All Commentary
Tuesday, December 5, 2017

The FREE Act Will Hamper the Credit Industry Needlessly

The bill put forth by Warren and Schatz would damage the entire credit reporting industry for one company's mistake.

The FREE Act, a bill put forward by Sens. Elizabeth Warren and Brian Schatz that would further regulate the credit reporting industry in the wake of the Equifax security breach, would harm the industry, consumers, and businesses.

The FREE Act Is Anything But

In September, consumers woke to news their social security numbers and other personal information was very possibly in the hands of cybercriminals thanks to a security failure at Equifax, a company many had never heard of before. In addition to social security numbers, the hackers made off with tens of millions of birth dates, driver’s license numbers, and, in a few cases, credit card numbers.

In the wake of this news, and with identity theft already a massive problem in the United States, politicians wasted no time drawing up legislation taking aim at the credit reporting industry, of which Equifax is one of the three biggest players. Most notably, Sens. Elizabeth Warren (D-Massachusetts) and Brian Schatz (D-Hawaii) introduced the Freedom from Equifax Exploitation (FREE) Act just a week after the news broke. Among other things, if passed into law, the FREE Act would require credit reporting agencies to

  • freeze and unfreeze a consumer’s credit report without charging a fee. (A freeze means no one can view your credit history. Prior to the Equifax breach, most companies charged fees between $2 and $10 to freeze and unfreeze credit reports.)  
  • refund any fees they charged for freezing or unfreezing credit reports in the aftermath of the Equifax breach.
  • provide a second free credit report to any consumer who already used her annual free report prior to the Equifax breach. (Under federal law, consumers are entitled to one free credit report yearly from each of the Big Three agencies, Equifax, Experian, and TransUnion.)

In announcing the FREE Act, Sen. Warren stated, “Credit reporting agencies like Equifax make billions of dollars collecting and selling personal data about consumers without their consent, and then make consumers pay if they want to stop the sharing of their own data. … Passing this bill is a first step toward reforming the broken credit reporting industry.”

Equifax may, indeed, be guilty of rank carelessness in the handling of valuable consumer information, but punishing the entire credit reporting industry, as the FREE Act would do, would harm borrowers, lenders, and the entire economy.

Problems with the FREE Act

The FREE Act would require credit reporting agencies to work for free. Freezing and unfreezing credit reports requires personnel, time, and other resources. The small fees charged in the past for this service 1) compensated the agencies for this work and 2) provided an incentive for consumers to limit their requests for this service. Reducing the price of this service to zero means consumers will seek more of the service than before, compounding the costs to credit reporting agencies.

Credit reporting agencies are likely to raise the prices of the credit reports they sell. To consumers, a law mandating a free service may seem wonderful. However, because unfreezing credit reports will involve contacting credit agencies, verifying identity, and more, it will not be a simple or costless process for anyone. In some cases, the headache involved may prevent credit from being sought and, thus, a transaction from taking place. It could delay someone’s hiring (because companies sometimes check the credit histories of job seekers) or delay or prevent other exchanges such as renting a residence or buying a car.

Credit reporting agencies, meanwhile, because they will be faced with higher costs without compensating revenue, are likely to raise the prices of the credit reports they sell to lenders, landlords, and other customers. At the least, this higher cost will have the effect of discouraging some credit checks from taking place, resulting in creditors relying on other, less reliable forms of discrimination when deciding to whom to make a sale or lend money. With fewer credit checks taking place, it’s also quite possible more consumers will enter into purchases they cannot afford.

Finally, while Sen. Warren argues that credit reporting agencies are profiting from consumer information without the consumer’s consent, the use of consumer data is nothing new or uncommon. Big Data is a relatively new concept, but a powerful one in today’s economy. Businesses collect and sell our shopping information to inform us of items we might want to buy. Even politicians have tapped Big Data to make their voter outreach efforts more cost-effective.

Why We Need Credit Reporting Agencies

The credit reporting industry is not “broken.” Credit reporting agencies perform an essential service by addressing the asymmetric information problem involved in nearly all credit-based transactions. A credit card company knows next to nothing about you when you ask for a credit card. You know whether you are a good risk, but the company does not. The same goes for a bank, a car dealership or anyone else who is willing to take a risk that you are good for your debts. By providing your credit history – whether you have filed for bankruptcy in recent years or have always paid your bills on time – credit reporting agencies provide a valuable service for consumers and creditors alike.

Contrary to Sen. Warren’s claim, the credit reporting industry is not “broken.” In addition to the Big Three agencies, there are many other credit reporting firms, often serving small, niche markets. The industry is not perfect and has often had to change its procedures (sometimes under government pressure), but consumers can take advantage of existing laws to monitor their credit histories and report any errors they discover. Imposing new burdens on the industry would likely put marginal agencies out of business, resulting in less competition and higher prices for consumer credit information.


The FREE Act would harm an entire industry for the mistakes of one company. What happened at Equifax was a disaster, putting millions of consumers at risk for years to come. But legislation punishing the entire industry is misguided and unfair. It’s also unnecessary. (More targeted legislation has been proposed in Pennsylvania, for example, that would limit most of its impact to companies that experience a security breach, such as Equifax.)

And there is nothing unusual about companies packaging and selling useful information about others. It’s common in media, marketing, retail, and other industries – even politics. Using consumer credit data to reduce the problem of asymmetric information in credit transactions is an essential part of allowing consumers to make purchases and receive loans in accordance with their borrowing histories.

The FREE Act would harm an entire industry for the mistakes of one company. It would make obtaining consumer credit information more cumbersome while likely reducing competition and raising prices in the overall credit reporting market. There’s nothing free about that.