Credit Reporting Agency (Business) - Explained
What is a Credit Reporting Agency under the FCRA?
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What is a Credit Reporting Agency?
Credit reporting/rating agencies are independent bodies that analyze the credit quality of public and private issuers. With so many debt issuers, these agencies were created with the aim of issuing ratings on the risk of securities remaining unpaid. These companies consider fixed income.
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A Little More on What is a Credit Reporting Agency
These agencies analyze credit quality by looking at the credit risk of debts issued and offer a rating that shows investors the risks of default of different entities without making a detailed analysis. In normal marketplaces, the state always has the lowest credit risk as it has the highest credit quality. Entities with high credit quality pay lower returns than entities with low credit quality. Top rating agencies include Fitch IBCA, Moody's and Standard & Poor's. These firms do not hold any risk or interest positions in markets and they are not members of any group acting in them. These agencies analyze the economic standing of a company, financial statements, risks involved in company business and quality of managers. A company that offers fixed-income security and asks to get a rating from a credit rating agency has to pay to get rated. This might be controversial as companys managers may think they pay for a better rating. However, this does not happen as it would mean the end of business for these credit reporting agencies. The main role of credit reporting agencies is to guide investors on the risk of investing in certain financial assets. Companies with no qualification and needs to issue debts in the financial markets have the disadvantage of paying high interests.
Ratings of Credit Reporting Agencies
There are short term and long term ratings used in the money markets and capital markets respectively. Ratings are not static; they change as the market circumstances change.
Academic Research on Credit Reporting Agency
- The evolution of commercial credit reporting agencies in nineteenth-century America, Madison, J. H. (1974). Business History Review, 48(2), 164-186. In this paper, Professor Madison examines how commercial credit reporting agencies have evolved. It looks at the emergence of new industries in the nineteenth century America. It looks at how firms such as Dun and Bradstreet agencies have overcome challenges to be at the top.
- Credit reporting agencies: A historical perspective, Olegario, R. (2003). Credit Reporting Systems and the International Economy, 118-131. This paper looks at the history of credit reporting agencies from their inception, their running, ethics and the future. It looks at different methods applied by these agencies and how they affect their results.
- Credit-reporting agencies: their historical roots, current status, and role in market development, Olegario, R. (2000). This paper analyzes the history of credit reporting agencies in the US and describes how these agencies support market development. The research looks at how these agencies provide credit and shows that information sharing reduces interest on loans and default rates and can even have disciplinary effects to encourage borrowers to meet obligations.
- When the Database is Wrong... Do Consumers Have Any Effective Remedies against Credit Reporting Agencies or Information Providers, Rameden, D. (1995). Com. LJ, 100, 390. This paper looks at the ethics of credit reporting agencies and the correctness of the information they provide. It examines the remedies that consumers can take when the database of credit reporting agencies is wrong.
- Information: Hard and soft, Petersen, M. A. (2004). This paper looks at the many ways in which information in financial transactions occur. The paper defines hard and soft information. It states that, hard information is quantitative and easy to store and transmit and the content is independent of collection methods. Technology has enhanced the way information is collected, processed and communicated. This paper looks at the evolution of financial markets and institutions in the face of new age information.
- An overview of consumer data and credit reporting, Avery, R. B., Calem, P. S., Canner, G. B., & Bostic, R. W. (2003). Fed. Res. Bull., 89, 47. This paper looks at how the Federal Reserve System obtains more data on debt statuses, loan repayment behavior and credit quality. These data have been collected by credit reporting agencies for many years to assist creditors to evaluate credit quality. Federal Reserve Board looks at the usefulness of this data by collecting data from one of the three credit reporting companies. This paper looks at different ways in which credit reporting agencies compile and report data.
- The Fair Credit Reporting Act: A Legislative Overview, McNamara Jr, R. M. (1973). J. Pub. L., 22, 67. This research paper looks at the fair credit reporting act and how this helps investors. It looks at the different clauses of the act, and analyzes how they help different parties involved.
- Consumer credit scoring: do situational circumstances matter?, Avery, R. B., Calem, P. S., & Canner, G. B. (2004). Journal of Banking & Finance, 28(4), 835-856. This paper looks at the challenges involved with credit history scoring. While credit reporting is important to both lenders and borrowers, there are important statistical errors that may occur. The paper shows that failure to consider local market circumstances and individual trigger events when creating scores can diminish the effectiveness of scores.
- Common Law Defamation and the Fair Credit Reporting Act, Maurer, V. G. (1983). Geo. LJ, 72, 95. This paper looks at the Fair Credit Reporting Act and how it relates to common law defamation. The paper examines how the act is enforced and how challenges have diminished the power of this act.
- The Fair Credit Reporting Act: Fair for Consumers, Fair for Credit Reporting Agencies, Vanderwoude, N. (2009). Sw. L. Rev., 39, 395. This paper looks at how the Fair Credit Reporting Act balances fairness to both credit reporting agencies and consumers. The paper examines how the act protects agencies and consumers.
- An historical primer on the business of credit rating, Sylla, R. (2002). In Ratings, rating agencies and the global financial system (pp. 19-40). Springer, Boston, MA. This paper notes that credit rating appeared late in the capital markets. The first rating agency was started in 1909 by John Moody. Later, research by W.B. Hickman showed that credit rating agencies provided correct information on default probability and bond quality to the investors.