduction in the weight given to unpaid medical bills that are with a collection agency.

The new bill, should it become law, would shake up the credit industry even more. Collections, judgments and paid tax liens would remain on credit reports for four years, down from seven. Bankruptcies would be reported for seven years, down from 10.

The Waters bill also calls for the removal of foreclosures and short sales if the Consumer Financial Protection Bureau deems them to be the result of deceptive lending practices. Similarly, these adverse events could be removed if the lender enters into a settlement agreement with the federal, state or local governments about lending practices. It also calls for the removal of any adverse debt information 45 days after those debts are fully paid or settled.

Private student loan borrowers will also be given leniency. Such borrowers who make nine consecutive on-time monthly payments will have any previous mentions of late payments on these loans removed from their credit reports. Under the current system, late payments remain on credit reports for seven years even if borrowers have caught up on their bills.
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