Atlanta entrepreneur Mike Mondelli has access to more than a billion records detailing consumers’ personal finances — and there is little they can do about it.
The information collected by his company, L2C, comes from thousands of everyday transactions that many people do not realize are being tracked: auto warranties, cellphone bills and magazine subscriptions. It includes purchases of prepaid cards and visits to payday lenders and rent-to-own furniture stores. It knows whether your checks have cleared and scours public records for mentions of your name.
Pulled together, the data follow the life of your wallet far beyond what exists in the country’s three main credit bureaus. Mondelli sells that information for a profit to lenders, landlords and even health-care providers trying to solve one of the most fundamental questions of personal finance: Who is worthy of credit?
The answer increasingly lies in the “fourth bureau” — companies such as L2C that deal in personal data once deemed unreliable. Although these dossiers cover consumers in all walks of life, they carry particular weight for the estimated 30 million people who live on the margins of the banking system. Yet almost no one realizes these files exist until something goes wrong.
Federal regulations do not always require companies to disclose when they share your financial history or with whom, and there is no way to opt out when they do. No standard exists for what types of data should be included in the fourth bureau or how it should be used. No one is even tracking the accuracy of these reports. That has created a virtually impenetrable system in which consumers, particularly the most vulnerable, have little insight into the forces shaping their financial futures.
Arkansas resident Catherine Taylor didn’t learn about the fourth bureau until she was denied a job at her local Red Cross several years ago. Her rejection letter came with a copy of her file at a firm called ChoicePoint that detailed criminal charges for the intent to sell and manufacture methamphetamines. The information was incorrect — she says the charges were for another woman with the same name and birth date — but it has haunted her ever since.
Taylor said she has identified at least 10 companies selling reports with the inaccurate personal and financial information, wrecking her credit history so badly that she says she cannot qualify to purchase a dishwasher at Lowe’s. Taylor must apply for loans under her husband’s name and has retained an attorney to force the firms to correct the record. She has settled one case, and a trial in another is expected next week.
“Everything went to hell in a handbasket from then on out,” Taylor said. “I can’t be the watchdog all the time.”
A credit score is like a financial driver’s license. It serves not only as proof of identity and a certain competency behind the wheel, but also as a passport to a world beyond your doorstep. A home, a car, a college education — all are financed by lenders that rely on the score to determine who gets credit and how much they pay for it.
For most consumers, those scores are based on records of loans they have taken out in the past and how well they have paid them off. Information on credit cards, auto notes and mortgages are all housed in the Big Three national credit bureaus — Experian, Equifax and TransUnion. Lenders use formulas developed by companies such as FICO and VantageScore to analyze the data and determine how likely each person is to repay.
Government regulators, financial firms and consumer advocates have launched extensive education campaigns in recent years to make sure that consumers understand what goes into their Big Three credit reports and how that affects the cost of a loan. Lawmakers and federal officials have crafted rules to try to help consumers understand what’s in their files.
But little attention has been paid to the firms that target consumers outside the mainstream financial system. Often they are students, immigrants or low-income consumers who do not qualify for traditional loans or choose not to use them. Instead, they rely on a makeshift system of payday lenders, check cashers and prepaid cards — none of which show up in the Big Three. Without a paper trail of credit, these consumers are virtually shut out of the traditional banking system.
Mondelli recognized this problem a decade ago during the telecommunications boom. Cellphone companies wanted to tap into this market but had no way to figure out who was risky and who was worth signing up. But Mondelli knew these people left financial footprints somewhere — he just had to find them.
“Credit bureau data alone is valuable but not the complete picture,” he said in an interview.
The trail led him to a jumbled marketplace of financial and other personal information that was ignored by the main bureaus. It includes magazine subscriptions, cable and utility bills and child care tuition. Some firms collect medical payments, prescription drug history and insurance claims; others mine public records for bankruptcies and liens.
LexisNexis, whose parent company bought ChoicePoint three years ago, handles background checks, tax assessments and criminal histories. Bounced checks can be tracked through Chex Systems, TeleCheck or SCAN. Payday lenders report to a company called Teletrack. Alliant Data compiles information on so-called “installment payments,” industry jargon for recurring monthly fees such as gym memberships.
The National Communications, Telecom and Utilities Exchange collects account information for 63 of that industry’s largest firms — although the group’s director won’t specify which ones. Members use the data to decide who to approve for new accounts and the size of a security deposit.
These dossiers go into what the industry calls a “black box” — a veil of secrecy surrounding the origins of the information, how it is analyzed and who buys it. Consumers have no voice in those decisions, even though the information concerns their lives. The data could help struggling borrowers prove they are ready for the financial mainstream. But the data can also penalize them for actions they didn’t realize were being tracked, forcing them to pay far higher interest rates or more fees.
Out of the black box comes a credit score that can be sold not only to lenders, but also colleges making tuition decisions, landlords choosing tenants or health-care providers determining financial aid. Every score out of the black box can be tailored for each of these buyers, even if it’s about the same person.
“It’s kind of like buying a tailor-fitted suit,” said Jeff Liebl, executive vice president at credit scoring firm eBureau. “When you build a custom model for your client, it just tends to fit better.”
The client in this case is not the consumer, but the lender. Consumers cannot dispute the result, and eBureau’s Web site lists no obvious way for them to request a copy of their files. Meanwhile, companies ranging from landlords to debt collectors may purchase the raw data.
“There are secret databases out there,” said Michael Turner, executive director of the Political and Economic Research Council (PERC), an industry research group. “You have to give consumers those rights and protections.”
The Fair Credit Reporting Act (FCRA) is the federal law intended to protect personal information that can be used to influence consumers’ credit scores, but the rules governing disclosures are not the same across the industry. For example, while the Big Three credit bureaus must provide consumers with a free copy of their report annually, the fourth bureau can charge consumers as much as $11 to access their own records.
The Big Three also must maintain a toll-free phone number and a Web site, annualcreditreport.com, to handle consumer requests. But firms that collect information on rental history, check writing, medical history, employment or insurance claims need only to create a “streamlined” system for consumer requests, although the law does not define what that is. Firms that gather other kinds of data don’t even have to go that far.
“My concern is that there is information in a file somewhere with my name on it, and I have no way of knowing what it is,” Farquhar said in a phone interview.
There is no registry of fourth-bureau companies, which makes tracking down all the firms that track you nearly impossible. The businesses that submit data to fourth-bureau companies have to provide only vague disclosures — if they provide them at all.
Federal law requires lenders to notify their customers that any late or missed payments could be reported to a credit bureau, but they do not have to specify which ones or at what point in the process. DirecTV’s notice, for example, says only that it reserves the right to contact the “appropriate credit reporting agencies.”
The disclosures are also often tucked within what one regulator nicknamed “word barf.” Companies that are not considered lenders do not have to notify consumers at all. Some argue that their business models exempt them from the FCRA altogether.
That creates a chicken-and-egg conundrum: Credit bureaus have to provide consumers a copy of their files only if they request it. But most people don’t ask for it because they do not know the company exists.
Lawmakers have tried to address the problem with a roundabout solution. Rules that took effect this year require lenders to explain to consumers why they are denied credit or didn’t receive the best interest rate. Starting this week, the notice must include a copy of the consumer’s credit score and the company that created it.
But Mondelli said he thinks the notices are complicated and are likely to generate more questions than answers. L2C is building a Web site to help shed light on what goes into his version of a credit score.
“The poor consumer now in my mind is even more confused than they were before,” he said.
What information should go into the fourth bureau is hotly debated, and even consumer advocates do not agree on one standard. At issue is how well any piece of information can forecast future behavior — and whether these firms are choosing data that create skewed reports on consumers.
“We put numbers in a box and we somehow come up with a magical answer,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “But there’s a real subjective piece to this.”
In 2008, a PERC study concluded that utility bills are one of the most promising types of information in the fourth bureau. The study found that it boosted credit scores for nearly 20 percent of all consumers. It also allowed lenders to create scores for 10 percent of people who did not have one before.
Some consumer advocates worry that even this data could backfire on the neediest consumers. That’s because the price of energy is often volatile, and an unexpected spike could result in a late payment for cash-strapped consumers. Many aid organizations also require families to miss a payment before they can qualify for financial help.
But even the most reliable data are no help to consumers if the information is wrong. Estimates for the number of files in the Big Three that contain errors have ranged from 1 percent to 25 percent, depending on which group conducted the study. But no significant analysis has been done on fourth-bureau data.
Catherine Taylor said the errors in her files have persisted despite several attempts to correct them. Another woman with a similar name would miss a payment or commit a crime, and Taylor said she would suffer for it. When she tried to volunteer with her daughter’s Girl Scout troop, she said a background check turned up a woman named Cathy Taylor charged with indecent exposure before minors. Taylor was barred from helping out with the troop.
LexisNexis did not respond to questions on Taylor’s case. It said in a statement that it makes changes to less than 0.2 percent of background reports because of consumer complaints.
It took Taylor four years to find a job after she was rejected from the Red Cross. Taylor said she has been turned down for an apartment and now lives in a house purchased through her sister. The stress of dealing with the consequences has exacerbated her diabetes and heart problems, she said.
“I’m guilty and then I have to prove myself innocent, and that’s just not how it’s supposed to be,” Taylor said.