The Consumer Financial Protection Bureau fined Equifax and TransUnion for providing consumers with credit scores not actually used by most lenders in making credit decisions. (Elise Amendola / Associated Press)
All credit scores are not created equal.
That’s the upshot of federal enforcement actions levied Tuesday against credit bureaus Equifax and TransUnion.
The bureaus will pay penalties of $23.1 million as part of a settlement with the Consumer Financial Protection Bureau, which said the firms misled consumers into paying for credit scores that might be dramatically different from the scores used by lenders.
Mortgage lenders, credit card companies and others generally use the ubiquitous FICO score, calculated by San Jose firm Fair Isaac Corp. But the CFPB alleged that TransUnion and Equifax sold customers their own in-house scores and improperly implied that those were the scores lenders check.
The CFPB also said the companies used the promise of free or cheap credit scores to hook consumers into costly monthly credit-monitoring subscriptions. The two companies will pay $5.5 million in fines plus $17.6 million in restitution to consumers to settle with the CFPB.
“Credit scores are central to a consumer’s financial life, and people deserve honest and accurate information about them,” CFPB Director Richard Cordray said in a statement. “TransUnion and Equifax deceived customers about the usefulness of the credit scores they marketed.”
The CFPB targeted Atlanta-based Equifax for practices from 2011 to 2014, and Chicago’s TransUnion for practices from 2011 until Tuesday’s enforcement action. The bureau did not take action against the nation’s other major credit bureau, Experian of Costa Mesa.
TransUnion spokesman David Blumberg said the company agreed to settle with the CFPB but nevertheless believes “that our consumer marketing has been clear and has complied with the law and other government guidance.”
Equifax spokeswoman Ines Gutzmer said the company agreed to change some of its practices after the CFPB began its investigation about three years ago and that, despite the settlement, the company “does not believe it has violated any laws.”
As part of the settlements, neither firm acknowledged any wrongdoing.
At issue is the difference between the credit scores calculated by the credit bureaus using their own in-house methods and the scores calculated using formulas developed by Fair Isaac Corp.
FICO scores are calculated by Fair Isaac using financial information compiled by the credit bureaus. The credit bureaus have to pay Fair Isaac to run FICO scores.
But the bureaus also have their own credit-scoring models that they can use without paying.
That means, when companies sell credit scores to consumers, they have an incentive to sell their own, in-house scores, said Chi Chi Wu, an attorney at the National Consumer Law Center who focuses on consumer-credit issues.
“Credit bureaus developed these scores because they want to keep the money they get from selling scores,” Wu said. “If they do FICO, they have to pay FICO.”
The credit bureaus’ in-house scores — also called educational scores — are often fairly close to FICO scores, according to a 2012 CFPB report that compared different scores for the same consumers. But the report suggested that the scores can be different enough to warrant caution.
For instance, the report found that thousands of consumers with FICO scores of 680 to 740 — representing good but not perfect credit — had educational scores that made them look significantly better or worse. In all, the bureau found that educational and FICO scores put consumers into different credit categories about 20% of the time.
“We’ve been complaining about credit monitoring for years if not decades.” — Chi Wu, attorney at the National Consumer Law Center
The CFPB noted in its report that big differences between these two types of scores might push consumers to apply for loans they ultimately aren’t likely to be approved for, or perhaps to not apply at all thinking their credit is worse than it really is.
In 2014, an Illinois man sued TransUnion over just this issue, saying he paid for a credit score that ended up being about 100 points higher than the score used by an auto dealership where he hoped to buy a car.
Attorneys in that ongoing case argued that TransUnion did not make clear that its in-house score was different than the score likely to be used by lenders.
The CFPB made a similar case in its actions Tuesday. For instance, the bureau said Equifax ran an advertisement for its in-house score that said, “Banks and lenders will most likely check your credit — make sure you see what they see.”
The two bureaus included some disclaimers on their websites, noting that lenders might use a different credit score, but the CFPB said those were not prominent enough.
The CFPB also tagged the credit bureaus for offering free or discounted credit scores and reports through teaser offers for credit-monitoring services. The bureau said both bureaus offered such deals, luring consumers to sign up for free trials that would later automatically convert into paid credit report subscriptions that cost more than $16 a month.
Wu of the National Consumer Law Center said there’s little need for consumers to sign up for those subscriptions because consumers are entitled to three free credit reports annually — one from each of the major bureaus — though they are not entitled to free credit scores.
“We’ve been complaining about credit monitoring for years if not decades,” she said. “People end up with these subscriptions, and they have a hard time cancelling them.”