Credit ratings are one way to measure the risk a borrower poses. It is ironic that during the housing bubble that a low credit rating often got one a mortgage while today it takes it a high one to get a similar or lessor mortgage.

An article in the New York Times discusses this problem.

It seems that lenders are overusing credit ratings because of their simplicity and a misunderstanding of their limitations. The score is an algorithm based on a collection of data by one of three major rating agencies: Transunion, Equifax and Experian. But there are no rules on how information is gathered. Lending companies and other debt organizations have a great deal of freedom in choosing what to disclose and where to disclose it.

This is a quote from the article:

You would think, given the critical importance of an accurate score, that there would be rules about the information that is submitted to them. There aren’t. Lenders can submit information about your credit history to one of the bureaus, all of them or none of them. Some of them turn over information right away; some take months; some don’t do it at all. Some are sticklers for accuracy; others are sloppy. The point is that the credit score is derived after an information-gathering process that is anything but rigorous.

The author went on to point out many errors in his report. These companies are unregulated and make up their own rules. But their decisions can be disastrous for individuals. Whether or not you can buy a house or a car is a critical decision for most people. Not to mention, the interest rate to be paid and whether or not you can get adjustments in rates are also factors determined in whole or part by credit ratings.

There need to be rules. These credit agencies have more power than most parts of the federal government, certainly more than the states. Isn’t it objectionable to you that there is a private company determining without oversight some of the most important elements of your life? Shouldn’t we do something about it?

How about just a small thing? Let’s make them correct errors not when they want to but whenever there is an error. Why don’t we standardize the rules about to whom and about what lending companies must report? How about criminal or civil penalties when reports are deliberately falsified? We can fix the problems that bedevil capitalism. There should always be ground rules. It is unfortunate that we cannot rely on the morals and honesty of individuals but that is not the case.

These companies have virtually unfettered power. Is that good for anyone or any organization at any time? Let’s change the rules. As citizens in a democracy we are entitled to fairness.

James Pilant