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Equifax and TransUnion on Tuesday agreed to shell out $23 million to settle claims that the companies duped consumers into paying big bucks for credit score subscription services that turned out to be less valuable than described. Equifax and TransUnion are two of the three biggest credit reporting agencies in the country, right behind Experian.
According to an investigation by the Consumer Financial Protection Bureau, the two credit reporting companies deceptively marketed credit score programs to consumers starting in 2011 — understating the programs’ cost and overstating the potential usefulness.
One key point: Equifax and TransUnion routinely advertised their credit scores as being the same ones banks use. But lenders tend to use a variety of credit scores, so no one rating is universally accepted, the CFPB points out in Tuesday’s announcement. The agency also found that the TransUnion and Equifax scores sold were not, in fact, the ones used to make loan decisions — and that, in fact, Equifax’s scores are calculated to create a model that it describes as being for “educational” purposes.
The two companies misled consumers into signing up for costly subscription services, marketing credit scores as “free” or only costing $1. Instead, there were strings attached, with a $16 monthly fee from which consumers had to opt out, and details buried in the fine print.
The agency ordered the companies to pay more than $17.6 million in restitution to consumers — $13.9 million from TransUnion and $3.8 million from Equifax — and fined them $5.5 million. Over the next few months the companies and the CFPB will develop a process and timeline for identifying eligible consumers, calculating payment amounts and making payments to those consumers.
As part of Tuesday’s settlement, TransUnion and Equifax will also have to change their marketing practices: becoming more transparent about the credit scores they’re selling, explicitly gaining customer approval for any purchase, and making it easy to unsubscribe to any reoccurring payments.
Both companies said they did not believe their policies violated any laws, and neither admitted any liability. Both said, however, that they had determined it was in their best interest to resolve the matter after what they said was as a three-year CFPB investigation into credit reporting companies’ marketing practices.
Meanwhile, if you are looking for a credit score, check your credit card statement. Many banks, including Ally, Chase, Bank of America , Barclays, Discover, and USAA, now include free scores for customers. If you want a full credit report, you can get yours once a year — for free — through Equifax, Experian or TransUnion, via federal statutes.
Equifax and TransUnion fined $23 million for misrepresenting credit products
Two of the nation’s largest credit reporting bureaus, TransUnion and Equifax, will together pay more than $23 million in fines and refunds to settle charges from a federal consumer watchdog that they misled consumers about the pricing and value of credit products.
The Consumer Financial Protection Bureau said Tuesday that the companies deceived consumers by suggesting that the credit scores they provided were the same scores used by financial firms to make lending decisions when in fact, the scores “were not typically used by lenders.” The firms were also unclear about the price structure of some products, marketing them as free or costing $1, when consumers were actually being enrolled in subscriptions that cost $16 a month.
“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.
Equifax and TransUnion will pay $17.6 million combined in restitution for consumers and $5.5 million in fines to the CFPB. The companies will need to notify affected customers about the refunds.
Credit scores can play an important role in consumers’ financial lives, affecting the rates they earn on loans and their ability to obtain credit. But financial firms often use a variety of credit scores when making lending decisions, at times tailoring the score to the type of loan.
The credit bureaus offered products that were being marketed as free, or as costing $1 in the case of TransUnion. But the CFPB said it was not made clear to consumers that they would face monthly charges adding up to almost $200 a year if they didn’t cancel their subscriptions at the end of the trial period, which lasted one week or 30 days. The practices started as early as July 2011 for TransUnion and between July 2011 and March 2014 for Equifax.
As part of the enforcement action, the companies will need to change how they market and sell certain products. The companies will need to gain consumers’ consent before signing them up for products that may lead to additional charges. And consumers will need to be given an easy way to cancel credit-related services to avoid those charges.
Under the Fair Credit Reporting Act, the three major credit reporting agencies — Equifax, TransUnion and Experian — are required to offer consumers one free credit report a year through AnnualCreditReport.com. The CFPB said that until January 2014, Equifax violated part of that agreement by showing advertisements to consumers before they viewed their credit reports. It was supposed to show ads only after consumers had received their reports.
Equifax said in a statement that it began making changes to address the CFPB’s concerns shortly after the agency’s investigation began about three years ago. The company said it does not believe it violated any laws in not admitting liability. TransUnion said it believed that its consumer marketing “complied with the law” and that it will “fully compensate any consumer who may not have understood that his or her trial program would convert to a subscription.”
Equifax, TransUnion fined for selling consumers credit scores not used by most lenders
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.
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.”