Credit Reporting: History of Data Exchange and Credit Reporting Agencies in the US

While personal credit was issued historically on a one-on-one basis or through networks of informants, as a business, credit reporting and economic profiling has only recently marked its centennial in the United States.
 
As smaller credit reporting agencies were assimilated during the rise of Retail Credit Co. (currently Equifax), beginning in 1899, the business of information brokerage expanded nationally to service insurance companies and creditors as well as providing information to employers. The information contained in a person's file and credit report was not limited to financial data, but contained an ever-increasing amount of personal information.

Government Gets Involved in Data Exchange

Early on, the federal government began to get involved. In 1903, US President Theodore Roosevelt pushed for the creation of the Bureau of Corporations to regulate business practices and collect information on behalf of the public's interest and protection. President Woodrow Wilson built on this in 1914 by signing the Federal Trade Commission Act. The Act granted, to the Federal Trade Commission (FTC), the power to observe business practices, both in terms of domestic and foreign partnerships allowing them to enforce fair business practices and guard against antitrust practices.
 
In the years following World War II and the subsequent Baby Boom, increased mobility and economic development created a society of eager consumers. Credit reporting agencies allowed consumers to purchase high-cost items on credit and to apply for loans without being dependent on personal relationships with local bank officers. Many businesses began to offer exclusive credit cards to customers whose credit report fit their demographic profile and financial criteria. The more information became available, the more cost effective and efficient direct marketing became, allowing business to expand quicker.

Credit Reporting Agencies and the Fair Credit Reporting Act

As business boomed, so did the demand for more detailed consumer information. Data exchange flowed freely and quickly, though it was not always correct. Quotas within credit reporting agencies to provide negative information lead to widespread abuses, including the forging of information.

Without any regulation, consumers were powerless to fight fraudulent claims on their credit report. In 1970, the Fair Credit Reporting Act (FCRA) governed the collecting of information by credit reporting agencies:

  • preventing the appending of financial information with private "lifestyle" information
  • providing limitations of use
  • rights to review, appeal, and correct information
  • securing privacy and access.

While the credit reporting agencies were now under federal regulation, financial data exchange continued between other financial agencies without restriction.

This was because a ruling by the Supreme Court argued that there was no protection of financial information under the Fourth Amendment, in that there was no reasonable expectation for privacy between an individual and their bank, accountant, or other service provider. However, in 1978, Congress sought to put a stop to this.

Right to Financial Privacy Act (RFPA)

The Right to Financial Privacy Act of 1978 (RFPA), brought before the House of Representatives by Congressman John Cavanaugh, stipulated that a consumer must be notified of all disclosures.

The consumer must authorize access to financial data, including the sharing of information with third parties. The government must obtain from a judge a subpoena, search warrant or summons (served to the individual) before viewing any financial records.

The RFPA initially seemed weak in that it only regulated government office and financial institutions, not private businesses or state and local government. However, by defining financial institutions as any company that issues a line of credit or credit card, no longer could personal information be shared with marketing firms. Many of the loopholes apparent in this definition were addressed in 2002, when the RFPA was amended to include:

  • casino and card clubs
  • commodity trading adviser
  • futures commission merchants
  • money order issuers, sellers and redeemers
  • securities and futures industries
  • travelers check issuers, sellers and redeemers
  • U.S. Postal Service.
Further amendments were made to both FCRA and the RFPA in an attempt to broaden their scope, but recent changes have weakened their effectiveness. Changes made by the Consumer Credit Reporting Act of 1996 increased the fluidity of data exchange between affiliates, weakened state laws and allowed for the dramatic increase of unsolicited credit offers to "prescreened" consumers.

The U.S. Patriot Act

The U.S. Patriot Act reversed a number of the RFPA's regulations on government access by allowing an intelligence or counterintelligence agency to search and seize financial records without any other authority than suspicion of terrorist activity. Further, the U.S. Patriot Act allows for no Congressional oversight of these activities.
 
Recent legislation on the state level has sought to counter these weaknesses, providing consumers with greater control over their credit reports and increased opportunities to opt-out of unsolicited offers of credit.