A major issue has been brewing for more than a year among data furnishers and credit bureaus regarding a practice that is sometimes known as “pay for deletion.” This is where a debt collector will tell a consumer that, in exchange for payment, they will delete the tradeline from the consumer’s credit report. This practice is expressly against the rules set out by the Consumer Data Industry Association (CDIA) guidelines, and some argue that it undermines the credit system.
insideARM received a copy of a letter sent September 5, 2018 by Kevin Stevenson, the President and CEO of PRA Group, Inc., to the leaders of Transunion, Equifax, Experian, CDIA, and federal regulators including the Board of Governors of the Federal Reserve, CFPB, OCC, and FTC. The letter provides an interesting history of the matter.
Stevenson outlines the problem:
“Our debt buying competitors are deleting tradelines from the Credit Bureaus upon payment or settlement in full. As you are likely aware, this is a clear violation of the Metro 2 standard.
For your reference, Encore Capital announced this policy over a year ago.
We respect the integrity of the credit bureau data as well as our contractual agreement to abide by the Metro 2 format.
Please understand that when these tradelines are deleted by debt buyers there is NO record anywhere of that charged off account, as all sellers, except for one, delete the tradeline upon sale.”
He argues that the lack of response to his considerable outreach on this issue has put his firm at a competitive disadvantage because consumers regularly become frustrated and note that others offer the “delete for payment” benefit. He also suggests that the failure of the Bureaus to enforce the CDIA policy is creating a “data integrity issue that may prove extremely harmful to parties who rely on such information in making lending decisions.”
“We now are forced to assume that you do not agree with us that the Pay for Deletion practice is a systemic risk to the financial system by corrupting the integrity of your credit reporting data. Therefore, PRA will adopt a Pay for Deletion policy, effective October 1, 2018. Upon adoption, our new policy will result in just under 3 million tradelines being deleted from the Bureau’s systems immediately, and millions more as the years go by.”
Indeed, the company did begin this practice late last year. On January 15, 2019, insideARM noticed a “pop-up” FAQ on the PRA website, highlighting that it will now request the deletion of tradelines for accounts that are resolved. That pop-up no longer appears on the website, but here is a screenshot of what we noticed:
The landing page which provided further details also appears to have been removed from the website (at least I couldn’t find it), but here is a screenshot of what we saw in January:
The FAQ says that PRA will request that credit bureaus delete their tradeline approximately 30 days after a consumer’s final payment. The company also notes, “We do not control the timing within which the credit reporting agencies process our requests. For further assistance pertaining to your credit report, please contact the credit reporting agencies.”
As for the Encore policy, here is a direct link to their January 10, 2017 press release (it was hard~ish to find, as it’s no longer referenced on their Newsroom page), which begins:
Encore Capital Group, Inc. (NASDAQ: ECPG), an international specialty finance company, today announced it has enhanced its credit reporting policy for collections tradelines, dramatically shortening the time certain negative information remains on a consumer’s credit report. Now, after only two years, rather than the current industry-standard seven-year period, all of Encore’s U.S. subsidiaries (Midland Credit Management, Midland Funding, Asset Acceptance, Atlantic Credit & Finance) will remove credit report tradelines (the payment history of a consumer’s credit account provided to the major credit reporting agencies) on accounts where the consumer has paid or otherwise settled their debt. Encore is the first debt recovery solutions company to adopt such a consumer-centric policy. This policy change is important for consumers seeking to re-establish their financial independence after working hard to pay off a debt.
Two consumer groups provided positive comment for the release about the policy and how it helps consumers to earn a second chance:
“Encore’s tradeline policy change is a huge benefit for consumers who have stepped up to pay off their debt obligations,” said Steve Rhode, consumer advocate and author of GetOutofDebt.org. “I know personally how important this can be to those who are trying to earn a second chance.”
“Many times people find themselves in a position to bounce back from financial setbacks, but there remain hurdles like the standard tradeline policy that hinder recovery,” said John Fisher, chief relationship officer of Money Management International, a nonprofit, full-service credit counseling agency. “With this decision, Encore is helping remove a barrier for people working hard to make progress in their financial lives.”
I gathered input for this article from Debb Gordon, Ph.D. She was formally the CFPB Program Manager for Markets for Credit Reporting, Scoring, Big Data and Alternative Data. She also is a statistician, and worked at FICO for 9 years. She offered the following thoughts on the consumer advocates' perspective:
“It may be true that the deletion enables a consumer to have a second chance, however, because many of the credit issues consumers encounter are derived from job loss or medical issues, they are not in a viable position to graduate from a credit score that reached sub-prime to a score that was artificially generated by the deletion to be Prime or Super Prime.
This creates significant issues for the credit economy in general. When a financial institution validates their credit scores, this will place two very different credit-worthy individuals in the same score band. The ability to offer prime rates and terms to one client who can well afford the credit will be negatively impacted as the probability of reoccurrence of default or minor and major derogatories will occur for the other consumer due to the deletion. There would be no way to distinguish one consumer from the other.
The lack of credit score validation will drive approval rates up and the benefitted consumer would soon find they were not credit worthy any longer. This will make the credit market tighter and will have a significant effect on the housing market, auto sales and credit card availability, rates and limits. In the long term, this will create a recession. The short term idea of a win-win will actually turn into a long term lose – lose scenario.”
The iA Perspective
On the promise of anonymity, I spoke with some credit bureau insiders. One individual mentioned that Encore/Midland’s policy is to delete paid tradelines two years after the first date of delinquency. I wonder how that is explained to the consumer. I suspect if we’re talking about purchased debt, it’s possible that two years has typically already elapsed by the time the organization receives a final payment. But still, it could be pretty confusing, and difficult to set expectations about when the deletion will happen.
Another practice I heard about is that some debt buyers’ policy is to not report newly purchased accounts to the credit bureaus for 120 days. This allows them to attempt to collect first, and to tell consumers there is a window during which they can pay, and the account won’t be reported.
Reacting to this, Gordon said, “If the debt buyer does not report to the credit bureaus, then the original tradeline MUST remain on the consumer’s record. The offer to the consumer can also be determined to be extortion and will violate the UDAAP statute. This is a threat to the consumer to pay.”
A third point worth making highlights a discrepancy between a claim made by PRA’s CEO and what may actually be happening. Stevenson said in his letter that “...all sellers, except for one, delete the tradeline upon sale.” I was told by one of those insiders that a majority of major issuers in fact leave their charge-off trade line on the credit file with a remark code of “SOLD.” While I don’t have data to support this, the latter practice certainly makes more sense to me, as it is an accurate reflection of what happened with the account.
Gordon said that many of the issuers will delete their tradeline once the sale is complete. The debt buyer is required by Metro 2 to list the originator so the consumer can identify the origin of the debt.
Finally, it was conveyed to me that credit bureaus have a responsibility to review and execute any complete/accurate requests for tradeline updates; their mission is to create an environment where the consumer’s file is as complete and accurate as possible. They could threaten to exclude a furnisher for violations like Pay for Delete, but then they would also likely be excluding millions of tradelines that are not ultimately deleted (evidently, the lion’s share of purchased accounts). This would cause greater credit report inaccuracy than deleting the delinquent but ultimately paid tradelines. So, they claim they don’t really have the teeth required to enforce all of the CDIA’s guidelines.
What does the Fair Credit Reporting Act (FCRA) say about this? The law says creditors who furnish information about consumers to consumer reporting agencies must:
- Provide accurate information, which includes the duties to:
- correct and update information;
- provide notice of dispute or closed accounts;
- provide notice of delinquency of accounts; and
- provide notice of identity theft-related information
- Inform consumers about negative information which will be or already has been furnished to a reporting agency (no later than 30 days after furnishing).
- Investigate certain disputes submitted directly by consumers.
According to Gordon, it is clear that deletion only pertains to disputes or fraud. Deleting the tradeline in full should only occur in a case of identity theft and/or fraud. She referenced Metro 2, page 2-7: (Note: Paid in full collection accounts must not be deleted.)
Finally, Debb Gordon offered this comment,
“I spoke with PRA Group previously and they delayed ‘pay for deletion’ as long as they could and still stay competitive in their market. If the CFPB, FTC, or the Federal Reserve is not monitoring or issuing consent orders on this topic, they needed to match Encore’s behavior to stay competitive.
This problem has a wholesale effect on the entire credit score-based industry that will result in tightening credit across the board. As financial institutions realize that a score does not mean what they thought (due to poor credit individuals’ tradelines being cleansed from the credit bureaus), they will need to increase reserves, increase CECL calculations and restrict credit to meet their regulatory requirements to lend. This will ultimately show up in the model risk management validations going forward, and will also have a direct effect on Fannie Mae, Freddie Mac, and Sallie Mae credit models. Ultimately, this could result in a widespread recession similar to that of 2008.”
The FCRA does grant the Consumer Financial Protection Bureau (CFPB) both enforcement and rulemaking authority in connection with those it supervises, which would include debt buyers and debt collectors, and many -- but not all -- data furnishers. So the CFPB could address this policy if it chose to.
Download the accompanying whitepaper: On the Horizon? Delete-for-Pay Lawsuits