Jeff Gelles: New oversight for nonbanks

If something goes wrong with your account at a bank and you can't seem to straighten it out, you know where to turn for backup - or can at least figure it out by sorting through the confusing array of bank regulatory agencies.

But what if something goes wrong with your credit report - say an error that keeps coming back no matter how many times you report it? What about a problem with a debt collector repeatedly demanding money you don't believe you owe, or a problem with money inexplicably vanishing from a prepaid debit card?

Financial woes like these, persistent problems for many consumers, have long been beyond the radar of most federal and state regulatory agencies, even if state attorneys general and the Federal Trade Commission sometimes get involved. Thanks to the FTC's efforts more than a decade ago, for instance, the main national credit reporting agencies - TransUnion, Equifax, and Experian - at least must eventually answer consumers' phone calls.

But if complaining to one of the credit bureaus doesn't solve a problem, consumers have few options beyond hiring a lawyer. Most just feel powerless, unable to cope or even comprehend what went wrong in one of these large and mysterious companies that collect and sell data about us.

Before you cue the refrain from Ghostbusters - "Who you gonna call?" - and bemoan the fact that Bill Murray and Dan Aykroyd aren't available, here's some good news: The new Consumer Financial Protection Bureau may step into the breach.

As it implements 2010's Dodd-Frank financial reforms, the bureau is considering whether to begin supervising credit reporting, debt collection, the prepaid-card industry, and other important nonbank financial services. Loan servicers, check cashers, debt-relief services, and money transmitters are also in its sights.

Why the new oversight? Nonbank financial institutions took much of the blame for the housing bubble and the 2008 financial crisis it spurred, which three years later still has us mired in a painfully slow recovery, weighed down by underwater homeowners and a moribund housing sector.

To prevent something similar from happening again, Congress established the new bureau and told it to extend the kind of oversight already directed at banks to nonbank financial institutions, specifically to payday lenders, mortgage lenders, and private education lenders, but also to other "larger participants" in the financial markets.

In part, the goal is to level the playing field. But the new authority is also aimed at addressing various pitfalls that have developed as the financial industry has evolved in unanticipated directions.

What will supervisory authority do? The key is that a regulator with authority to supervise and examine a nonbank financial institution will be much better equipped to understand how it functions and determine what kind of consumer protection is needed.

The FTC has never had that power. Unless it files suit and initiates discovery - a difficult and costly process - it has no way to get inside and explore the workings of, say, a credit bureau or debt collector.

It's hard to anticipate what might come of the new authority, aside from giving consumers with a complaint the ear of an agency that, unlike the traditional banking regulators, promises to make consumer protection a priority. That alone is no small matter.

But it's easy to identify some things that often go wrong for consumers, and that should interest a supervising agency, says Jim Francis, a Philadelphia lawyer whose firm, Francis & Mailman, specializes in credit reporting, debt collection, and other consumer matters.

For instance, Francis says a common problem with credit bureaus involves a so-called mixed file, in which consumers are plagued by data mistakenly included with their credit reports.

One client is a Dover nurse who shares first and last names with another Doverite - a woman with an ugly credit file, including court judgments and a tax lien.

Francis' client and her counterpart have different middle names, different dates of birth, different addresses. They are, indeed, completely different people. But unfortunately, their Social Security numbers are similar - seven of the nine digits match.

The result? One of the major credit bureaus continually lumps the ne'er-do-well in with the nurse when it issues credit reports. The mistake has prevented her from getting credit, stopped her from cosigning a loan for her son, and caused a succession of similar headaches.

"Our woman has disputed it for years, and it keeps coming back," Francis says.

Francis says all the major credit bureaus make similar mistakes, as do the specialty bureaus that sell reports to potential employers or landlords. The Fair Credit Reporting Act ensures that consumers can dispute errors, but some never manage to quash them.

"We only bring a lawsuit after they've tried self-help and it doesn't get them anywhere," he says. And Francis has no shortage of clients.

If the bureau does its job well, Francis may have less work. But that's one kind of unemployment that might actually be good news for the consumer economy.