[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
H.R. 2622--FAIR AND ACCURATE
CREDIT TRANSACTIONS ACT OF 2003
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
JULY 9, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-47
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WASHINGTON : 2004
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North CHARLES A. GONZALEZ, Texas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota ARTUR DAVIS, Alabama
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
C O N T E N T S
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Page
Hearing held on:
July 9, 2003................................................. 1
Appendix:
July 9, 2003................................................. 93
WITNESSES
Wednesday, July 9, 2003
Belew, Joe, President, Consumer Bankers Association.............. 75
Bell, Kayce, Chief Operating Officer, Alabama Credit Union, on
behalf of the Credit Union National Association................ 77
Brobeck, Stephen, Executive Director, Consumer Federation of
America........................................................ 37
Dugan, John C., Partner, Covington & Burling, on behalf of the
Financial Services Coordinating Council........................ 38
Duncan, Mallory, Senior Vice President, General Counsel, National
Retail Federation.............................................. 30
Fischer, L. Richard, Visa U.S.A.................................. 84
Hoofnagle, Chris, Deputy Counsel, Electronic Privacy Information
Center......................................................... 82
McEneney, Michael F., Partner, Sidley Austin Brown & Wood LLP, on
behalf of the U.S. Chamber of Commerce......................... 33
Muris, Hon. Timothy J., Chairman, Federal Trade Commission....... 10
Pratt, Stuart K., President, Consumer Data Industry Association.. 41
Shelton, Hilary, Director, NAACP, Washington Bureau.............. 78
Snow, Hon. John W., Secretary, Department of the Treasury........ 8
Spriggs, William E., Executive Director, National Urban League
Institute for Opportunity and Equality......................... 34
Taylor, D. Russell, Chairman, America's Community Bankers........ 81
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 94
Clay, Hon. Wm. Lacy.......................................... 96
Emanuel, Hon. Rahm........................................... 97
Harris, Hon. Katherine....................................... 99
Israel, Hon. Steve........................................... 100
Belew, Joe................................................... 102
Bell, Kayce.................................................. 111
Brobeck, Stephen............................................. 119
Dugan, John C................................................ 135
Duncan, Mallory (with attachments)........................... 148
Fischer, L. Richard (with attachments)....................... 157
Hoofnagle, Chris Jay (with attachments)...................... 175
McEneney, Michael F.......................................... 195
Muris, Hon. Timothy J........................................ 207
Pratt, Stuart K.............................................. 224
Shelton, Hilary.............................................. 238
Snow, Hon. John W............................................ 243
Spriggs, William E........................................... 248
Taylor, D. Russell........................................... 253
Additional Material Submitted for the Record
American Financial Services Association, prepared statement...... 260
H.R. 2622--FAIR AND ACCURATE
CREDIT TRANSACTIONS ACT OF 2003
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Wednesday, July 9, 2003
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The Committee met, pursuant to call, at 10:14 a.m., in Room
2128, Rayburn House Office Building, Hon. Michael Oxley
[Chairman of the Committee] presiding.
Present: Representatives Oxley, Leach, Bachus, Royce, Lucas
of Oklahoma, Kelly, Gillmor, Ryun, Ose, Biggert, Shays, Miller
of California, Hart, Capito, Tiberi, Kennedy, Hensarling,
Murphy, Barrett, Harris, Renzi, Frank, Waters, Sanders,
Maloney, Velazquez, Ackerman, Hooley, Carson, Sherman, Lee,
Inslee, Moore, Capuano, Hinojosa, Lucas of Kentucky, Clay,
Israel, McCarthy, Baca, Matheson, Miller of North Carolina,
Emanuel, Scott and Davis.
The Chairman. [Presiding.] The Committee will come to
order.
The Committee meets today for a legislative hearing on H.R.
2622, the Fair and Accurate Credit Transactions Act of 2003,
the FACT Act, comprehensive legislation to reauthorize certain
key provisions of the Fair Credit Reporting Act and make other
needed reforms to our national credit reporting system.
The bill was introduced just prior to the 4th of July
recess by a bipartisan coalition of 32 members of this
Committee, 18 Republicans and 14 Democrats, led by the Chairman
of the Financial Institution Subcommittee, the hardworking Mr.
Bachus, Ms. Hooley, Mrs. Biggert and Mr. Moore.
The FACT Act grew out of an exhaustive series of hearings
that Chairman Bachus's subcommittee has held on the FCRA over
the past several months. Those hearings, which featured
testimony from some 75 witnesses, representing every
conceivable perspective on the FCRA, has laid the groundwork
for this Committee to act, hopefully later this month, to
preserve the benefits of the national credit reporting system
and give consumers important new rights in the process.
I commend Chairman Bachus and all of the members of the
Financial Institutions Subcommittee for their diligent and very
thorough approach to this complex issue. The legislation that
the Committee considers today is a testament to their months of
hard work.
The subcommittee's hearings have, in my view, established a
compelling case for reauthorizing the FCRA's uniform national
standards. As one of our distinguished witnesses at today's
hearing, FTC Chairman Muris, has stated, the ``miracle of
instant credit created by our national credit reporting system
has given American consumers a level of access to financial
services and products that is unrivaled anywhere in the
world.''
According to the Federal Reserve Board, since FCRA's
enactment, the overall share of families with general purpose
credit cards increased from 16 to 73 percent, with low income
families achieving the greatest increase.
American families' ability to buy a home has also
increased, with ownership levels growing significantly from 60
to 68 percent, again with the largest gains achieved by lower
income and minority groups.
These improvements in the credit and mortgage systems have
saved consumers nearly $100 billion annually, according to some
estimates. The FACT Act is, first and foremost, an attempt to
make sure that the considerable benefits of that system to
consumers and to the U.S. economy do not go up in smoke at the
end of this year when the FCRA's uniform national standards are
set to expire.
Let me highlight just a few of the provisions that I was
particularly pleased to see included in this important jobs and
economic growth bill.
The FACT Act incorporates a number of provisions drawn
largely from legislation introduced earlier this year by Ms.
Hooley and Mr. LaTourette that aimed to reduce the incidence of
identify theft and protect those who are victimized by this
increasingly common form of criminal activity.
The bill prohibits the printing of complete account numbers
and expiration dates on credit and debit card receipts and
requires verification of certain address changes so that
consumers are less likely to have their accounts stolen.
It helps consumers who fear they have been victimized by
identify theft to place fraud alerts on their credit reports to
ensure that criminals can't access their accounts.
And it allows identity theft victims filing police reports
to block any fraudulent information from appearing on their
credit reports to protect their credit reputations from being
destroyed.
With these targeted reforms, the FACT Act will strike a
serious blow against the identity theft criminals who have
succeeded in victimizing millions of innocent Americans over
the years.
The FACT Act also contains a number of provisions
strengthening consumers' ability to dispute the accuracy of
incorrect or incomplete information that appears on their
credit report.
For example, perhaps the most fundamental protection the
bill gives consumers is the right to a free annual credit
report accompanied by an explanation of their individual credit
score and what steps they can take to improve it. This will not
only help consumers guard against identity theft, but will
empower consumers to ensure they will not be unfairly denied
access to credit or other financial products before the need
arises.
Let me again thank Chairman Bachus and the original co-
sponsors of this legislation for their leadership and exemplary
work.
Let me also indicate to members that I fully expect this
bipartisan consumer protection legislation to continue to be
perfected as it moves through the markup process.
The ranking minority member, Mr. Frank, has stated that one
of his priorities will be to ensure that the legislation
includes heightened safeguards for consumers' health-related
information. We have been working hard on that issue and I am
committed to continuing to work with him in the same bipartisan
spirit that has characterized the Committee's review of FCRA
thus far.
Other members on both sides of the aisle have thoughtful
proposals addressing various aspects of the FCRA that also
warrant the Committee's careful consideration.
In closing, I want to welcome Secretary Snow and Chairman
Muris before the Committee and thank them for their
constructive role in this process. Just last week, Secretary
Snow unveiled the Bush administration's proposal for
reauthorizing FCRA's uniform national standards, which included
sweeping new protections for the security of America's personal
financial information.
And under Chairman Muris's leadership, the FTC has recently
begun implementing its national ``do not call'' registry--bless
your heart--something that I and many members of Congress have
long supported to limit unwarranted telemarketing phone calls.
Judging from the millions of Americans who have signed up for
it thus far--and I understand it is 20 million and counting--
this Bush administration effort appears well on its way to
becoming one of the most popular consumer protection
initiatives of all time.
The Chair would add that pursuant to the Chair's prior
announcement, he will limit recognition for opening statements
to the Chair and ranking minority member of the full Committee,
the Chair and ranking minority member of the Subcommittee on
Financial Institutions and Consumer Credit, or their respective
designees, to a period not to exceed 16 minutes evenly divided
between the majority and minority. The prepared statements of
all members will be included in the record.
The Chair now recognizes the ranking member, Mr. Frank, for
an opening statement.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 94 in the appendix.]
Mr. Frank. Thank you, Mr. Chairman. I appreciate the
cooperative spirit in which we have been able to work so far.
I think it is very clear from a wide range of conversations
I have had that the votes exist, both on the Committee and in
the House, to continue the existing FCRA, including the seven
preemptions. I can't name them all. I think I can get more of
them than of the seven dwarfs, but I am not sure, but I know
them when I see them.
[Laughter.]
So that outcome is not in question. There are, I should
say, within the responsible consumer community, on our side of
the aisle here, some people who oppose that. And what I am
giving now is not my personal preference, but my statement of a
fact. It is clear to me that there is majority support for
extending the preemptions. The question is, in what form?
Now, we should accept reality. It is very clear that if the
majority party in this House decides to pass something, it will
pass. A lot of time may pass before it passes, as we learned a
week ago, but it will pass.
Things are obviously different in the Senate, and that is
what is relevant here.
Just briefly, our deliberations will decide, I believe,
whether or not a bill passes the House extending the
preemptions with 240 or 250 votes or 380 to 390 or maybe even
400 votes. I think it would be better if it were the latter.
One, I think it would be in the interests of the country
and of the economy for us to pass a bill that extended the
preemptions with increased consumer protections.
And I should note that there is, I think, a very high
degree of agreement among all of the members of the Committee,
about the consumer protections. There is a very high degree of
conceptual agreement, areas such as identity theft, medical
information, better information for consumers about what is in
fact happening to them. I am impressed with the degree of
consensus.
We have had a very good set of hearings and I congratulate
the Chairman of the subcommittee and the ranking member of the
subcommittee. I read the hearing opening statements over the
break. I don't often read opening statements for hearings
unless there is no other soporific available. But in this case
I really found them cumulatively quite useful.
So the question then is, can we translate this conceptual
agreement on a lot of things into enough agreement so that we
get a large vote? And the reason for a large vote is very
important. Obviously, the United States Senate is going to be
getting this bill, and there is a deadline of the end of
December, so the bill will be one of the things being acted on
along with appropriations bill at the end of the session.
And as I said, I acknowledge that in the House the majority
will be able to pass it. In the Senate, obviously, things are
very different. I mean, I have explained to people that if a
dog dies in the wrong place it can keep the United States
Senate from acting. If a dog dies in the House it gets a rule
and gets passed.
[Laughter.]
So, I mean, that essential difference between the two
bodies ought to be kept in mind.
The more we can achieve a consensus and a large vote in the
House, the likelier we are to get a bill that can be signed
into law in a way that won't be disruptive by the end of the
year.
Now, there is one particular issue. As I said, I am struck
by the degree we have had a lot of agreement on more
transparency, on identity theft, which is a problem both for
the consumer and for the financial institutions. The consumer
bears a great deal of the anguish and stress of this; the
financial institutions bear a great deal of the burden.
I think it makes sense to focus on the Fair Credit
Reporting Act and not on Gramm-Leach-Bliley. There are issues
to be addressed there. I think opening them up would be--I do
not see how the United States House and the United States
Senate can complete action on this between now and December 31
with all the other business pending if we broaden this beyond
the Fair Credit Reporting Act.
There are a couple of areas that are particularly important
to me. Our colleague from New York, Mr. Ackerman, has been
raising the question of giving consumers notice when there is
inaccurate information, they think, about them. We are all in
agreement that people should be able to correct inaccurate
information about themselves, but if you don't know it has been
put there, then by definition you can't do anything about it.
And waiting until you have been penalized for inaccurate
information obviously imposes costs on the consumer that I
think are unacceptable.
In addition, there is one flaw in the system that I have
seen. I do believe the consumer credit system works well. I
think it works well on the whole. It obviously supports a
considerable part of our economy. We have increased the extent
to which people get credit. All those are good things.
I think there is a problem in the extent to which
individuals who are the victims of identity theft or simple
error or whatever are able to get some redress. That is, I do
believe that the existing procedures whereby a consumer who has
been the victim of inaccurate information tries to get that
corrected are not very good.
I was told by one of the groups, ``Well, if you have
information about you that is inaccurate we will include in the
statement that we send out your statement that what we say
isn't true.''
So if I want to get some credit people will get a statement
about how bad I am and a corresponding statement from me
saying, That is not true, I am really a nice person.
I think that is the equivalent of the newspaper that having
printed an inaccurate obituary corrects that by printing a
birth notice. Sending out information that is both accurate and
inaccurate I think is unacceptable.
I think we can do a better job of mandating that the credit
furnishers and the credit reporting agencies take care of those
cases where there is injustice.
And I want to address specifically the argument that, well,
there are people who think the system works very well and there
are people who think it doesn't work well.
I think it works well with the major exception that--and it
is a relatively small number of individuals who are victimized
by inaccurate credit, but I don't think it is acceptable to say
to them that in the interest of the system as a whole they are
going to have to bear that particular burden. I think we can do
a better job of cleaning up their accuracy.
So from that standpoint I hope that we will be able to
proceed, as the Chairman has said, to take a basically
reasonable approach and make it stronger, and I look forward to
our being able to work together, and I hope that with that kind
of approach we will be able to get a very large majority
ultimately for a bill that extends the preemptions and protects
consumers.
The Chairman. The gentleman from Alabama?
Mr. Bachus. I thank the Chairman.
What we are dealing with here is a national delivery
system, and that is our national credit reporting system. And
like our national interstate highway system, like our national
power grid, like our national communications system, they
deliver an incredible amount of value and are very important to
the economy.
Consumers today are able to move from state to state, they
are able to finance loans, get mortgages at low rates. And part
of the reason is what they never see, and that is the national
uniform credit reporting system.
As much as anything, and I think Secretary Snow pointed
this out in a press conference last week, we have seen the
democratization of credit, where low and middle income families
enjoy incredible access to credit today at unparalleled levels.
And I think that no one on this Committee wants to
jeopardize that. At the same time, Chairman Oxley earlier this
year recognized that many of the uniform standards were
expiring, that that was a threat to this national uniform
system, and he made it the top priority of this Committee not
only to reauthorize those national standards, but to also
improve upon the system. And we can improve upon it, and that
is what this legislation is all about.
The ranking member, Mr. Frank, pointed out identity theft.
That is the fastest growing white collar crime in America.
Hundreds of thousands of victims. People used to rob banks, and
then they found that it was easier to rob railroad or trains,
because they weren't protected like the banks were.
Well, the last thing that thieves have discovered is easy
to rob is people's credit, because people's credit has a great
deal of value to them, and people are now stealing people's
identity and using that identity and the credit that goes with
that identity to steal millions of dollars every day here in
America.
This legislation is the result of a bipartisan group of
members--Ms. Hooley, Mr. Moore, Mr. Frank, even Mr. Sanders has
had input and his stamp is on this bill, Chairman Oxley, Ms.
Biggert. Really, you have got 14 co-sponsors on each side of
this Committee, and every one of them has had a role to play in
this legislation.
This is a work in progress, as any legislation. We are at
the beginning of the legislative process, we are at the end of
the hearing process where we had 75 witnesses. We will continue
to work with the members to refine this. We are aware of Mr.
Ackerman's concerns. We are aware of concerns of other members.
And what we will do as we address all these concerns, we
will try to determine what is in the best interest of the
American consumer, the public, and we will try to balance the
concern with the benefit of the system as it now exists.
And if we can tweak that system, if we can make refinements
to that system without erecting barriers to our uniform
national credit reporting system, we will do that, and where
justice dictates, we will do that.
Now, I want to end, Mr. Chairman, by saying that, as much
as anything, this bill demonstrates that when the
Administration works with the Congress what a benefit that is.
The Treasury Department and the FTC have worked very
closely with us. Witnesses on our first panel have been very
helpful to us, and their agencies.
But as much as anything else, this is a bill where
bipartisan cooperation has come together, and we have all put
aside some of our personal differences to come up with the
legislation that is a starting point for renewing the uniform
credit system. Thank you.
The Chairman. I thank the gentleman.
The gentleman from Vermont.
Mr. Sanders. Thank you, Mr. Chairman. And I want to thank
you and Ranking Member Frank for holding this important hearing
on H.R. 2622, introduced by Subcommittee Chairman Bachus, and I
want to thank Spencer Bachus for his openness in this entire
process, and for his willingness to work in a non-partisan way.
We appreciate that, and we look forward to continue working
with him.
And I also want to thank Secretary Snow for being with us
today, as well as our other witnesses.
And, Mr. Secretary, you and I will be meeting later on
today to deal with another crisis, and that is the collapse of
our pension system, which is affecting millions of American
workers, and we look forward to that meeting, as well.
Mr. Chairman, while this bill does include some modest
consumer protections, H.R. 2622, as currently drafted, does not
include a number of reforms that are needed to increase the
accuracy of credit reports, reduce identity theft, and protect
the medical privacy of consumers.
Most importantly, H.R. 2622 contains a major anti-consumer
provision that would permanently bar the States from passing
stronger bad credit reporting laws designed to protect their
citizens against any number of problems, including identity
theft and the ability to protect consumers' access to credit by
ensuring that the notoriously flawed credit reporting system is
cleared up, and in my mind just that is not acceptable.
Mr. Chairman, this issue is extremely important to
consumers, which is why the National Association of Attorneys
General, representing all 50 of our states, unanimously passed
a resolution opposing this preemptive language.
They, the Attorney Generals throughout this country, who
are closest to the problem, know that to protect consumers in
this country, they have got to have the ability, whether it is
in Alabama or Ohio or Massachusetts or Vermont, the ability to
respond quickly and effectively to the particular consumer
problems of people in their own State. And we should not deny
them that right.
Mr. Chairman, this preemption provision is also opposed. We
hear the word consumer very often, but we should be clear that
this preemption provision is also opposed by every major
consumer organization in this country, including the Consumer
Federation of America, or ACORN, the Center for Community
Change, Consumers' Union, Consumer Action, U.S. Public Interest
Research Group, and the lower-income clients of the National
Consumer Law Center.
I look forward to working with Subcommittee Chairman
Bachus, Ranking Member Frank, and Chairman Oxley, on improving
this legislation before it reaches the floor.
Let me also mention a few other concerns that I have. While
HR 2622 does allow consumers to receive free credit reports
annually, and that is a very important step forward, it is not
clear that it does allow consumers to receive free credit
scores, the most important information consumers need to find
out if they qualify for credit.
The language here is vague, and I look forward to working
with the Chairman to improve that language, to make it clear,
abundantly clear, that consumers who receive free credit will
receive free credit scores along with their free credit report,
including the key factors adversely affect the consumer's
credit score.
Further, Mr. Chairman, we must address the crisis in the
credit card bait-and-switch scam, as recently reported by The
New York Times, the Washington Post, ABC News and other media
outlets.
Credit card companies are penalizing customers who have
always paid their credit card bills on time by, in some cases,
tripling their interest rates due to information contained in
the consumer's credit reports that were linked to other loans.
In other words, people pay their bills on time, month after
month, and because they may have borrowed money for a personal
crisis, or for another reason, credit card companies around
this country are doubling or tripling their interest rates, and
that is not acceptable and we have got to address that issue.
Lastly, Mr. Chairman, I also support the visions that would
protect Social Security numbers from identity thieves, protect
the medical privacy of consumers, protect the credit of persons
in combat or activated to military service, provide
notification to consumers when negative information is put on
their credit reports, protect consumers by disclosing insurance
clause, reduce the time frame available for credit bureaus to
investigate and correct consumer reports, increase the
penalties for companies that repeatedly report inaccurate
information to credit bureaus, and prohibit credit and
insurance clause for bringing reduced space on the number of
credit inquiries.
Finally, Mr. Chairman, credit is more important than ever
in our society. Consumers need to know that both the Federal
and State governments are working hard to protect their access
to credit. We need a strong federal law with flexibility by the
States to react to local problems.
I thank the Chairman, and I look forward to working with
him and Mr. Bachus to improve this bill.
Thank you.
The Chairman. The gentleman's time has expired.
And the Chair would reiterate that all members' opening
statements be made part of the record. Without objection, so
ordered.
We now turn to our distinguished panel, beginning with the
Secretary of the Treasury, Mr. John Snow.
And, Secretary Snow, it is good to have you back again
before the Committee.
And also to Chairman Muris from the Federal Trade
Commission.
We thank both of you.
And, Mr. Secretary, whenever you wish, you may begin.
STATEMENT OF HON. JOHN W. SNOW, SECRETARY, DEPARTMENT OF THE
TREASURY
Secretary Snow. Thank you very much, Mr. Chairman, Chairman
Bachus, Ranking Member Frank, Member Sanders. It is a pleasure
to be back here with you.
In listening to your opening statements, for the most part
I would say, as lawyers often say in proceedings, I stipulate
to what you said and want to identify myself with it and adopt
it as my own, because you have really hit on the high points of
what this is all about, and there is hardly any reason for me
to go through a lengthy statement.
I have submitted a statement for the record, and I would
ask that it be adopted----
The Chairman. Without objection.
Secretary Snow.----and included in the record.
As Chairman Bachus said, the FCRA is the invisible
infrastructure of the credit markets of the United States, and
that invisible infrastructure makes possible the most extensive
and widely available credit at the best rates anywhere in the
world. And it simply wouldn't be possible without that broad
sharing of information. And that is why it is so important, so
important, critically important, that you take the steps to
make those standards permanent.
Consumers have two vitally important interests here. First
is access to credit and other financial services. They also,
though, have a vital interest in the accuracy and the security
of their financial information. Good legislation is going to
serve both interests, and any proposals, it seems to me, should
be judged by those two standards: Does the proposal advance the
availability of credit, and does it make the information more
secure and more accurate?
It is important to recognize, I think, as we think about
the extension of the FCRA, how important it has been for lower
income people and how many people at the lower portions of the
income scales in the United States have credit today because of
the FCRA and the information pooling that it makes possible.
It is also important to recognize just how many people
generally benefit from the national uniformed standards.
The Council of Economic Advisers has done some studies in
this regard that I have detailed in my submitted testimony.
They estimate that without the national standards, 280,000 home
mortgage applications that are now approved each year would be
denied. And that is roughly $22 billion of new mortgage money
made available, made available because of these standards.
And as I say, this democratization of credit has especially
benefited minority and lower-income families. And if you look
at the credit numbers, you will see that credit extension,
credit card extension, mortgages and so on have even grown even
faster among minorities and lower-income people over the last
decades than among the populace generally.
Good as it is, it can be improved. And significant
improvements are suggested by the Administration and are
included in the legislation that is pending before you today. A
critically important area where improvements can be made is in
this area of identify theft that needs to be addressed. It is a
terrible national problem. In my written testimony I have
offered some examples illustrating the lengths that these
identify thieves go to rob people of their financial identity,
illustrating how clever they are, how adaptable they are, how
heartless they are as they perpetrate these horrors on innocent
victims. And one of the worst aspects of the identity theft is
how quickly one's good reputation can be destroyed, and in turn
how long it takes to get it back.
Our proposals and your legislation addresses that issue.
And it is important to recognize how important these national
standards for sharing information can be in both reducing the
prospects for identity theft and in correcting it once the
crime has occurred. And I have detailed in my testimony the
various ways we would suggest that be done.
In closing, I want to congratulate the sponsors of this
important legislation, the Bachus-Hooley-Biggert-Moore bill,
all of whom I think I see here on the podium. This is
legislation that is very much akin to the proposals that the
Administration thinks makes good sense and the very proposals I
talked about last week. And we are in very broad agreement, I
want you to know, with what you were proposing in that
legislation.
We look forward to working with the members of the
Committee, and the sponsors particularly, to move a strong
package of reforms forward to ensure that the Fair Credit
Reporting Act becomes an even more effective tool for meeting
the financial needs of American consumers. I am confident that
the legislation that is being proposed does that, and we want
to see it become law.
And I thank you for the opportunity to testify before you
this morning.
[The prepared statement of Hon. John W. Snow can be found
on page 243 in the appendix.]
The Chairman. Thank you, Mr. Secretary. And again, it is
always good to have you here before the Committee. And thank
you for your good work in this area.
We now turn to Chairman Muris from the Federal Trade
Commission. Mr. Chairman, welcome.
STATEMENT OF TIMOTHY MURIS, CHAIRMAN, FEDERAL TRADE COMMISSION
Mr. Muris. Thank you. Thank you very much, Mr. Chairman,
and members of the Committee.
I am certainly pleased to appear here today to discuss the
FTC's legislative recommendations with respect to the Fair
Credit Reporting Act. The FCRA has been a remarkably effective
law and serves as a model for our efforts to protect consumer
privacy.
As the Chairman mentioned, the FCRA makes possible what I
call the miracle of instant credit. This miracle occurs all
over American every day. For example, if a consumer has good
credit he or she can borrow $10,000 or more from a complete
stranger and within an hour drive away in a new car. Now, I am
told that you need a higher authority than a credit manager to
bestow miracles, but it is a remarkable event when you focus on
it.
The flexibility of our credit markets is one of our great
strengths as a nation.
It is one reason why we are so large, strong, and
prosperous.
Since the FCRA was enacted, over 30 years ago, consumer
credit has expanded exponentially and today accounts for two-
thirds of our nation's GDP.
Since 1970, access to credit has greatly expanded as well.
Thirty years ago, less than 10 percent of the least affluent
Americans had credit cards. Today, more than half do.
The FCRA has facilitated this growth while at the same time
protecting consumers' sensitive financial data.
Our recommendations for legislation will help fight
identity theft and improve credit report accuracy. At the same
time, they will preserve the benefits to consumers of the
national credit reporting system.
To begin, the Commission recommends that Congress renew the
existing preemptions of Section 624 of the FCRA. The national
character of our credit markets is a powerful argument for
retaining these provisions. The current system functions well,
and we believe there is no compelling justification for
fundamental changes.
This is not to say that the FCRA is perfect, and we have
other proposals that we believe would improve the act.
These proposals focus on getting credit reports more easily
to consumers who want them, streamlining the dispute process
and easing the burden on identity theft victims.
I want to finish by highlighting our proposal to expand
adverse action notices to consumers.
In its basic operation, the FCRA is an extraordinarily
insightful statute. Without the consent or choice of consumers,
an enormous amount of information is collected, information
that allows our national credit markets to function.
Use of this information is strictly limited, however, to
permissible purposes as defined under the statute.
With all of the information, some inaccuracy is inevitable.
Here to, the FCRA solution is ingenious. The FCRA requires that
when credit is denied based even in part on a consumer report,
the creditor must notify the consumer of one, the identity of
the credit bureau from which the creditor obtained the report,
two, the right to obtain a free copy of the report, and three,
the right to dispute the accuracy of information in the report.
Now, the self-help mechanism embodied in the FCRA scheme of
adverse action notices and the right to dispute is critical to
maximize the accuracy of consumer reports.
It puts credit reports in consumers' hands when they are
the most motivated to inspect the report for inaccuracies. That
is, after they have been denied credit, employment, insurance,
or another benefit based on the report.
Moreover, adverse action notices help fight identity theft.
An adverse action notice can alert a consumer that he may have
bad marks on his credit that he doesn't know about.
The subsequent free credit report helps consumers discover
these accounts that an impostor may have opened.
Enforcing the FCRA's adverse action provisions is at the
heart of FTC action, but we believe there is room for
improvement.
Today, the FCRA requires an adverse action notice only when
a consumer is denied credit based on his credit report. The
consumer who is offered credit on less advantageous terms and
accepts the offer gets no adverse notice.
Ten years ago, consumers simply were denied credit based on
their credit report. Today, however, with the prevalence of
risk-based pricing, it is more likely that consumers are
charged a higher rate rather than rejected outright.
For this reason, we recommend that Congress give the FTC
rule-making power to expand the circumstances under which
consumers will get adverse action notice in these credit
transactions.
We make several other specific recommendations, which I
will be happy to discuss in response to the Committee's
questions.
It is a pleasure to be here, and particularly to be here
with Secretary Snow, and we support his proposals as well.
Thank you very much.
[The prepared statement of Hon. Timothy J. Muris can be
found on page 207 in the appendix.]
The Chairman. Thank you, Mr. Chairman.
And let me begin with a couple of questions for Secretary
Snow.
Mr. Secretary, you testified that the Council of Economic
Advisers estimates that if Congress doesn't reauthorize the
uniformity under FCRA and the States pass significantly
different laws, that as many as 280,000 mortgage applications
per year could be denied, especially for first-time home
buyers.
Doesn't that make the legislation that is before us, the
FACT Act, the top priority for our country and, indeed,
guarantee our economic viability?
Secretary Snow. Absolutely, Mr. Chairman.
I couldn't agree more strongly. These national standards
are essential to the way credit gets made available in this
country. They have made for much more robust credit markets.
Those robust credit markets lie at the heart of the success of
the American economy. They are integral to the success of the
American economy.
As Chairman Muris said, consumers represent some 70 percent
of all the activity in the American economy. And that depends
on credit. And we have the best credit markets and the most
available credit and the lowest cost credit in the world. And
that is, in large part, due to these standards.
So I would see the legislation pending here, making these
standards permanent, an essential condition for the continued
success of the American economy.
The Chairman. Mr. Secretary, I was struck by some
testimony, when Chairman Bachus had his series of hearings, as
to how mobile our society really is, almost clearly the most
mobile society in the world. Fourteen percent of Americans move
every year.
We indeed do have a national credit system that is, I
suspect, the envy of most countries. And despite that, there
are those who--including the gentleman from Vermont--who
mentioned the attorneys general not wishing to have a uniform
national standard.
It just seems to me that based on this incredible
infrastructure of credit that we have developed in a national
marketplace and given the mobility that our people have that it
is almost incumbent upon us to maintain that national system.
Would you agree and expound on that?
Secretary Snow. I would indeed. In some ways, credit is as
American as apple pie. We lead our lives because credit is so
readily available. And so many Americans are in the system
because of widespread credit availability.
Those numbers on mobility. I have seen that study. It is an
astonishing thing. Americans move, on average, every 6 years.
That is about 17 percent of the U.S. population in a given
year. It is an astonishing number.
There is no other country that has that sort of mobility.
And that sort of mobility is central to keeping this economy
fluid and flexible with people moving to where the jobs are.
It is at the very heart of having flexible labor markets.
And you can't have those flexible labor markets unless people
have the credit to be able to buy the home in the new location,
unless they can open checking accounts, unless they can shop.
And these standards allow one to take your good credit
reputation with you wherever you go. And that facilitates labor
mobility and is a critical part of what defines the success of
the American economy.
So I agree entirely.
The Chairman. It just seems that we have such a mobile
society. They move because that is where the jobs are, which is
exactly what you want in a vibrant economy. But it is one thing
to move from Ohio to Arizona and get a job and then have
problems getting credit, which really defeats the purpose
behind the move in the first place.
We appreciate the comments.
Chairman Muris, how does our current system of credit
reporting help to ensure that people who should not get credit,
who are not qualified to get credit, do not get credit?
Mr. Muris. Well, the system works, as I mentioned, not at
the choice of consumers. Consumers who have bad credit can't
hide that fact, and that is a very important part of why the
system functions so well.
In many parts of the world, so-called negative information
is not allowed to be reported. We allow that to be reported,
and that is of tremendous benefit to the people who have good
credit records, that the absence of that negative information
when it is reported.
The Chairman. My time has expired.
The gentleman from Massachusetts.
Mr. Frank. I appreciate the testimony, and particularly, in
both cases, I think, the witnesses represent what we need to
do, which is to let us now start to get specific about
improvements.
Mr. Muris, I am particularly pleased to see a couple of
things for that. As I said, my sense of this is that the one
weakness that I believe most critical to address is that a very
small minority of consumers about whom inaccurate information
gets kind of locked in, and I think they are inadequately
protected, and I think it is within our capacity in this large
system to improve the protections for these individual
consumers without burdening the system.
I mean, people say it is going to cost more. Yes, we are
socializing the cost a little bit, but when we are talking
about the hundreds of billions of dollars that are supported
here, I don't think we are out of the ball park. I am also, I
have to say, joining the Chairman congratulating you on
implementing the do-not-call list.
When I read some of the concerns about some of the industry
groups about some of the consumer protections we are talking
about, they predict danger to the economy, damage to the
economy, like the people who are in the call business predict
from the do-not-call lists.
And I don't think they were right there, and I don't think
they are right here. That is, the gloom and doom we heard about
the do-not-call list, I think, will soon be shown to be that I
don't think the American economy has really been that dependent
on bothering people's dinner.
And I don't think that perpetuating inaccurate information
in files is necessary to the consumer credit situation.
You had a couple of very important specific suggestions,
which I am going to be asking the people on my staff to be
working on. One, on page 15, you recommend that the FCRA be
amended to provide that disputes raised with furnishers receive
the same treatment as disputes filed with a credit reporting
agency.
That is very important. To some extent, it is almost like
sort of 18th century England: If you are the consumer, you must
go through all the right forms, and if you don't go through all
the right forms, you are penalized.
In my conversations, I too often heard with some of the
people who are in the business of furnishing credit or other
credit reporting entities the argument, well, if the consumer
does it all right then this or that can happen.
With identity theft, or whatever, if you filed the police
report, well, not everybody knows they are supposed to file a
police report or can find it easy to file a police report, or
in a lot of communities when they are having to lay-off cops
you are going find a policeman to report it to, because he is
busy out there trying to catch a bad guy who is trying to whack
some guy.
So, here the notion that you would not have a substantive
right to get your reinvestigation because you didn't go to the
FCRA, I think that is very, very important, and I appreciate
it.
I also was pleased in pages 10 and 11, with your specific
endorsement of making it statutorily clear the resellers have
the same responsibility as other people.
I mean, I think we ought to be very clear. You have a right
to complain, you have a right to a substantive reinvestigation,
and you have that right with anybody who might be perpetuating
the, or sending along the misinformation.
And one of the things that strikes me here, and, well, I
know we will probably wind up preempting going forward, the
advantages of not having preempted prematurely seem to me to
come forward.
My own State of Massachusetts, and I was not previously
familiar with this, it wasn't an area I had specialized in, is
grandfathered in a piece of legislation which gives the
furnishers and others a somewhat higher standard, and I am
struck by that because apparently Massachusetts has been able
to sell things.
The existing of the higher standard in Massachusetts has
not had the negative consequences that some of the furnishers
predict. And so I am going to be looking at that, I think, in
that we have some happy experience here in those three States
that were grandfathered, and I look forward to working with
your staff.
As I said, I am going to be trying to translate these two
into statutory language, we will look forward to you working
together on that, and I appreciate your coming forward with
that.
So I thank you.
Mr. Muris. Thank you.
Mr. Frank. Mr. Snow, I also appreciate your testimony. I
really want to talk to you about capital controls in Argentina,
but we will do that some other time. Thank you, Mr. Chairman.
[Laughter.]
The Chairman. Gentleman yields back.
The gentlelady from New York, Ms. Kelly.
Mrs. Kelly. Thank you, Mr. Chairman. Secretary Snow, and
Chairman Muris, I would like to thank you both for appearing
before the Committee and voicing your strong support for H.R.
2622.
As you know, this legislation's been drafted after careful
consideration by this Committee that included a multitude of
views from many diverse witnesses. We actually began the
process by investigating the issue of identity theft in several
oversight subcommittee hearings, including a joint hearing that
I chaired with Chairman Bachus in the beginning of April, and I
am pleased that this legislation specifically addresses some of
the problems we discovered in these hearings and hits at the
heart of identity theft.
In the past few months, in my subcommittee, we have also
investigated another important security issue, the blocking of
terrorist financing under the USA PATRIOT Act. I believe this
legislation will further help law enforcement combat financial
fraud and track down criminals and terrorists.
However, there are some concerns about the privacy under
this act. And as we move forward with consideration of the FCRA
reauthorization, I believe we must also be concerned about the
sanctity of privacy for the American people in this act.
As we will hear from several witnesses today, medical
information is readily available and easily identifiable on
credit reports. I am currently exploring language that will
protect medical information of individuals without disrupting
the access to low cost credit and the security of information.
In fact, I believe it enhances the security of personal
information.
To that end, I would like to ask a couple of questions.
Chairman Muris, is it the intent of a credit report to
specify information outside the realm of the credit-granting
process? Would you support coding medical information in a way
that would allow financial transactions to appear on a credit
report, but not the actual names of the institutions or the
entities that have provided those transactions?
Mr. Muris. This is a problem or an issue that has recently
been brought to my attention. First of all, I am not sure the
extent to which there is a problem. We are looking, and we will
be glad to work with you and the other members and your staffs,
to see what the impact of that would be.
I do know under the FCRA there are separate standards and
separate procedures for getting medical information. And if you
want to get a life insurance policy, for example, you will need
to consent to the insurance company for the right to receive
medical information about you. That is regulated to a certain
extent by the FCRA.
But the specific issue that you mention is one that has
just been recently brought to my attention, and we would be
glad to work with you on it.
Mrs. Kelly. Let me just give you an example of what I am
concerned about. In New York City we have a wonderful cancer-
treating institution called Memorial Sloan-Kettering. If I am
being treated and I have a bill dispute with Memorial Sloan-
Kettering, the assumption would be that I am being treated for
cancer and the assumption is in many people's mind still that
cancer is almost inevitably problematic to the extent that it
deeply affects your ability to work or can result and does
result in death.
My concern is if that name, like Memorial Sloan-Kettering,
appears on a credit report, there may be an assumption made by
someone who is looking at that credit report that I have a
difficulty without understanding that I am there because I am
actually going back in for a checkup and there was a discussion
about that bill.
I want to make sure that we work out a method so that the
financial end of that could be presented, but the entity
providing that service is not listed. That is my intent, that
is the legislation that I am working on, and I am glad to think
that you would be working with me on that. I would hope that
you would support that.
Mr. Muris. Well, yes, we would certainly be glad to work
with you on it, and it may be easy to do that. I don't know
what the ramifications are.
I do know that in the situation that you are talking about,
if someone currently, under the current law, is denied a
benefit because someone drew an inference they didn't like in
their credit report, the person has to be told that they were
denied the benefit because of the credit report.
The person has to be told that they were denied the benefit
because of the credit report.
So some protection already exists. And I would be glad to
work with you on the additional issue.
Mrs. Kelly. Recognizing that that protection does exist, my
problem is that it is one more step that we simply, I don't
believe, need to have people get involved in if we can stop it
before it happens.
Secretary Snow, in your testimony you discuss the integrity
of information and note that one of your most important assets
is your reputation. Do you believe that there needs to be
specific medical information on an actual credit report? Or do
you think it makes sense to consider coding the information in
some way, as I have described?
Secretary Snow. You raise a good issue, an important issue.
And I don't have a fixed answer to it. I want to think about
it, though, against the criteria that we set forth--I set forth
in my statement, and that is how would a given proposal such as
that, affect the accuracy and security of information to
protect the individual, and how would it affect access to the
credit?
And I think your proposal is something to be looked at, but
against those criteria. Today, of course, there is some sharing
of medical information that grows out of so-called
experiential, but not otherwise.
And getting that line right, I think, is something that
deserves attention. And like the Chairman, we would be pleased
to work with you to try and get that balance right. But it is a
critically important issue and a very sensitive issue.
The Chairman. The gentlelady's time has expired.
Mrs. Kelly. Thank you very much.
The Chairman. The gentleman from Vermont, Mr. Sanders.
Mr. Sanders. Thank you, Mr. Chairman.
Gentlemen, the legislation that we are discussing today
allows consumers to receive free credit reports annually, and
that is something that some of us have fought for and we think
is a real step forward. Unfortunately, the language in the bill
is vague when it comes to providing free credit numerical
scores along with a free credit report, including the key
factors that adversely affect the consumer's credit score.
So my first question to both of you is does the
Administration support the right of consumers in this country
not only to get free credit reports, but to get the scores and
the explanation about adverse numbers that might impact the
consumer? Mr. Snow?
Secretary Snow. We would support, as we have said in the
testimony, access to the credit bureaus of the data. We would
also require that with the data go some help in understanding
how the data is used, so that the individual consumer would be
in a better position to understand what they might be able to
do to improve their credit standing.
The score I am more dubious on, and I will tell you why,
Congressman. The score itself is a proprietary product. It
comes from not the credit bureaus, of course you know, but from
these private entities, who have invested a good deal of
intellectual capital developing their algorithms and so on.
Mr. Sanders. Mr. Secretary, you used the word
``proprietary''; that is my information, that is my life that
that information is about. And to suggest that it is an
intellectual property right for somebody else when it is
information about what the heart of what my life is about, I
would suggest it is my information.
Secretary Snow. But it is your information, but it is there
methodology and their intellectual property.
Mr. Sanders. But don't I have a right to know if three
different credit companies, agencies, provide three different
scores, don't I have a right to know how that came about?
Secretary Snow. You will have the data under our proposal
that they use; you will know what the records are. And you will
be given assistance and help in trying to understand how that
data would be applied. The scores comes from a different
source.
Mr. Sanders. Frankly, that is not good enough for me, and I
think we have got to go further than that. And I look forward
to working with you and with the majority to clarify that
issue. I think consumers are entitled to more.
Second issue, what I call bait-and-switch. As you know,
right now if I have a credit and I responded to one of the 5
billion applications that people get in this country at 3
percent and then I take out a loan because my wife is ill,
suddenly it can go up to 25 percent.
I think that is an outrage. I think that is a ripoff of
consumers in this country.
Is the Bush administration going to be strong in protecting
consumers against this ripoff and help us include strong
language, strong language, in this bill?
Secretary Snow. This is an area that the Chairman can speak
to.
Mr. Sanders. Thank you.
Mr. Muris. It certainly is under our jurisdiction. To the
extent it involves banks and credit cards, it is not. But to
the extent it is under our jurisdiction and for a lot of
lenders, it is.
There are circumstances under which, I think, this raises a
problem. We are looking at this issue specifically and, in
general, the issue about unilateral modifications to standard
form contracts. As an old contracts law professor, there are
many circumstances in which those modifications should not be
allowed.
Mr. Sanders. Just a question. In English.
I sign up with your credit card company at 3 percent. You
are giving me this 1 year at 3 percent. Every month, I pay my
bills on time. Suddenly, I am now paying, instead of three
percent, five months later I am paying 25 percent although I
have paid what I owe you every month promptly.
Is that appropriate? Is that right? Or should we make sure
that credit card companies cannot do that.
Mr. Muris. I think, again, you would have to look at the
circumstances. But if someone on their own, which is what
unilaterally means, not bilaterally with the consent of the
consumer, changes the terms in a one-sided fashion, that can
easily be a problem.
Mr. Sanders. Well, I look forward to working again with you
and the majority on that issue. Lastly, I want to make a
philosophical statement and let you respond.
Your Administration is, admittedly, in a conservative
administration, in my view, one of the most conservative
administrations in the history of this country.
Day after day, I hear on the television, hear on the radio,
how the big, bad federal government should not be taking over
the powers that folks closest to the people have, that we have
got to protect States' rights, and so forth and so on. And yet,
what I am hearing from you is that despite what the Attorney
Generals of the United States want, despite what every consumer
organization wants, you think that the federal government
should crush the ability of state governments to protect
consumers and fight and pass standards that are higher than the
federal government.
Why would a conservative administration that tells us how
bad the big, bad federal government is want to crush States'
rights in protecting consumers' needs.
The Chairman. The gentleman's time has expired. The
gentleman will respond.
Secretary Snow. Congressman, I think you know we are not
alone in this view that these uniform standards should be
applied in the preemptive way that has been suggested.
It has come to my attention that the Conference of State
Bank Supervisors, that is all the state bank supervisors
themselves, support the legislation that is pending here and
the Administration proposal. And they do so because they
recognize the greater good that comes from the existence of
these----
Mr. Sanders. Then, answer my question why a conservative
administration----
Secretary Snow. Well, because of the greater good.
The Chairman. Gentleman's time has expired.
Mr. Muris. Mr. Chairman, could I say something about that.
The Federal Trade Commission has four Clinton appointees
and one Bush appointee. And the recommendation to support these
proposals is unanimous.
Mr. Frank. Well, that would explain their disregard for
States' rights.
[Laughter.]
Mr. Muris. Well, I would be glad to respond to that. It was
a two-part question. One is how the conservatives--I don't
think the four Clinton administration appointees--but could I
respond to----
Mr. Frank. That is my point. Sure.
Mr. Muris. Just as one of the most important things that
happened in our country was in 1787, when they formed the
Constitution. One of the main purposes of that was because the
States were preempting a national economy. The states had
individual tariffs. They had individual standards.
National credit standards, although not as important as
prohibiting states from imposing tariffs, I think national
credit standards are extraordinarily important. And it is that
uniformity which provides enormous benefits for consumers.
If we need more consumer protection, and I think we do, it
should come as part of national standards.
Mr. Frank. Just for 10 seconds. If you could, maybe, send
me the reference in Bailyn's Debates on the Constitution to
credit reporting, I would appreciate that.
The Chairman. Gentleman's time has expired.
The gentleman from Connecticut, Mr. Shays.
Mr. Shays. Thank you. I thank both of you for your good
work to our country and the sacrifices you make in serving our
country.
I just would like you to respond as clearly as you can to
the consequence of not taking action.
Secretary Snow. Well, I think, Congressman, that the
consequences of not taking action would be to, in a far-
reaching way, undermine the performance of the American
economy. I think these national standards are integral to the
enormous success of the American economy, because they underpin
credit, and we are a credit-based economy. They underpin, as we
talked about earlier, labor mobility, and labor mobility is a
hallmark of the success of this economy.
The uniform standards make credit available to lots of
people who otherwise wouldn't have it, which means they can get
into the mainstream of economic activity in this country. And I
don't have the econometric studies' results in my mind, but it
is pretty far reaching, something like 3 percent reduction in
the total credit availability in the country and something on
the order of a 50-basis-point increase in the cost of credit.
Fifty-basis-point increase in the cost of credit on a $7
trillion credit economy, we are talking gigantic numbers and
far-reaching negative impacts on the economy if these national
standards aren't maintained.
Mr. Shays. Yes, sir?
Mr. Muris. Just to make a brief amplification, the economy
compared to the rest of the world, our economy has a few simple
reasons why it is so much better than many other economies, and
two of those reasons are our labor markets are so flexible, and
another is our credit markets are so flexible. And I think that
flexibility crucially hinges on having national standards in
the credit markets.
Mr. Shays. I have had 13 years in the Statehouse, and I
know the argument for states being allowed to pass its own laws
and supersede what the federal government, and now I have had
16 years in the federal level. But it seems to me this issue is
so crucial that we can get into the ideology of States' rights
versus federal, and in the process we risk, frankly, putting
our economy in danger.
I, Secretary Snow, want to just voice a concern about a
lack of clarity on the Department of Treasury as it relates to
Jesse's. And I want to understand what your position is as it
relates to why we would allow Freddie Mac and Fannie Mae to not
have the same kind of disclosures as any other Fortune 500
company. And I would like to know when this lack of clarity
will be clearer.
Secretary Snow. Congressman, that is an issue that we are
reviewing right now, and in the context of the recent
disclosures that have made the news at Freddie Mac. We have
always articulated the need for disclosure, and have been in
the forefront of pushing for the disclosure under the 34 act.
And I am pleased that Fannie Mae has now done that and is
submitting the 34 act information. And once you go into 34 you
don't come back out.
Mr. Shays. Right.
Secretary Snow. So they are permanently under 34.
Mr. Shays. But what confuses me is you have Alan Greenspan
making it very clear he sees no reason why they also shouldn't
be under the 33 act. And I am just wondering why there would be
any argument that they shouldn't be under it.
Secretary Snow. Well, there doesn't seem to be any current
difficulty with their issuances.
But clearly, there needs to be transparency, disclosure and
good transparency, and effective regulation.
Mr. Shays. Well, I thank you all for looking at it.
Secretary Snow. And that whole subject is, of course, being
looked at by the Committee.
Mr. Shays. Thank you. Thank you, Mr. Chairman.
The Chairman. The gentleman's time has expired.
The gentlelady from Indiana is recognized. Ms. Carson? No
questions?
The gentlelady from California, Ms. Lee.
Ms. Lee. Thank you very much, Mr. Chairman. And let me say
I, too, am very happy to be able to listen to this testimony
today and have many of the same concerns that many members, of
course, on our side have raised.
One is I would like to ask Secretary Snow a little bit more
with regard to the issue raised in terms of credit scoring, the
proprietary information, and I think what Mr. Sanders indicated
with regard to the fact that this is personal information,
private information, that is now being packaged, really, and
being sold.
One is do consumers really know that this information is
now a commodity and that their entire private information is
actually a product, and that this product is being sold? Is
that information we know?
Secretary Snow. You know, I don't know what percentage of
the general public knows that. I would distinguish between the
credit report, the data that is in the file that the credit
bureaus have, which you should have access to, and which under
the proposed proposal you would have access to, free access to.
All you have to do is request it.
But I would distinguish that, and this is clearly something
people can argue about, that and the score. Your information is
your information, it is your records, but the score, which
really comes from somebody else, is their application of their
methodology, it is their undertaking, it is what they have done
to evaluate those records.
Now, we think people ought to understand more about how
that is done, and how scores are set.
Ms. Lee. Sure, but Mr. Secretary, what I am asking is do
consumers have a right to know that this, whatever this
methodology is is a methodology that is being packaged as a
product to be sold to make money?
Secretary Snow. Yes, they absolutely should have the right
to know that their records are, and they should have access to
those records.
Ms. Lee. Access to the records is one thing, Mr. Secretary,
but I am asking with regard to the right to know how this
scoring information is being used in terms of the sale of it.
Should they have a right to know that, and if they don't, then
just, they don't.
Secretary Snow. Well, they certainly have a right to know
that people are putting scores on them.
Ms. Lee. But that the scores are being sold?
Secretary Snow. And there is a market in these scores.
Ms. Lee. Sure.
Secretary Snow. I mean, there are, these companies are
selling these scores, and they will sell them to you, as an
individual.
Ms. Lee. Sure, but do consumers know that? All I am asking
is should, and does the Administration and under the bill----
Secretary Snow. You mean, should there be a disclosure?
Ms. Lee. Should there be a disclosure that this scoring----
Secretary Snow. That there are scores, that scoring goes
on?
Ms. Lee. That there are scores, and that the scores are
proprietary information----
Secretary Snow. I have no objection.
Ms. Lee.----and that this proprietary information is being
sold?
Secretary Snow. Well, I think if you read the newspapers,
that is daily fare in the newspapers.
Ms. Lee. Well, Mr. Secretary, I really want to just know,
do you think we should work on this a bit in this bill, and
maybe tighten it up and make some----
Secretary Snow. Well, I don't, I would not recommend
mandating making the scores available for free. I would
recommend, as we have, making available on request the records.
Ms. Lee. But making available the information that the
scores are being sold to make a profit, should consumers just
know that as they apply for credit? They may choose not to
apply.
Secretary Snow. Well, I think sure. I don't see anything
fundamentally wrong at all with disclosure: The data goes into
the compilation of scores.
Ms. Lee. Then we would like to work with you on an
amendment, on a disclosure amendment.
And let me just ask Mr. Muris one thing with regard to
adverse actions. With regard to multiple credit inquiries,
oftentimes consumers attempt to find the best deal, the best
rate, the best terms. I know for a fact many individuals have
called and indicated to me that as they do this they are
notified that there is an adverse action now because they are
attempting to find the best loan. Why is it that multiple
credit inquiries become ultimately a negative on your credit
report when really you are trying to find the best product? And
what can we do to correct for that in this bill?
Mr. Muris. Well, my understanding is this is an issue that
only comes up--the credit's only concerned about if you are
doing it a lot in a short period of time.
And I can understand their concern if that is true. If you
are applying with several people or making inquiries with
several people at once, that is something that creditors would
want to be aware of.
Ms. Lee. So why would it be a negative when the consumer's
attempting to find the best interest rate and the best terms?
The Chairman. The gentlelady's time has expired. The
gentleman may respond.
Secretary Snow. Mr. Chairman, can I clarify one----
The Chairman. Of course, sure.
Secretary Snow. As I think we are in agreement on at least
making available the scoring process. I mean, we support making
available knowledge of the scoring process. So if you are
asking do we want people to know they are getting scored, the
data is being used to make scores, yes, we do. The only place
that we may have a difference here is making the score itself
available----
Ms. Lee. But also making available the information that
that is being sold----
Secretary Snow. Well, sure. Because what we are proposing
to do is to make a free report available along with the
knowledge of how the scoring process works, so you will be
informed that there is a scoring process with respect to these
records.
Ms. Lee. And that it is being sold.
Secretary Snow. Well, sure, these people are in business.
The Chairman. The gentlelady's time has expired.
Mr. Muris. If I could respond?
The Chairman. The gentleman may respond.
Mr. Muris. Because I think I--right before Secretary Snow
responded--I think I misunderstood your question. I was
thinking of multiple applications. If it is multiple inquiries,
I think you are correct. And I think the practice now is to
treat multiple inquiries in a short period of time as one
inquiry. If people are treating it otherwise, I think there is
a problem----
Ms. Lee. I would like to work with you on that, Mr. Muris.
Mr. Muris. Sure, and I agree with you.
The Chairman. The gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Mr. Secretary, we have heard lots of evidence at the
subcommittee level about the fact that as Americans we enjoy
the greatest access and the lowest cost of credit available. I
am not really sure that anyone cares to debate that proposition
today.
I have a specific question. Now, as a member of the
subcommittee, I actually attended what I believed the Chairman
described as the exhaustive six hearings, and actually learned
something by attending these hearings. I heard evidence from
the Hispanic Chamber of Commerce that 7 out of 10 small
business in America are capitalized with less than $20,000, and
that 45 percent of them use credit cards as a major source of
financing for their capital formation or their capital for
expansion. And so the question I have is, has Treasury seen
similar data? And if so, do you have an opinion on the possible
adverse impact on employment should we fail to reauthorize
FCRA?
Secretary Snow. Well, I am generally aware that credit
cards play a critical role in the financing of small business.
And the virtue of these uniform standards is that they
allow the pooling of information, which reduces the uncertainty
of the credit furnisher. And that particularly helps those who
have the most difficult time getting credit. Some small
businesses would certainly tend to fall into that category.
So I think the failure to extend these standards and I
would hope make them permanent, the failure to do that, extend
the standards, I think would have a differentially adverse
effect upon small business, certainly, and Hispanic small
business would probably fall into that category particularly,
yes.
Mr. Hensarling. Chairman Muris, a lot of folks on the
Committee obviously have a concern about identification theft,
as do many of our constituents. I am actually one of the
members of this Committee who has been victimized by
identification theft. Frankly, I was one of the lucky ones in
being able to recover the losses and to ensure that my credit
rating was not adversely impacted.
And although we have heard a lot of testimony, I think it
really comes down to a critical question, and that is when it
comes to the subject of ID theft are we better off with or
without the reauthorization of FCRA? I am curious of your
opinion and why you hold the opinion.
Mr. Muris. Well, I certainly think in terms of the national
standards we are better off. We are certainly better off with
the ability of businesses to share within affiliates, for
example, information freely. I think that helps in terms of
identity theft.
I do think there are some provisions where we can
strengthen the law within the context of the national uniform
standards, and we and Secretary Snow have proposed several. I
think they would help on identity theft.
There are things outside this bill or outside--criminal,
increased criminal penalties, for example--we have supported,
and I think that would help on identity theft as well.
It is a very serious problem. We are charged by the
Congress with providing assistance to consumers. We have taken
a lot of steps.
As a minor example, we publish a booklet that we can't keep
in stock, because there are just so many people who request it:
How to Deal with Identity Theft, How to Protect Your Good Name.
We have recently just started publishing it in the last year or
so in Spanish. And the consumer education is a very important
part of what we do, but also the legislative proposals we have
here, I think, will help on identity theft.
Mr. Hensarling. Although I am a veteran of six of these
subcommittee hearings, I still find it a little challenging to
get my arms around the number of inaccuracies that may be
appearing in a consumer's credit report. I am curious about
what data you may have, because there have been some
accusations that a huge number of reports contain inaccuracies.
I am curious, Mr. Chairman, about what information you have
on this matter. To the extent that these inaccuracies exist, is
it mainly in the nature of a wrong telephone number or an
address due to a fairly mobile society? What portion of the
information may actually be used in an adverse action against a
consumer?
Mr. Muris. Well, I think the implication of your question
is the materiality of inaccuracies is extremely important, and
let me focus on that.
But first there have been some recent studies, and although
I generally get along and am supportive of and supported by my
many friends in the consumer groups, this is an area where I
disagree with some of the recent studies.
What you have here are different companies with different
standards, and if you pull a credit report on different
individuals the information may be reported differently, there
may be somewhat different information.
The key to the Fair Credit Reporting Act we think is in the
adverse action notice, which is why we support increased use
for new techniques of adverse action notices, because what I
call the self-help feature is extraordinarily important.
The consumer needs to know when they are denied a benefit
based on what is in their credit report, because then they are
put on notice that if there is something wrong, you know, they
say, well, there is nothing wrong with my credit, then they
know that they should look at that report and dispute it.
That is the heart, I think, of the very ingenious system
that Senator Proxmire set up over 30 years ago. But I think
because of changes in credit, we need to expand the use of
adverse action notices, and we have made that proposal.
The Chairman. The gentleman's time has expired.
The gentleman from Illinois, Mr. Emanuel.
Mr. Emanuel. Thank you, Mr. Chairman. Thank you for holding
this hearing.
My colleague from New York, Congresswoman Kelly, talked
about health information. I actually have an amendment that
when we get to marking up the Chairman's mark and offering it.
It is a bipartisan amendment that deals with, in fact, health
information, which I think we need in the area of health
information to provide consumers, I think, this safe harbor.
And it gets beyond the issue of the opt-in and opt-out, but
creates what I call a blackout as it relates to health
information, particularly when it is in the credit granting
process or in the selling of relevant financial information or
services. Obviously, if it is relevant to life insurance, that
is one thing, but it is not relevant--there should be a
blackout on health information.
I think that is essential to giving some consumers in a
changing environment that we have and the technology's that
advancing, that safe harbor that that information that is
relevant, that their health information not be used against
them in the credit process.
And I know it wasn't in the Administration's bill of
recommendations, but your openness to that, I think, is
essential. We have a bipartisan amendment. I think it is based
on common principles that your health information should not be
used against you in this process.
Secretary Snow. Congressman, I think I indicated in
response to Congresswoman Kelly that we would be open to
talking to you about that and working with you on that score.
But it should be looked at in terms of those criteria that
I laid out. What does it do for the security and accuracy of
information? What does it do for general credit availability?
Mr. Emanuel. To that standard is what does it do to help
our consumers? Because my view is if you can't give the
consumers in this changing world some sense of a safe harbor,
it also has an impact.
This bill has been developed in a bipartisan fashion, we
continue that effort here. It is one of the things that Ranking
Member Frank and also Chairman Oxley have talked about the
importance here. I think this amendment would go a long way
toward doing that and meeting the standards that you have set
out.
Secretary Snow. We would look forward to working with you
on that.
Mr. Emanuel. Okay. The other matter is I also want to
compliment you, although unrelated to this subject, is working
with you on the Earned Income Tax Credit and the ability to
deal with making it simpler so we get more people involved,
reduce fraud, and simplicity. And want to compliment you and
your agency and the people involved for working with you on
that very important matter.
Secretary Snow. That is another area where we want to
continue to work with you.
Mr. Emanuel. If this continues we are going to start
singing Kumbaya at some point.
[Laughter.]
So with that, I have no other questions.
The Chairman. Don't push your luck.
Mr. Emanuel. You know the words?
[Laughter.]
Do you think he knows the words, though? We give you a
little cheat sheet on that.
[Laughter.]
The Chairman. The distinguished Chairman of the
subcommittee, Mr. Bachus.
Mr. Bachus. Thank you, Mr. Chairman.
One of the ways to combat identity theft that we are using
in this legislation--in fact, the Administration and the
agencies have also talked about--the use of so-called red flags
to detect or inhibit identity theft. And there has been a
debate on this Committee as to how we best institute the use of
these red flags.
We have seen cases where when we have too rigidly
proscribed what the financial institutions will do that it
actually inhibits their efforts to combat identity theft,
because they don't have flexibility. You know, they have a lot
of knowledge. They have a lot of experience in how to identify
these things themselves.
And I notice that, Secretary Snow, many of your proposals
rely on best practices approach or an approach that allows the
regulators to come up with the use of red flags. But although
it gives specific direction to the financial institutions, it
provides them with flexibility to achieve the desired result.
What are the dangers of prescribing a rigid approach, as
opposed to leaving flexibility in dealing with the financial
institutions in exactly what they do?
Could it actually hurt our efforts if we are too rigid, or
we prescribe too much?
Secretary Snow. Well, that would be our view, Mr. Chairman.
Because we need to be continually creative and find new and
better solutions to deal with the creative people who are out
there on the other side trying to engage in criminal behavior.
They are determined, they are smart, they are capable and
they are ruthless, and the red flag idea should be embraced by
the banking community, but improved upon.
I mean, it seems to me they are the experts on the use of
internal financial information and how best to use it to
accomplish the objective they have in mind, and their consumers
have in mind.
If somebody is likely to be a victim of this, spread the
information quickly, raise the red flags, get it out there. And
I think the banking institutions themselves are probably better
at evolving the best way to deal with that.
That has been a rule that was written at a point in time
that can't by its very nature evolve. That would be our basic
thinking.
Mr. Bachus. Right. In fact, yes, I have heard from talking
to some of the financial institutions, and actually some of the
law enforcement community, that sometimes the law, if it is too
structured, it is 20 years behind the criminals, or that they
actually use the definition of, you know, if it is too
carefully prescribed, and they know what that definition is, to
get around it.
And I would hope that the Committee would give
flexibilities to the regulators, and that you, in turn, would
give flexibility to the financial institutions.
Secretary Snow. That is very much where the Administration
is coming from.
Mr. Bachus. Thank you.
Chairman Muris, some have suggested that this 30-day time
frame for investigating consumer disputes about accuracy of
information contained in their credit reports is too long and
should be shortened to 15 days.
Does the FTC have a position on such proposals? Are there
any negative consequences to the uniform credit reporting
system that might flow from truncating this reinvestigation
process down from 30 days?
Mr. Muris. Well, we have not taken a position on
shortening. We are supporting the law as it is. My personal
view is that there could be serious consequences from reducing
the time, particularly by that dramatic of a reduction.
First of all, this is a voluntary system.
And a second problem is that we see something called credit
repair scams, and one of the things that these people tell you
to do is to dispute everything in the hope that the clock will
run out. And if we shortened the system that much, I think that
might facilitate that sort of tactic, which doesn't do, you
know, the majority of consumers who pay their bills any good at
all.
Mr. Bachus. I thank the panel.
I would like to say to the members, and to the panel, that
the legislation as drafted, and I have discussed with Mr. Moore
and Mr. Davis, as far as credit scores, it was the intention in
drafting this legislation, that is the credit reporting
agencies had credit scores that that would be revealed. Not
only would the credit report go to the consumer, but also the
credit scores. So there is some concern that has been expressed
here earlier that the legislation may not do that.
It is an intent, and we will continue to work, because if
the consumer is not given the credit score along with the
credit report, much of the philosophy behind allowing consumers
to be able to have, to be educated and improve their credit
scores. If they don't know what their score is, it is pretty
impossible to improve that score.
So it is our intention that they do receive their credit
scores, and I will work with members on both sides to see that
that is done.
The Chairman. Thank you. The gentleman's time has expired.
The gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you very much, Mr. Chairman.
Secretary Snow, I would like to ask you a couple of
questions on two of the points that I think have been sort of
points of contention here, one, the scoring, and the other, the
free credit report.
First of all, we are all aware, and I think you mentioned
in your remarks, the need for consumers to be educated about
their credit scores. Chairman Bachus has just indicated the
willingness to work on this issue a little more.
But I would like to call your attention to the fact that
too often consumers are not even aware that they have a credit
score until that credit has been denied.
What efforts specifically can the Administration take to
educate consumers and raise awareness about their credit scores
before that credit is denied?
Secretary Snow. Well, the proposal that we have very
similar to what Chairman Bachus talked about, would give
consumers the opportunity to review their credit reports for
accuracy and for completeness. They would also be given more
information about their credit scores and would be informed on
what they can do to improve those scores, improve effectively
their credit profiles. I am not sure where the differences are,
if any, between where the Committee bill is the Administration
on that, but I will look at that. I don't think we are very far
apart at all on that.
We want people to know their credit reports. We want them
to know that this information is being used to create scores.
We want them to have a sense of how the scores are being
created. We want them to have a sense of what they can do to
improve their credit profiles. And it seems to me, you go to
the identity theft issue, it is very important they have these
records so they can correct them if they are wrong, and wrong
information doesn't continue to be circulated in the credit
system.
Mr. Scott. Let me ask you another question, because my time
is slipping, and we have to go vote. But I want to ask you
something about the expanded use of giving free credit reports,
which is very important, we support.
But there is another side to this. There is some concerns.
In my district we have Equifax. You are familiar with Equifax
as a company, very reputable company in my district and a
leader in this whole credit reporting industry. They have
raised concerns with me, and I would hope that they have with
you and, if not, I am sure that they will, but, I hope, we need
to address that, about the potential cost of complying with the
requirements as they are now drafted and written into the law,
that there has not been an adequate benefit cost-analysis being
given to that. And in order for this very important tool of
accessing a free credit report, I think it has to be done
within a way that the industry that is in this business can do
it in a successful way.
It appears to me right now that the regulations, or the way
it is written, are rather loose, that not only would it make it
somewhat difficult and problematic for those businesses that
are in this business and make their business giving credit
reports, put this requirement on them, but not do the job that
we needed to be done, to do what needs to be done if the
industry that has to give these free reports is not done in a
way in which they can maintain their business as well.
And I would like for you to address that in terms of how
the benefits might outweigh the costs, and specifically if you
could address Equifax's concerns.
Secretary Snow. Well, Equifax is one, as I understand it,
one of these three major credit bureaus that do such a good job
of collecting this information and then making it available to
credit issuers. And they play a very important part in all of
this.
Today, under a variety of circumstances, free reports are
available. We are expanding some upon requests. How many
requests will be made? I don't know. Certainly, if you have
been turned down for credit, you can get it free today. Or if
you failed to get a job because of a financial credit report on
you, you can get it free today. We would propose expanding it.
The Bachus bill would propose expanding it as well.
I don't think on a cost-benefit basis, Congressman, this
will fail to be advantageous to the credit bureaus, because
they have such a stake in accurate information.
And what the free reports will do is give anybody who has
got a question about his credit report a chance to go back and
look at it, understand how it was created and then try and get
it corrected. I know there is some concern among the reporting
agencies that this will be unduly costly. I would hope they
would look at the benefits they would get, because they have
the biggest stake of anybody, next to the consumer himself, in
making sure these reports accurate.
The Chairman. Gentleman's time has expired.
The Chair would announce there are two votes on the House
floor. It would be my intention to recognize two more members
for this panel, then dismiss this panel and reconvene at 1:00.
So we will now recognize the gentleman from California, Mr.
Royce----
Mr. Royce. Thank you, Mr. Chairman.
The Chairman.----for four minutes, hopefully.
Mr. Royce. Appreciate that.
Welcome Secretary Snow. And I wanted to ask you
specifically, I know from public statements that you and your
team are studying the issue of government-sponsored enterprise
regulatory reform.
Secretary Snow. We are.
Mr. Royce. And with that in mind, I am not trying to get
you to comment specifically on the topic before you all
complete your study; however, I would like to know, in your
view, what are the attributes of an effective world-class
regulator in respect to GSE oversight.
Secretary Snow. Well, Congressman, I think the attributes
would be the ability to understand the risks in the enterprise,
the ability to understand the business, a command of the facts
of a business, a command of the facts with respect to the risks
that the capital structure of a business poses, the ability to
get at the information you would need to have to know that.
So transparency, disclosure, and as with all regulators,
the ability to hold the attention of the regulatee, to bring
sanctions for conduct that poses risks to the system, to the
financial system. So ability to lay in credit standards, risk
standards, capital standards, and then sanctions to see that
the standards are observed.
Mr. Royce. The other question I was going to ask of you, I
was pleased that the SEC recently approved the New York Stock
Exchange and Nasdaq rules that require companies that are
listed on those exchanges to obtain shareholder approval for
stock compensation plans, for management or for their
employees.
Do you see the need for additional compensation reform, or
do you believe that the new corporate governance rules are
sufficient to protect shareholders from potential excess in the
system?
Secretary Snow. Congressman, you are now speaking
generally, corporate America, right?
Mr. Royce. About corporate America in general.
Secretary Snow. Yes. I think the issue of corporate
compensation ultimately has to be a critical priority for
boards, and particularly compensation Committees, because
ultimately they have to make these decisions on how to retain,
how to attract and how to motivate senior management.
So I would not be in favor of highly prescriptive set of
rules, but I would hold boards of directors, and particularly
compensation Committees, to very high standards of conduct.
The Chairman. Gentleman's time has expired.
The gentleman from Kansas, Mr. Moore.
Mr. Moore. Thank you, Mr. Chairman.
Very quickly, Secretary Snow, the Administration proposal
includes a direction to the FTC and bank regulators to make
opt-out notices for pre-screened credit officers simpler and
easier to understand. And I really appreciate the
Administration's position on that.
Several of my colleagues, and I recently wrote a letter to
the regulators asking them to create a simple, understandable
privacy notice. Would you agree that it might be--can you agree
that it might make sense to have both of these in simple
English that consumers could understand and have an
understandable right to opt out in both areas?
Secretary Snow. Congressman, I am all for plain English.
Mr. Moore. And I am a lawyer. So am I.
Secretary Snow. And we get too little of it, I think. So
that people understand the rights and privileges that are being
made available to them.
And I would be happy to look at what you have in mind, and
give you my comments on it.
Mr. Moore. Very good. We will do that. Thank you, Mr.
Secretary.
The Chairman. I Thank the gentleman. The gentleman's time
has expired.
Gentlemen, we most appreciate Mr. Secretary and Mr.
Chairman for an excellent presentation, and the Committee
stands in recess until 1:00 p.m., at which time we will take up
the second panel.
[Recess.]
Mr. Bachus. [Presiding.] I want to welcome you all back
from the noon break.
At this time we are going to call the second panel. The
Committee is meeting today, the Financial Services Committee,
to hear testimony on H.R. 2622, which was introduced by
Representative Hooley, Representative Biggert, Representative
Moore and myself, and has 28 co-sponsors on the Committee: 14
Democrats and I think now 17 Republicans, so a balanced group.
I very much look forward to the testimony of our second
panel. From left to right I want to identify the panelists. We
have Mr. Mallory Duncan, Senior Vice President and General
Counsel for the National Retail Federation; Mr. Michael F.
McEneney, partner, Sidley Austin Brown & Wood. And you are
testifying on behalf of the U.S. Chamber Of Commerce--we
welcome you--Dr. William Spriggs, Executive Director of the
National Urban League Institute for Opportunity and Equality;
Mr. Stephen Brobeck, Executive Director, Consumer Federation of
America; Mr. John C. Dugan, a partner in Covington & Burling,
on behalf of the Financial Services Coordinating Council; and
Mr. Stuart K. Pratt, President, Consumer Data Industry
Association.
I want to welcome all of you gentlemen. We have no ladies
on our second panel. So I want to welcome each of you all.
And at this time, Mr. Duncan, we will start with your
testimony.
STATEMENT OF MALLORY DUNCAN, SENIOR VICE PRESIDENT, GENERAL
COUNSEL, NATIONAL RETAIL FEDERATION
Mr. Duncan. Thank you, Mr. Chairman.
My name is Mallory Duncan. And I am testifying today on
behalf of the National Retail Federation, where I serve as
Senior Vice President and General Counsel. NRF is the world's
largest retail trade association. We greatly appreciate the
opportunity to present our views on H.R. 2622, the FACT Act of
2003.
I would like to preface my discussion with a brief
illustration of the credit underwriting process. The seven
preemptions currently contained in the FCRA are the
underpinnings of the modern credit granting system. If we have
a clear understanding of the underwriting process, it is much
easier to analyze the vital role of the policies contained in
the FCRA.
For example, attached to my written testimony there are two
simple revolving loan portfolio examples, each containing 100
loans of $1,000 a piece and each paid off within a year. One
has an interest rate of 5 percent, the other a rate of 18
percent. If one loan in the 5 percent portfolio were to
immediately default, whether because of identify theft,
consumer bankruptcy or poor judgment on the part of the lender,
it would take the interest payments from approximately 41
performing loans to compensate for that default. The credit
granter can, if it has enough capital to make 41 new loans, and
hope that they all perform, or the credit granter can live with
a much lower rate of return.
If as few as three borrowers default, the credit granter is
completely under water and will lose money even before facing
the expense of maintaining those 97 other loans.
If one loan in the 18 percent portfolio defaults, it takes
the interest from 12-plus performing loans to compensate for
that one default. Even if that credit granter gets it exactly
right 92 percent of the time, no matter how well those 92 other
consumers pay their bills, the credit granter is in serious
trouble. That is why retailers expend so much effort to get it
right.
Now, the complicated part in my example occurs when trying
to fit the maximum number of borrowers in that continue of rate
between 5 and 18 percent while keeping defaults to a minimum.
Anything that enhances this process is obvious consumer
benefit. Since 1996, the seven preemptions of the FCRA has
enabled retailers and other lenders at a national level to take
advantage of the technological advances to serve their
customers while greatly refining their ability to fit the
borrower to the right rate.
Mr. Chairman, as you indicated, in effect, the FCRA and the
1996 amendment have created an interstate credit superhighway
that has done an outstanding job of delivering unprecedented
volume of credit more cheaply and more quickly to more people
at all income levels.
Is the system perfect? No. There are bumps, potholes and
accidents along the highway, but very few overall, and
especially so given the magnitude of the system and the speed
at which it operates.
It seems to us that the policy question today is how much
do we want to impede credit traffic flow and increase costs for
highway users in hopes of further reducing the number of
accidents and bumps? We have reviewed the provisions of H.R.
2622 with this in mind, along with the criteria suggested by
the Department of Treasury. And I would like to just briefly
make a few comments there.
The NRF applauds the inclusions in H.R. 2622 of the
critically important amendment that makes permanent the
national uniform standards under FCRA. The bill also includes a
number of provisions to address specific scenarios that involve
identity theft. For example, the bill imposes new obligations
in connection with certain address changes, fraud alert and
address discrepancies. The NRF supports efforts to address
these issues and looks forward to working with the Committee to
functionally strengthen these proposals.
A common theme of our recommendations to these provisions
centers on maintaining flexibility to address these potential
identity theft scenarios. In particular, we are concerned, as
you mentioned, that if the methods for addressing identity
theft are rigidly specified in the bill, credit granters will
be forced to devote resources to complying with those methods,
even if they become ineffective or if more efficient
alternatives become available.
Therefore, we recommend that the bill maintain its approach
of specifying a particular method for addressing each potential
identify theft problem, but also include new provisions that
would enable credit granters to develop reasonable alternatives
with guidance from the federal agencies. This is the approach
taken in the USA PATRIOT Act, Section 326, designed to combat
terrorism, at least as important a problem.
In short, we need to maintain the flexibility to change our
method as rapidly as the criminals change their scheme.
Now, some examples where the bill would benefit from this
approach include the provisions for investigation of change of
addresses and those governing conflicts where consumer fraud is
present. Retailers are particularly concerned if the bill's
provisions do not inadvertently frustrate consumer's ability to
use their existing accounts or open up the opportunity for
unscrupulous credit people to manipulate the system, to the
detriment of millions of honest consumers. We submitted
suggestions to the Committee and look forward to working with
them on this very important issue.
In closing, I would like to emphasize the retail industry's
strong support for permanent reauthorization of the seven areas
of preemption contained in Section 624. Without the extension
of nearly uniform national standards, it would be harder to
judge with any confidence the credit worthiness of each
individual. It would slow the credit process and lending rates
would rise. Consumers have come to expect instant access to
credit when purchasing everything from automobiles to consumer
goods, such as furniture, appliances and apparel.
In the final analysis, we in the retail industry have a
real concern that a more fragmented approval process for credit
underwriting would negatively impact consumers and, as a
consequence, retail sales, ultimately costing jobs and hurting
the economy as a whole.
Thank you again for this opportunity. Be happy to answer
any questions.
[The prepared statement of Mallory Duncan can be found on
page 148 in the appendix.]
Mr. Bachus. Thank you, Mr. Duncan; and Mr. McEneney?
STATEMENT OF MICHAEL MCENENEY, PARTNER, SIDLEY AUSTIN BROWN &
WOODS LLP, ON BEHALF OF THE U.S. CHAMBER OF COMMERCE
Mr. McEneney. Thank you, Mr. Chairman and members of the
Committee.
My name is Mike McEneney, and I am a Partner at the law
firm of Sidley, Austin Brown & Wood.
I am pleased to have the opportunity to appear before you
today on behalf of the U.S. Chamber of Commerce. I would like
to commend the members of the Committee for their efforts to
protect the security of consumers' personal information and
ensure access to credit at low cost. I would like to commend
the sponsors of H.R. 2622 for their leadership in crafting an
important foundation for addressing identity theft and FCRA
issues.
The FCRA and its national uniform standards have provided a
robust framework for the most advanced consumer credit and
insurance markets in the world. Indeed, the benefits of the
FCRA were highlighted in a recent information policy institute
study, which found that the national uniform standards
established by the FCRA have contributed significantly to the
consumer benefits of the current credit marketplace.
The study concluded that the loss of the existing framework
of uniformity would threaten the current consumer benefits and
that Congressional action is necessary to ensure the continuity
of our national standards.
We applaud the sponsors of H.R. 2622 for taking such
action. The national standards established by the FCRA are also
an important component of protecting the security of consumers'
personal information. For example, the national uniform
provision under the FCRA ensure that financial institutions can
have access to reliable credit report information for identity
verification and other identity-theft prevention measures.
Although renewal of the FCRA national standards is an
important step, we agree with the Committee that more can be
done. The proposal legislation includes provisions to address a
number of potential scenarios involving identity theft. The
Chamber strongly supports efforts to address these important
issues and appreciates the opportunity to provide comments on
the legislation.
In general, we believe that there is a common theme that
may be helpful in guiding consideration of provisions to combat
identity theft. In particular, as Secretary Snow mentioned
earlier, the methods used to address potential identity-theft
scenarios should be flexible, allowing companies to utilize the
most efficient means to thwart identity thieves.
We believe that this goal is embodied in several provisions
in the bill. For example, the legislation includes a provision
requiring federal banking agencies to develop so-called red
flags for use in detecting identity theft. This provision
relies inherently on recognition that a one-size-fits-all
approach may not work.
The red flags presented by identity thieves will invariably
change over time, and the tools used to combat the thieves
should change as well. The legislation takes important steps in
the direction of providing this flexibility, and we hope that
this theme can be further explored.
The bill also addresses the important issue of a consumer's
ability to access his or her credit report. The Chamber
welcomes consideration of how to make credit reports more
available to consumers.
We believe, however, that this issue requires careful study
before next steps are taken. In particular, there should be a
full examination of the cost associated with a free report in
order to ensure that there are no unintended consequences,
particularly for consumers.
Moreover, the frequency and volume of demand for free
reports will be difficult, if not impossible, to predict since
a widely circulated press report or e-mail could drive
extremely high volumes in short periods of time. Given the
inherent unpredictability, it is unclear how credit report
companies would be in a position to adequately manage this
problem. For example, even the most basic issues, like
establishing adequate staffing levels, are difficult to address
when you cannot predict the volume of the demand.
The Chamber is pleased that the bill includes the provision
that would make it clear that companies can conduct
investigations of wrongdoing in the workplace without the
inappropriate application of the FCRA. Because of the
difficulties in conducting an investigation while complying
with the FCRA's requirement, the FTC interpretation on this
issue deters employers from using experienced and objective
outside organizations to investigate workplace misconduct.
While the FTC's interpretation affects all businesses, it
is particularly damaging to small and medium businesses that do
not have in-house resources to conduct these investigations
themselves.
Once again, I would like to commend the Committee for its
efforts to maintain the consumer benefits of our current
financial marketplace, while also protecting the security of
consumers' personal information.
The Chamber looks forward to working with the members of
the Committee as the legislation moves forward, and I thank you
again for the opportunity to appear before you today. I would
be happy to answer any question you may have.
[The prepared statement of Michael F. McEneney can be found
on page 195 in the appendix.]
Mr. Bachus. Thank you, McEneney. And Dr. Spriggs, we
welcome your testimony.
STATEMENT OF WILLIAM SPRIGGS, EXECUTIVE DIRECTOR, NATIONAL
URBAN LEAGUE INSTITUTE FOR OPPORTUNITY AND EQUALITY
Mr. Spriggs. Thank you, Mr. Chairman. My name is William
Spriggs. I am the Executive Director for the National Urban
League's Institute for Opportunity and Equality.
The National Urban League is the nation's oldest and
largest community-based organization dedicated to moving
African-Americans to the economic mainstream.
We are very encouraged by the language in H.R. 2622 that
seeks to ensure that consumers can get a summary of their
credit score and information on how it was derived so that the
score can be approved.
We applaud the Committee for that step. And I was very
encouraged by your comments earlier in the first panel that you
also meant the credit score to be available along with the
credit report.
We would like to see the Committee go one step further,
however. Credit scores have now dominated the way in which home
mortgages are made. Home mortgage is, of course, important to
home ownership, and home ownership is at a record level in the
United States.
While 75 percent of white non-Hispanic households are home
owners, for African-Americans that is only 47.7 percent, and
for Hispanics it is 46.7 percent.
Part of that differential seems to be a persistent gap in
access to home mortgage, and the loan denial ratio
unfortunately has stayed constant for African-Americans, at
around 2 to 1, and for Hispanics at 1.5 to 1, compared to
whites, this despite the fact that in 1995 there was a
mushrooming of the use of credit scores.
Many people believe that credit denial took the form of
differential treatment using credit scores everyone is now
convinced has not just been for differential treatment, but we
must remain on guard for differential impact.
So it is not just access to the scores; it is access for
the Committee and for the FTC and for the American citizens,
and to understanding the accuracy--not just the tendency, not
just the averages, but the accuracy of the scores themselves.
We need to have transparency of the score creation in the
same way that we have transparency with HMDA data. This has
allowed us to look behind the veil at how home mortgages are
done. We need to be able to look behind the veil of the credit
scores, as well.
Now, the credit scores is a statistical thing, and it is
subject to all sorts of statistical problems. I just want to
mention a few of them. They really aren't race-specific, they
really deal with consumers.
You have had a series of reports presented to you on levels
of accuracy. All statistical models assume that the data is
accurate. It is very difficult to deal with statistical models
when you start with data that has measurement error in it.
It is important for outside researchers, it is important
for Congress, it is important for the FTC to understand how the
scoring industry treats this measure and error, because how
that gets treated is very important as to whether there would
be an introduction of bias into the system.
Missing data. You have also heard information presented to
you at other hearings that for a number of reasons, either
credit card information, or sub-prime loans in the mortgage
industry, don't get reported to the credit bureau.
So how does the industry handle missing data? Again, there
can be a great introduction of bias when it comes to what is
the way in which missing data is handled.
Finally, there are omitted variables, variables that you
would imagine ought to be in the model, things like employment,
things like even regional variations in terms of the economy's
performance.
But they aren't in the model. And it is not possible for us
to understand, for instance, if there is a slow-down in
manufacturing in Illinois, as an example.
Are those workers' credit records really the same if they
fall behind as an employed worker living in northern Virginia,
where the unemployment rate is 0.1 percent, who falls behind?
Do they really present the same credit risk if we are
looking forward? Probably not. But the way that the scores get
treated if we don't understand the model means that we could
have unexpected differences in credit scoring across the
country that are unintended. But we need to be able to have
access to that information.
Now, what is the importance here, as people would say that
the credit scores now allow people to get credit? But it is
credit at different prices. So accuracy matters. Just
yesterday, when I was preparing, I looked at the Fair Isaac Web
page. The difference between a 699 score, which is a decent
credit score, not great, and 720 would be 0.66 points on your
mortgage. That is enough everybody here would rush out and
refinance their mortgage over 0.66. That is just 21 points
different in your credit score.
So it is really important that the FTC, that Congress, that
government have access, bring some sunshine to these models,
and then provide us with a report card so that consumers, so
that regulators have a better understanding of what has been
going on.
In that respect, we have a series of things we would like
to see the FTC report in this report card. We want to make sure
that there isn't a disparate impact of the credit scores, and
we have not liked the information that has been provided so far
on that.
The issue isn't average tendencies, it is not just that,
yes, the models will predict equally well the average tendency
for default rates, it is the mean prediction error. Is it the
same for all subgroups? And if it is not, why models have been
considered, which ones ended up on the cutting room floor,
which ones ended up being the models that were used? And if we
look at the mean prediction error of those models by subgroup,
is it possible that some of the scoring methods that aren't
used were better for some subgroups? We need to have that
information.
We need to have information on how errors were handled. We
need information on the relative performance of the models that
were rejected but not accepted. All of that needs to be in
place so that we can understand what is going on.
The day has now changed. Getting your credit report doesn't
tell you anything anymore. This credit explosion is really the
result of the ability to use credit scores. And the credit
information industry has in many ways now moved beyond the
legislation. So giving information to consumers on what is on
your credit report doesn't give them what they need. They need
the credit score, and then we need the information on the
accuracy of those credit score models.
And I will be happy to answer any questions.
[The prepared statement of William E. Spriggs can be found
on page 248 in the appendix.]
Mr. Bachus. Thank you.
Mr. Brobeck?
STATEMENT OF STEPHEN BROBECK, EXECUTIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Brobeck. Thank you, Mr. Chairman.
Mr. name is Stephen Brobeck. I am Executive Director of the
Consumer Federation of America. And my testimony today is on
behalf of my own organization and Acorn, Center for Community
Change, Consumer Action, Consumers Union, U.S. PIRG, and the
low-income clients of the National Consumer Law Center.
At the outset, we want to commend the Committee for holding
the comprehensive series of hearings on the Fair Credit
Reporting Act. These hearings have established the huge and
growing influence of credit reporting in the lives of Americans
related to consumer access to affordable credit, insurance,
rental housing, utilities and even to employment; to consumer
vulnerability to socially unacceptable invasions of privacy
involving medical information, as well as financial
information; and to consumer vulnerability to the horrific
experience of identity fraud.
The extent, frequency and severity of problems in these
areas, well documented in your hearings, must never be
forgotten in seeking solutions that are considered by financial
services providers to be inconvenient or even somewhat
disruptive.
At the outset we also want to commend you and other
sponsors of H.R. 2622 for including in your legislation
important new consumer protections. For example, there is no
question that measures designed to curb identity theft would
reduce its incidence. While we believe these measures need to
be strengthened, they would require credit bureaus and lenders
to make more serious efforts to reduce this theft.
Similarly, the requirement that bureaus make available a
free credit report annually would increase the ability of
consumers to detect and correct errors.
While we believe more adequate government regulation of
bureaus and lenders is also needed, the greater involvement of
consumers in what is largely a self-regulated system would
ensure a more accurate, fairer system that would benefit
lenders in the long run, as well as consumers.
We also believe, however, that these protections could be
improved in ways outlined in our written testimony that would
further reduce abuses against consumers while not imposing
unreasonable burdens on credit bureaus and lenders.
Let me give just two examples. It is not enough to give
adversely impacted consumers free access to their credit
reports and scores through credit bureaus. It would not only
greatly increase consumer access to the actual reports used by
lenders, but would actually ease the burden on credit bureaus
if lenders were required to provide to adversely impacted
credit applicants the merged files and scores that served as
the basis for their decisions.
Typically in the purchase of mortgage and installment
loans, this would require nothing more than a loan officer
handing to the applicant a copy of the file. In most cases,
they would probably also help explain this file, urge the
applicant to check for errors, explain how to correct any
errors and perhaps even assist in this correction. After all,
lenders would prefer to make, not deny, loans.
Second, consumer remedies against inaccuracies and abuse
need to be more effective. Certainly, regulators need to be
given more responsibility and authority for addressing credit
reporting abuses against consumers, but they cannot conceivably
resolve more than a small fraction of individual problems. It
is also essential to empower consumers to resolve their won
legitimate grievances. That could be largely accomplished by
giving them the ability to seek first, minimum statutory
penalties of, say, $100 to $1,000 per violation and, second,
injunctive relief to stop reporting agencies from spreading
false information.
In our opinion, however, the greatest weakness of H.R. 2622
is its permanent limiting of the ability of states to pass
needed protections. The states need this ability to address
regional concerns, to respond quickly to new credit reporting
problems, and to experiment with protections not contained in
federal law. Any increase in efficiency, whose claims we
believe to be wildly exaggerated by credit bureaus and lenders,
is a small price to pay for the many benefits of the ability of
states to remedy abuses. And we do not understand why the
legislation would also make preemption permanent when it
directs agencies to undertake studies that are intended to
examine problems and remedies.
At the very least, the preemption should be sun-setted
shortly after the completion of these studies. Principally for
this reason, we cannot endorse H.R. 2622 despite its many
merits, but we would urge its sponsors, as well as all members
of this Committee, to reconsider this provision as well as the
others that were the subject of our written testimony.
In conclusion, because both industry and consumer groups
basically support the passage of legislation, Congress has an
historic opportunity to reduce serious and growing abuses in
the credit reporting system. It may not have this chance for
many years to come.
Thank you for the opportunity to provide this testimony.
[The prepared statement of Stephen Brobeck can be found on
page 119 in the appendix.]
Mr. Bachus. Thank you, Mr. Brobeck.
Mr. Dugan?
STATEMENT OF JOHN DUGAN, PARTNER, COVINGTON AND BURLING, ON
BEHALF OF THE FINANCIAL SERVICES COORDINATING COUNCIL
Mr. Dugan. Thank you, Mr. Chairman.
My name is John Dugan. I am a Partner with the law firm of
Covington and Burling. I am testifying today on behalf of the
Financial Services Coordinating Council, the FSCC, whose
members are the American Bankers Association, the American
Council of Life Insurers, the American Insurance Association,
and the Securities Industry Association. These organizations
represent thousands of large and small banks, insurance
companies and securities firms that, taken together, provide
financial services to virtually every household in America.
The FSCC strongly support H.R. 2622, which renews and
strengthens the Fair Credit Reporting Act. We believe its core
provisions strike the right balance in preserving the FCRA's
uniformed national standards in adding strong new provisions to
deter and remedy identity theft. Our member trade associations
pledge to work hard for the enactment of this critical yet
measured approach to FCRA reauthorization.
While the FSCC recognizes that the legislation is still a
work in progress, we believe it is imperative that it retains
this balanced approach throughout the legislative process.
For example, we would strongly oppose addition of the types
of restrictions, however well intended, that would
substantially increase consumer costs without commensurate
consumer benefits, or ones that would deter financial
institutions from making the type of full and voluntary
information submissions to credit bureaus that they do now. At
the same time the bill's provision should preserve adequate
flexibility for the industry to address legitimate concerns in
the most efficient manner possible.
In addition, our members have technical concerns with some
of the bill's provisions that we hope can be addressed. Let me
now provide detail about each of these points.
Title 1 of H.R. 2622 makes permanent the uniform national
standards that underpin the FCRA. These standards make our
extraordinary credit insurance markets truly national, which,
in turn, have brought unprecedented benefits to Americans
throughout the country. By virtually any measure, the 7-year
experiment with uniform national standards has been a
resounding success, stirring strong industry competition that
has resulted in, among other things, more and cheaper consumer
credit and insurance, a wider variety of consumer products and,
most fundamentally, economic growth.
By improving the performance of the entire market, as
described in more detail in my written statement, FCRA's
uniform national standards have lowered the cost of credit and
increased the numbers of Americans who qualify for credit.
Accordingly, the lynch pin of the FSCC's strong support of
H.R. 2622 is the permanent extension of all of the FCRA's core
uniform national standards.
Let me now turn to identity-theft provisions and other key
provisions in the bill.
Stopping identity theft before it occurs and resolving
those unfortunate cases that do occur is of utmost importance
to the financial services industry. As technology and the
Internet have made more information readily available,
financial institutions have redoubled efforts to help educate
consumers about how to prevent and resolve cases of identity
theft.
That said, the financial services industry has no illusions
about the enormity of this problem. The FSCC fully appreciates
why the Committee is now considering the identity-theft
provisions in this bill, which are woven through the fabric of
most of the title.
In addition, several of the bill's provisions provide
consumers with greater access to credit report information and
address related consumer protection provisions.
Before commenting on these provisions that affect our
financial institution members most directly, let me note that
many of the bill's other provisions impose new responsibilities
on consumer reporting agencies. While the indirect effect of
these credit bureau provisions could result in significant new
costs for our members, we believe the credit bureaus
themselves, who are also testifying here today, are in the best
position to address practical issues or concerns that are
raised by such provision. We do implore the Committee, however,
to recognize that none of these provisions, however beneficial
to particular consumers, comes without cost. And these new
costs must ultimately be borne by consumers.
The FSCC believes that, before taking action on any of
these credit bureau provisions, the Committee should weigh
carefully the expected all-end cost to consumers as well as
expected benefits because, in some cases, the ultimate consumer
cost may, in fact, be quite substantial.
Section 201 includes specific statutory procedures that
require a credit card issue or that receives a request for an
additional credit card within 30 days after receiving a notice
of a change in address to notify the cardholder of the request.
While FSCC supports the intent of this provision, one possible
improvement would be to delegate greater authority to the
Federal Reserve to craft regulations to address the problem,
which could be adapted to changing circumstances over times
much more easily than could specific standards codified in
statute.
Section 202 addresses fraud alerts, which the FSCC agrees
are a critical tool for containing the magnitude of losses
caused by identity theft. We believe the provision should be
clarified, however, so that once a fraud alert is placed in a
file, it does not require separate authorization each and every
time a consumer uses a credit card, which we think would be
unworkable.
Instead the provision should apply to the making of a new
loan or a new credit account. Further clarification would also
be useful regarding the duration of the fraud alert.
The FSCC also supports Sections 203, requiring truncation
of credit and debit card numbers, and 206 requiring regulators
to issue red flag guidelines to identify possible identity
theft.
In connection with the guidelines, however, the provision
should be modified so as not to duplicate the account opening
requirements imposed by the banking regulators under the USA
PATRIOT Act.
The FSCC also supports Section 301, regarding coordination
of consumer complaint mechanisms, and Section 303, which
requires a study of investigations of disputed consumer
information.
In both cases, we would urge more direct coordination and
cooperation between the Federal Trade Commission and the
federal banking regulators, and with respect to the study, we
believe the financial services industry should be provided the
opportunity to provide input before it is finalized.
Finally, Section 402 would prevent furnishers from
providing information to a credit bureau where the furnisher
knows or has reason to believe that the information resulted
from fraudulent activity.
The FSCC remains concerned that the reason-to-believe
standard, while seemingly sensible, would in fact be triggered
too easily in some circumstances where a financial institution
was truly acting in good faith.
We believe that is not the Committee's intent, and we hope
to work with you and your staff in the coming week to see if
there is an appropriate way to address this concern.
Indeed, since our credit reporting system depends on
voluntary submissions of information to credit bureaus, it
would be counterproductive to impose restrictions on furnishers
that would make them more reluctant to provide information in
the first instance.
As described at the outset, our hope is to provide
additional comments on provisions in the bill as it proceeds to
its first markup. Again, the thrust of our comments will be to
preserve adequate flexibility for provisions to adapt over time
to changing circumstances, to weigh carefully potential costs,
as well as potential benefits, and to preserve the incentives
for information furnishers to voluntarily provide full
information to credit bureaus.
And with that, thank you very much.
[The prepared statement of John C. Dugan can be found on
page 135 in the appendix.]
Mr. Bachus. Thank you. At this time, Mr. Pratt, actually as
our witness representing the credit bureaus, and I hate to
segment that testimony, but Mr. Pratt, you all have sort of
been singled out for a lot of----
[Laughter.]
A lot of the burden of this legislation is going to fall on
the credit bureaus. And, in fact, I think we are pretty far,
pretty close to the line, if we are not over the line, on you
being able to handle that burden.
But we do have votes on the floor, we have about three and
a half minutes left, so we are going to dismiss the hearing at
this time. we will come back and we will hear your testimony,
and then we will have questions.
So at this time we are recessed, hopefully for about, let
us just say until 2:15 p.m. Thank you.
[Recess.]
Mr. Bachus. We welcome the second panel back.
And at this time we will hear the testimony from Mr. Stuart
Pratt, who is the President of the Consumer Data Industry
Association; to most people that means the credit bureaus. And
as I said before the break, many of the burdens and
requirements are going to fall quite heavily on the credit
bureaus, and I know that there is quite a bit of concern there.
So we recognize you for your testimony, Mr. Pratt.
STATEMENT OF STUART PRATT, PRESIDENT, CONSUMER DATA INDUSTRY
ASSOCIATION
Mr. Pratt. Mr. Chairman, Ranking Member Frank and members
of the Committee, thank you for this opportunity to testify
before you today on the subject of H.R. 2622, the Fair and
Accurate Credit Transactions Act of 2003.
For the record, I am Stuart Pratt, and I am President and
CEO of the Consumer Data Industry Association. And Mr.
Chairman, as you indicated, we do our represent what are
sometimes called the big three consumer credit reporting
systems in this country. We represent all of the major check
acceptance system, all of the major mortgage reporting systems
in this country as well. So a lot of different companies
involved in this consumer credit marketplace, providing the
information that has been in large part the subject of the many
hearings that you held over the course of June. That was quite
a marathon.
We join with everyone else who has applauded you and the
Committee at large and those who have sponsored the bill for
the introduction of H.R. 2622, and in particular for Title 1,
Section 101, which does reauthorize and make permanent the
national uniformed standards which are so essential to the
continued success of our nation's economy.
Reauthorizing and making permanent these standards under
FCRA ensures that consumers can continue to enjoy $30 billion
in additional disposable income per year, due to increased
competition and due to the availability of credit that we see
today in the marketplace.
Your bill also looks at and takes a serious look at the
question of identity theft. And we agree with many other
panelists that identity theft is a serious problem. It is one
that requires serious solutions. And we applaud a number of the
ideas that are provided for in the FACT Act, including the idea
that fraud alerts can be an excellent deterrence. We agree with
that. Our members do administer fraud alerts, and we see value
in that being codified on a go-forward basis.
We do believe, like others, that the fraud alerts should be
time limited on the file, because they should operate more like
a red flag. They should operate during a period of time when
there is a heightened sense of urgency, of concern. If they
stay on the file in perpetuity, we begin to have a cry-wolf
kind of effect, where they stay on forever and eventually a
lender has to try to pull apart the wheat and the chaff, and
that becomes progressively more difficult. So we suggest that
there is a time limitation for fraud alerts if they are to
remain on the file.
You suggest a summary of rights for consumers relating to,
candidly, some of the changes you are making in this act and
also relating to the Fair Credit Reporting Act and other acts
as well. Consumer reporting agencies are always willing to
deliver the right notices to consumers that explain their
rights under, particularly the FCRA.
Some of the other statutes that were cited simply are not
statutes that regulate us. If consumers were to receive a
notice from us about those laws, our consumer relations folks
just wouldn't know how to answer questions about those.
I think some of that may be covered under the FTC ID theft
clearinghouse and the fact that they, too, provide a great deal
of information. That might be a better solution for how some of
the notices are delivered.
Blocking information with police reports, I think, is a
good idea. It is one that we can effectuate for the national
credit reporting systems in our marketplace. It is an idea that
works well for that type of consumer reporting system. You will
find throughout our testimony and throughout our work with the
Committee, there are times where consumer reporting agencies of
various types don't fit as well with one duty or another duty.
And that these duties will have to be custom fit to the type of
consumer reporting agency that we really want to focus on.
Coordination of consumer complaint investigations in
Section 301, again, makes sense for nationwide consumer
reporting agencies. It allows us to allow a consumer to make a
single phone call and to have fraud alert information, if you
will, transferred between other nationwide agencies.
Your bill does have some proposals in it. The bill does
suggest some things that we want to visit with you about here
today in the time I have remaining. In particular, two items
under Section 5, Sections 501 and 501, propose free reports for
consumers and a score disclosure requirement of sorts for
consumers, as well. And I think there has been some discussion
today of the intentions of that provision relative to scores.
And let me just share a few thoughts on each one.
Free reports are provided widely today. In fact, 16 million
free file disclosures are given every year in this country. The
1996 amendments to FCRA did address free file disclosures for a
wide range of consumers who had particular need. And we think
that that was the balance that was necessary then, and we think
that is roughly the balance that is necessary now.
That law, in our mind, is working very well because, again,
16 million consumers every year are getting their files for
free. The vast majority get it free of charge. Very few
consumers seem to be harmed or impaired by the way the act is
operating in that area.
Score disclosure concerns us because in fact, we don't own
many of the scores that I guess consumers think we have or that
others think we have. And in fact, in many cases, we would have
to purchase scores from others if score disclosure was to take
place. And that is one of the points of confusion.
That, plus in our testimony we do offer some context for
how the marketplace seems to be providing consumers quite
frequently to scores, access to advice, access to how scores
are analyzed, credit history information and so on and so
forth.
So you will find us looking forward to continue to work
with you on the file disclosure issues, the score disclosure
issues. And we applaud the fact that this bill does, again,
make permanent and reauthorize those national standards under
the FCRA. And we thank you for the opportunity to testify here
today.
[The prepared statement of Stuart K. Pratt can be found on
page 224 in the appendix.]
Mr. Bachus. Why, thank you.
With that, we will go to questioning. And I think my first
question will be actually to you, Mr. Pratt. What I think Title
5 of the bill says is that if you have those credit scores, you
disclose them. So, you know, if you have them, you would be
required to disclose them. Obviously, I don't think we can
require you to disclose something you don't have. That would be
my interpretation.
We have heard from your members about their concerns about
the cost of providing the free credit reports.
And I think, as you have said, the present law requires a
broad range of free credit reports: people that have been
denied credit, been denied a job, several other exceptions. Do
you have any idea how much it would cost to supply these
reports? And what if they were done online? What are some
provisions?
Mr. Pratt. Two questions: Let me break that down, if I may,
Mr. Chairman. We are still trying to run the numbers based on a
whole range of factors that we tried to outline here in our
testimony, but let me go through some of those. Some of the
factors are simply the fact that if free is free for everyone,
National Media could create spikes of activity. By parallel
example, today even with the opt-out number we use for
prescreened offers of credit, an e-mail circulates every year.
During any given year, the opt-rate spikes by as much as
fourfold from what it is today.
We estimate that we might have as much as a fourfold
increase in files disclosed for a range of reasons. Security
breeches, which we have discussed in a hearing that, in fact,
you co-chaired earlier this year. We talked about the fact that
a single security breech cost our members each respectively
about $1.5 million. I think we are approaching numbers that are
a quarter of a billion dollars in incremental cost increase for
the cost of file disclosures.
Mr. Bachus. How much?
Mr. Pratt. A quarter of a billion.
Mr. Bachus. A quarter of a billion? Okay.
Mr. Pratt. And that is based on the information I have. I
have been visiting with the CEOs of the major systems. And this
is based on what we know are the unit costs for disclosure and
the estimated number of disputes that would follow and the
servicing and the requirements of law that we know that we must
comply with today. And it doesn't entirely allow us--even that
doesn't really tell us whether we are going to be successful.
If, for example, we have a rush of consumers who decide to
make a phone call, and you can look at the parallel of the
numbers of folks who have been trying to us the new FTC Do Not
Call List----
Mr. Bachus. Of course, that was a one-time----
Mr. Pratt. It was. And candidly, I guess, the question is,
how often will we have that sort of one-time event to occur
over and over again?
Mr. Bachus. But maybe we could build something into the
legislation to----
Mr. Pratt. Maybe so. Those are the kinds of issues I think
our members--we are not trying to be arbitrarily against
access. We are all for access of files.
Mr. Bachus. You have been very cooperative. Your industry
has been very cooperative in working with us on this
legislation.
Mr. Pratt. To your other question, certainly delivery
online is going to be vastly less expensive than the production
of paper.
Mr. Bachus. But would that hurt you competitively? For
instance, if you could get that information online, some of the
people that you now sell reports to, institutions, could they
not go online and get those reports? Is there a danger of that?
Mr. Pratt. You know, that is a good question. I don't know.
I suppose large institutions tend to have very high-tech
hookups between the national systems that are highly secured
and encrypted. And I don't know that would happen.
Absolutely, some smaller institutions would probably think
that maybe pulling a free file disclosure would be the way to
go, and that would be perfectly fine for their credit lending
purpose. And so, yes, that could poach on traditional business.
That kind of idea would poach on the current, direct to
consumer marketplace, and some companies estimate tens of
millions of dollars in lawsuits from that as well.
Mr. Bachus. Right.
Mr. Dugan, I think, you and Mr. McEneney have both
mentioned idea of not too rigid of standards, flexibility built
into the system. And I believe that is going to be a key to
being able to modernize and keep up with the criminals in ID
theft cases. I think if we adopt too rigid of standards, we
really put our law enforcement efforts and our efforts to
identify these people in a straight jacket.
And as you know, we have just addressed check truncation in
this Congress, this session, even though the marketplace has
probably been there for 20 years. So it is sometimes not
encouraging how long it might get around to us if we put
something in concrete, it might actually inhibit efforts.
Mr. Dugan. Well, that is exactly our concern, Mr. Chairman.
And we know that in the provision that does the red flag
guidelines, that does have quite a bit of flexibility and
vision that you are not trying to proscribe those things at
once. It will have to evolve, and you have given authority to
the regulators to do that. That is the kind of thing in some
places that we think is a useful way to look at things.
Mr. Bachus. Your testimony, I think, has been very helpful
in identifying areas that we need to address.
You all have followed the hearing and where we are going on
this, and we do get suggestions for provisions on almost a
daily basis.
It might help one consumer in a particular circumstance,
but when we run that down and we balance it, we find that the
end result of that would be shutting down our national uniform
credit reporting system as we know it now today.
And that would have a detriment on literally millions of
consumers each day. In an earlier panel, and I think someone
that needs bearing in mind, is that today in America you can
walk in and you can get a car loan in an hour, or thirty
minutes.
You can get credit extended in a matter of 30 seconds. In
countries, in Europe particularly, where they have much more
stringent requirements, credit availability, particularly to
low-and middle-income citizens, is simply not there like it is
here.
If it is there, it is at a much greater cost, and they may
be able to get credit, but the result may be at a 1 or 2
additional percentage differences.
So we certainly want to establish some meaningful
standards, but give the regulators, the financial institutions
and even the credit bureaus flexibility to address these
issues. One thing that I think we have seen from these hearings
is the you all are very motivated to address these issues
because they affect you, too.
Even when we have had our two identity theft witnesses,
both said they had lost over $40,000. Now, when they said that
actually a credit card company in both cases took 90 percent of
the actually that $40,000 of bad charges, the credit card
companies took those hits.
Now, they did have quite a considerable expense. It was a
nightmare situation for them. But everybody took a hit. I mean,
the institutions took a hit, the credit card companies took a
hit, and they took a hit, so there is quite a bit of identity
of interest there.
So I think that as we go forward you can help us to refine
this approach, and then I would hope that we would maintain
flexibility.
At this time, we recognize Mr. Frank.
Mr. Frank. Thank you.
Mr. Bachus. I was hoping to recognize you before you were
prepared to go home.
Mr. Frank. That is okay. I was going to defer, I was going
to be outside, but I will be quickly here. To Mr. Brobeck, and
I apologize for not being able hear all the testimony, but I
have made a point of reading it.
You address, what seems to me to be the biggest current
weakness of the system now, which I believe generally works
well. But there does seem to be this weakness.
You talk about the failure to guarantee the accuracy of
credit reports. Now, the knowledge I have gotten from both from
reading and talking is that people acknowledge that there are
situations where you the consumer learn that there is
inaccurate information about you. And one of the good things
about the bill, and there is a great agreement that we should
give the consumer more information, so as a result the consumer
is likely to be able to discover that there was inaccurate
information.
The problem then comes is, okay, well, what can you do
about it? And I am beginning to think in some of these cases
from the peace of mind of the consumer she might be better off
not knowing, because in some cases she just can't do anything
about it.
And I am told that there are situations in which you the
consumer learn, and I am working with the gentleman from New
York and others, make the going even more quickly, that there
is some inaccurate information about you, but that there are
really no adequate means for you to combat that in every case.
That is, you can contest it, as I understand it, you
contest it to the consumer reporting agency, and you can submit
a lot of documentation, and the consumer reporting agency
individual may have literally only a few minutes to review your
information, then sends a two-letter code to, in some cases,
the furnisher of the information. I must say, as I thought
about that, various combinations of two letters came to mind to
describe what was happening, but, then the credit furnisher, in
effect, checks his or her own arithmetic and spelling.
And if the credit furnisher determines that, yes, I did
tell the credit reporting agency that, that is considered to be
the reinvestigation, and that is where we stand.
Now, and I am told that in many cases the credit reporting
agency will then accommodate the consumer by accompanying the
negative information with the consumer saying, it ain't so.
Am I correct that there is not now in the system a way for
you to document the inaccuracy and to show that even though
they may have correctly reported what they had reported, that
the underlying data was incorrect? And if that is true, what
can we do? What is a way to break out of that?
As I said, I think it probably occurs in a fairly small
percentage of the cases. But I would say to those on the
industry side, the smaller the number of cases, the less you
have to worry about it. The less the burden ought to be. But it
just is unacceptable to say that the few individuals--of
course, a few when you cover the whole country is tens of
thousands, hundreds of thousands--won't have to pay that
burden.
So, Mr. Brobeck, am I accurate in the facts? And what do we
do about it?
Mr. Brobeck. Certainly, there are inaccuracies that are
detected in a small minority of cases. We would argue that
there are a number of inaccuracies that adversely affect
consumers, who purchase sub-prime mortgages, other sub-prime
loans, or are denied credit, who are not aware of these
inaccuracies. And that that number is far larger than the
number----
Mr. Frank. Right. We now understand. With credit, it is not
just either-or, but more-or-less, and that it has been a
conceptual view that credit was an either-or situation, but we
are now into a more-or-less situation.
Mr. Brobeck. So there is no question there is a minority,
but we think it is a larger minority than most people assume
currently. And it is true that even the minority have trouble
getting redress. So how do we fix the problem?
Well, there is no magic bullet. One way is a combination to
give everybody the ability to access their credit report for
free and if they find, in fact, that there are a large number
of errors, that will basically create a pressure group for the
industry to fix the problem. And if they don't, we will be back
here in 7 years.
It comes down to, they have to make a sufficient
commitment. That is to say, you have got to require them to do
certain things, including spending enough money to correct any
inaccuracies. We have heard estimates of what seems to me to be
far too large an expenditure, but even that $250 million
suffers in comparison with the tens of billions of dollars----
Mr. Frank. What is his number, $250 million?
Mr. Brobeck. It is $250 million to basically provide
everybody with a free credit report. I can't believe that----
Mr. Frank. In the context of all the great good that this
does for the country, after all, the economy in the United
States is, apparently, from what I read, substantially
dependent on this. What was the gross domestic product? What
percentage of the gross domestic product is $250 million? It
seems to me we are talking about rounding errors.
Mr. Brobeck. Some mountain track will be socialized
throughout the systems, and all lenders will pay a little bit.
And then, consumers will end up paying a little bit. And nobody
will really feel the difference.
So even if it is high, it is $250 million, always keep in
mind the cost of tens of billions that consumers----
Mr. Frank. I understand, but I really want to focus.
Are there things we can do in this bill that would mandate
a better performance in the collection process?
Mr. Brobeck. Yes. Consumers need better, stronger
individual remedies. And we would recommend a couple here.
They need the ability to obtain injunctive relief. And
instead of having to prove that there are damages, there should
be statutory violations of relatively small amounts, $100 to
$1,000, that would act as an important deterrent to the
repositories and the lenders.
Mr. Frank. Let me ask you. This would have to be in federal
court. Right? Because this is a totally federal operation.
Mr. Brobeck. I am not certain.
Mr. Frank. Part of the problem is that we don't have
jurisdiction over the remedies. I almost wish we could create
sort of a small claims court to deal with this. Because this is
really what we are talking about. And that may frustrate us to
some extent because the Committee on Judiciary would have
jurisdiction over some of the remedies.
But I would be interested, from you or anyone else, and
that includes people in the industry. Remember, I want
suggestions for how to fix this. If the suggestions for how to
fix it only come from the consumer groups, then the industry is
going to say they are too harsh. So the way to deal with that
is to send me your solution.
But I will fight very hard against allowing this bill to go
forward if we don't do something to improve the ability of
consumers to deal with this. We are doing a lot in the bill, I
believe, and will do a lot better to inform consumers about the
inaccuracies. And I don't think the inaccuracies are rife, but
I do think that we need to tell people.
We give incentives. You give incentives for people to get
the data a little bit right in the first place.
So I agree with you. This is the cost which when socialized
throughout the entire economy, is bearable. And I would be
welcoming of any specifics about how we improve the process by
which corrections are made.
I don't know of any other place where I have been involved
as a public official where I have been told, well, you have to
tell people that the answer is ``tough,'' that in the interest
of the old system, there may be some inaccuracy about them, and
there really isn't any way that they are going to be able to
prove that it is an inaccuracy. But we will manage to tell
people that they think it is inaccurate.
I would not be content for it to rest that way.
Thank you, Mr. Chairman.
Mr. Duncan. Congressman, may I take a quick stab at that?
Mr. Frank. Yes, sir.
Mr. Duncan. And that is if you look at the bill, there are
really three things going on, the current and the FACT Act.
The first of those, of course, is that there is this
dispute process you mentioned. The consumer can avail
themselves of that, and many, many disputes are resolved in the
consumer's favor.
The second thing is that as a retailer, we have multiple
reasons to want to have someone shop in our stores. You do not
want a situation----
Mr. Frank. Multiple reasons?
Mr. Duncan. Multiple reasons. I mean----
Mr. Frank. I was thinking of one, but it is a pretty big
one: money.
You like their company? You are lonesome? You are there to
make money. That is a good thing. Don't apologize.
Mr. Duncan. But the bottom line is that is you have someone
as a credit customer, you also have them as a retail customer.
And if that customer complains that there was something and
they file a dispute, most retailers will put a thumb on the
scale in favor of that customer because they want to keep that
customer as a shopper in their store. So it is more often than
not, it is going to be resolved in the customer's favor.
And then the third thing is this unusual ``he said, she
said'' situation, which occurs very seldom as you mentioned. It
is often the result of identity theft. One of the advantages of
2622 is that there is now a provision that would allow someone
to follow the port and have that trade line blocked so that no
one would get what they claimed to be that false information.
So we think there really is a remedy right here.
Mr. Frank. Well, I agree. But the fact that it is sometimes
as a result of identity theft strengthens my view that we have
to be very protective of the consumer.
Yes?
Mr. Pratt. My only addition was that the bill does require
a study of the re-investigation process to make sure that it is
working well.
Mr. Frank. I have great faith in a variety of studies
around here, but that is still not nearly as reassuring to me,
as it apparently is to you.
Mr. Pratt. Well, I don't know if it is reassuring to us
either, but I think the most important part of this that re-
investigations can be complex, particularly in the situation
that Mr. Duncan described. We think a study is the best place
to try to look at that issue to try to pull it apart and
understand the----
Mr. Frank. The effect of a study is status quo.
Let me say. I might be willing to go along with a study if
the extension of the preemptions was co-terminus with the
period of the study. But if you get a permanent extension of
the preemptions, then the study becomes less attractive because
the leverage to enact the results of the study is attenuated.
So if you wanted to have a short-term extension of the
preemption while we study this and decide what to do, okay. But
a permanent extension of the preemption attenuates the value of
a study because given the way this works--you know, people talk
about, well, money is the most important thing in the
legislative process, politics is the most important thing in
the legislative process.
We don't talk about that inertia is the most important
thing in the legislative process. And once these preemptions
are made permanent, that is the end of the ball game. So the
study doesn't do me any good at that point.
Mr. Bachus. I thank the gentleman.
One thing that, as Chairman, and I know Chairman Oxley is
committed to continuing to work with you and with Mr. Ackerman
and Mr. Sanders and others to try to come up with wording on
improving--I think we can probably do that. I appreciate that.
I think we will do that.
Our problem, I think Mr. Brobeck, you know, we have not
been able to come up with that magic solution or the wording at
the present time that doesn't impact the delivery of credit
reporting, of reports and the free flow of information. So we
are still searching for the solution.
Gentlelady from Illinois, Ms. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman.
One of the questions that I had wanted to ask Secretary
Snow when we had to adjourn, in a recent appearance he had said
that ``Another goal of the uniformed standards of the Fair
Credit Reporting Act is to help consumers learn how to manage
their credit to obtain the best outcomes for their personal
finances. In the modern American economy, smart credit
management is an elementary lesson in financial literacy.''
And I would like to ask you if you think that the FACT Act
does adequately address this issue? For anyone that would like
to respond. Dr. Spriggs?
Mr. Spriggs. If I may, Congresswoman? That is my concern
where the legislation doesn't go far enough in looking at
credit scoring. Because the reality is that with consumers
today, their score is so much more important than just the
report. And as you heard just a moment ago, you are directing
the credit bureaus, but they don't own the credit scores.
And earlier questions got to the issue of who owns the
credit score, they get to sell them, et cetera. This is a
portion of the industry that is not being adequately covered
here.
And for a consumer to make a difference in their home
mortgage, as an example, the example I gave when I talked
earlier, it means a 21 point difference in your credit score
means a lot of money to a consumer. And so, I think we have to
bring the credit scoring industry in the same way that we are
very concerned about what the credit bureaus do.
And we have asked them to be accurate, but we have no data
or measurement made public about the accuracy of the credit
scoring mechanism. Some of the concerns about inaccuracy within
the credit bureau data get magnified in ways we don't know
within the scoring, because we don't know what the weights
exactly are.
So I think if we want to educate consumers, we have to have
a far more transparent scoring system so that consumer groups
or that the government, so that others can talk about: What are
the indicators? What are the real ways that you can clean up
that score? Because the score has now become so much more
important than the report itself.
The Consumer Federation of America's report points out--and
I think some you have experienced this when you go to refinance
your home--you can get three or four different credit scores on
yourself and they are all over the place. So you know,
different scoring companies will score you differently.
And without having the transparency, without the overlay so
that you can talk about what do those differences mean. It is
very hard for consumers to get that education to manage that.
Mrs. Biggert. Well, in the legislation then, how would you
propose putting that in? Is that just elementary financial
literacy for consumers? Or is there something that needs to
make sure that an agency doesn't have to report a score or
explain a score when they really don't have the proprietary
rights over that?
Mr. McEneney. Congresswoman, could I----
Mrs. Biggert. Mr. McEneney?
Mr. McEneney. Yes, if I could just make a comment here.
This hearing is obviously to focus on the Fair Credit Reporting
Act. But there is another statute here that I think is
relevant, and that is the Equal Credit Opportunity Act, which
prohibits discrimination in any aspect of a credit transaction.
And also has that same effect in the context of the use of
credit scores. Any credit scoring model has to be developed in
a way so that includes only factors that are neutral, don't
include race or any other prohibited basis.
The banks that use those credit scores are examined for
compliance with those standards. So the agencies are looking at
these issues.
Also, you mentioned that it might be helpful to have a
mechanism for consumers to understand how these scores affect
them. Well, the Equal Credit Opportunity Act does that as well.
One of the things it provides is that if a consumer is denied
credit, that consumer is entitled to receive the principal
reasons for the denial.
Now, if a credit score was involved in that denial, what
that consumer must have access to under the ECOA are the
principal reasons that went into that score that created the
denial for the consumer. And the idea behind that is to focus
the consumer in on the most important information, which are
the principal factors that are holding back the consumer score.
Mr. Brobeck. Congresswoman?
Mrs. Biggert. Mr. Brobeck.
Mr. Brobeck. In terms of educating consumers, making
available a free copy of a credit report will do more than just
about anything that I can think of for two reasons. First of
all, it would generate an enormous amount of media coverage,
which people will have difficulty avoiding. It will also
stimulate a great deal of consumer demand for information about
the data in the credit report and scores. And if that is
properly explained by the repositories, that will represent a
very useful educating mechanism.
And then we would also, as I indicated in our testimony,
recommend that those consumers who are adversely impacted by a
credit decision be given the file that is used by the lender
and the score used by the lender. And in most cases, because
lenders are interested in lending money, not denying credit
applications, they will probably help the applicant to
understand their credit file and perhaps even advise the
applicant about how to improve the accuracy of that file.
Mr. Pratt. If I could just respond to the--we continue to
talk about the file disclosure. And we have always agreed as
the industry that access to files is important for consumers.
It is part of how I learn about all the different--in fact,
sometimes consumer discover they have more open lines of credit
than they may have remembered just because some are less active
and maybe not in their wallet as frequently.
We are still struggling with why the current approach that
the law has in it is not working. We are giving away 16 million
files a year to consumers. That is a good number of files for
consumers. They are educating a lot of consumers. We think the
educable moment is quite often, and Mr. McEneney referenced
this to one extent, is the point I want to look at my file when
something has happened, when there is a question that I have
about what my record looks like.
What we seem to be losing track of is the literally tens of
millions of transactions that go through successfully every
year in this country. And the system does work well. And of
course, all of us have a right of access to our file. And the
fee is capped and determined by the Federal Trade Commission
under the current FCRA.
There is a lot of free file disclosures that are available
today. We are just still struggling with why free seems to be
the panacea solution for all the ills that we seem to be
suffering when it comes to financial literacy. We don't think
that is the case because consumers certainly can have access to
files and certainly can, in many cases, free and in some cases
not.
Mrs. Biggert. Still the question that you had was the
proprietary that is not right.
Mr. Pratt. That is more difficult, that is true. We can't
disclose another company's score. And that is so important for
the Committee to know that. Our members do develop scores
ourselves. We compete in that marketplace. But we can't
disclose another company's score, their intellectual property.
It is just the way the law works. I think and generally
that is probably the right way for the law to work.
Mr. Spriggs. Excuse me, Congresswoman.
And again, that reiterates my point that that is the
industry that is not brought to the table here and why the
credit score access for consumers needs to be there. But if the
FTC could issue a report card--it is not enough--unfortunately,
the Equal Credit Opportunity Act doesn't get enforced properly
on this issue of the credit score because of the issue of
disparate impact.
A consumer who gets denied who may think that there was
some racial bias on the score gets their report and is told
maybe this is the key ingredient. But they don't get a report
card that says if I look at the Fair Isaac model, if I look at
somebody else's model and I see three different credit scores
for myself, I don't get the objective view of someone like the
FTC might be able to provide and say, look, if you look at how
well this one predicts and how well this model predicts and
these are the key elements and this is how they handle errors
and this is how they handle missing data. That gives me a lot
of clues as a consumer, and to you as policy makers, about well
what do we think is wrong here and what can we improve.
Currently, because we don't have that on the table, we
can't even really talk about some of those elements. So I think
the first thing is that we need that report card from the FTC
evaluating the score, the different score companies. And then
if they sell my score in the same way that we stick it to the
credit bureaus and say if someone looked at my report, they
have to give me the report, then the scorers need to give me my
score.
And that--and if I get that score with the FTC report
attached to it, that is going to give me a lot of clues as a
consumer about how my credit rating really works. Because,
again, if I get that credit report and I haven't used five
lines of credit in the last 10 years, I maybe got a credit card
when I was in college and I left it open, I don't know about
it. That hurts my credit score.
Now, as a consumer and I look at that and I say, well, I am
not even using it. It has got a zero balance. What is the
problem here? I don't see why I am being denied credit. Okay, I
have got 10 lines of credit out there, but I am not using any
credit cards.
As a consumer, I am not really being made intelligent
enough about it until I see a credit score that says, boom,
that is bad. You are being a bad boy. You don't need 10 lines
of credit.
And so, that is why, again, you need to bring the credit
score in, regulate them like you regulate the bureaus, if
someone gets that information or uses the credit score, then
they have to be as accountable as the credit bureaus and say,
okay, you got denied because of the score, here is your score,
here is the FTC report card with all the different scoring
mechanisms, here is how these models work, here is how they
predict, and that will inform the consumer.
Mr. Hensarling. [Presiding.] The gentlelady's time has
expired. The Chair now recognizes Mr. Sanders.
Mr. Sanders. Thank you, Mr. Chairman. Let me ask, to start
off, Mr. Brobeck, over the weeks we have been hearing an
enormous amount of testimony from the industry, and today from
the Secretary of Treasury, that Western civilization would
collapse as we know it if states were given the full power to
protect consumers in this area.
Do you think civilization would collapse, or do you think
maybe consumers might get some benefit if we had attorneys
general throughout this country, and legislatures and
governors, who wanted to stand up and pass a stronger consumer
protection law than Congress is apt to protect? Can you comment
on that, please?
Mr. Brobeck. Mr. Congressman, I don't even think a small
part of civilization would collapse. After all, before 1996 a
number of states passed some very strong measures that were
grandfathered into the 1996 law, and the sky did not fall, the
industry adapted. In fact, they ought to be better able to
adapt now because of technological improvements.
In the area of provision of social services, because of
computers, we have dramatically lowered cost. I can't imagine
that those cost savings are not available to the industry, as
well.
And there is going to be a small cost here, some
inefficiency, but I would urge this Committee to ask the
industry whenever they allege that the sky is going to fall on
them that they document carefully the cost of interventions by
the States that they have already taken, that are enforced
right now, and that they then compare those costs with the
benefits that have accrued to consumers as a result of those
interventions.
Mr. Sanders. Now, what am I missing, Mr. Brobeck, when I
think that if there are particular problems in a state, whether
it is Alabama or Vermont or California that the legislatures
and the Attorney Generals of those states might be able to
respond more effectively and quicker at the statewide level
than waiting for the United States Congress to move? What am I
missing in terms of the needs of consumers?
Mr. Brobeck. We don't think you are missing anything. In
fact, our federal system is wonderful because it gives the
States an ability to respond more quickly, which they often do,
because there are 50 of them, rather than just one U.S.
Congress, to problems that arise.
Sometimes those problems are local or regional, so there is
more interest in that state in responding to a problem than
there is, say, in Washington.
But, I mean, where is the harm? We have, we have seen the
macro-economic analysis that ascribes the growth in our economy
in the 1990s to the credit reporting system.
I would argue that there are many other far more important
factors. One could even perversely argue that the credit
reporting system is somehow related to the rise in consumer
bankruptcies, because, after all, if consumers' scores are
inaccurately high, then they are more likely to take on credit
that will lead to default.
If they are inaccurately low, the creditors will turn
around and charge them higher rates. In both cases, that will
tend to drive borrowers into insolvency.
Mr. Sanders. Let me take that statement and lead to a
second question, and Mr. Spriggs, Dr. Spriggs, or anyone else
can comment on it, but let me address it to Mr. Brobeck again.
I have been concerned about a scam which I call switch and
bait, bait and switch, by which companies, credit card
companies say, we are going to give you, Mr. Brobeck, 3 percent
for a year.
You pay every month faithfully what you owe the credit card
company, and lo and behold, after four months of paying on
time, suddenly your interest rates have gone from the 3 percent
they promised to 25 percent.
And the reason that they will explain to you is that you
borrowed more money because your wife was ill, and so forth and
so on. What do you think about that type of action, and what
should Congress do to address it?
Mr. Brobeck. Well, we think that is unfair. What is driving
that is that in a certain sense credit card markets have become
more competitive, and the so-called traditional rates, they are
basically tiered rates, the promotional rates being under 5
percent, typically, traditional rates, traditionally were 18
percent, but now they are as low as 10 or 11 percent.
And then you have the penalty rates. Well, competition in
middle markets and upper markets basically drove the
traditional rates down. That squeezed the margins of the
creditors, so they looked for other income opportunities, and
what they did is they raised the fees and they created this
penalty rate category, and now what they are doing is figuring
out clever ways to move people from the traditional rates into
the penalty rates.
And unfortunately, they are using credit scores as an
excuse to do that, or other material in credit records.
Mr. Sanders. Right. Dr. Spriggs, do you want to comment on
that?
Mr. Spriggs. Well, I did, because it gets right back to the
issue of the credit scores, because that drives the market so
much more than just what comes out of the credit bureau.
And that intermediary effect is what gets you out of that,
allows them their out, because probably in that fine print that
you didn't observe.
It is not as unilateral as it may appear is something to
deal with your credit standing. And the moment that extra loan
came, your score changed. So they may not be making as
unilateral a switch as it at first appears.
That issue is important because we don't know what is in
the models. We don't know--maybe after you looked at the
models, you might say I see their point, it looks valid. But
you may also look at their models and say, well, if you modeled
it different, and here is a different scoring company that
models it differently, they wouldn't have scored me that way.
Why does this model say that that is bad?
We could have that exchange. But we can't have that now,
and so we need to get them out of that loophole by making this
more transparent.
Mr. Sanders. Does anybody have an idea--I am kind of
curious, that when--we understand that about 5 billion
applications, credit card applications, are sent out a year,
which is an astronomical number. I would be curious to know if
we have some figures on what percentage of people who sigh up
for one promotion or another end up paying higher rates than
was on the original promotional application. Does anybody have
a guess on what percentage? I mean, if they come to me and they
say, Mr. Sanders, you can have 3 percent for a year and they
raise me to 20 percent, what percentage of the American people
are in that box?
Mr. McEneney. You know, Congressman, I don't know. But I
just want to mention that I think there is a law on the books
today that squarely addresses the issue that you raise in the
context of the potentially bait and switch scenario. The Truth
in Lending Act requires, pursuant to a recent Federal Reserve
Board amendment to Regulation Z, that any credit card account
that offers an introductory rate, that introductory rate has to
be disclosed on those Schumer box disclosures and the penalty
rate has to be disclosed as well.
Under those--and the circumstances under which the penalty
rate may be imposed must be disclosed also.
Mr. Sanders. Excuse me, let me just ask you for
clarification. Is the penalty--if I borrow money from another
source, is that considered now a penalty?
Mr. McEneney. Well, actually I think what you are referring
to is risk-based pricing.
Mr. Sanders. Yes.
Mr. McEneney. And what can happen in a risk-based pricing
scenario is a creditor obviously has one view of a particular
consumer's experience with that creditor. What it will do, in
some circumstances, is go out to a consumer report to see if
there is a more complete picture that gives a better
understanding of that consumer's risk.
In some cases they may find that the consumer has defaulted
on several other loans, therefore presents higher risk. And the
creditor at that point has a couple of choices. It can either
allow the other consumers in the portfolio to pay for that
consumer's risk or can price that consumer's product, so that
that consumer pays for the risk that consumer presents.
Mr. Sanders. Bottom line, let me ask you this, and then I
will give back the mike here. Is that if I signed up with your
credit card company and I faithfully pay you every month what I
owe you, do you believe you have the right to double or triple
my interest rates even though I have never missed a payment
with your company?
Mr. McEneney. Well, I can't get into the doubling or
tripling.
Mr. Sanders. That is what happens.
Mr. McEneney. But I am aware that what will happen is that
when that introductory offer is made, what will be disclosed to
the consumer is the fact that this rate, this introductory
rate, may go away under certain circumstances. And under the
Truth in Lending Act, the creditor has got to describe those
circumstances before the consumer even applies for the account.
Mr. Sanders. But sometimes those--that language is written
in very, very tiny writing, is it not?
Mr. McEneney. Well, actually, these disclosures, under that
recent Federal Reserve Board amendment I mentioned, have to be
in a certain type size.
Mr. Sanders. Thank you, Mr. Chairman.
Mr. Pratt. Mr. Sanders, if I could just respond to one
comment that was made about the credit reporting industry as
though it was somehow responsible for bankruptcies in this
country. And I just can't leave the record void on that.
That literally 2 billion consumer reports are sold every
year in this country. Sixteen million consumers look at their
files every year in this country. Less than half those
consumers ever even call the credit bureau back, although they
have toll free numbers and access to live personnel. And for us
to be left with the impression here on this hearing record that
somehow whole cloth credit reporting systems are vastly
inaccurate and somehow contributing to bankruptcy is just a
falsehood.
Mr. Sanders. Well, I think Mr. Brobeck was attempting to do
what some in industry have done and suggest that if we give the
States the right to protect consumers, somehow this will be
causing devastation. He was being a bit hyperbolic, I guess, is
the word, right.
Mr. Brobeck. I was trying to analyze the last 7 or 8 years
and suggesting that was one plausible explanation for the rise
in consumer bankruptcies. One of many.
Mr. Sanders. Okay. Thank you very much.
Mr. Gillmor. [Presiding.] We will go to Mrs. Kelly.
Mrs. Kelly. Thank you, Mr. Chairman.
Gentlemen, I, in my subcommittee, held two hearings on
this. This is now the sixth hearing that we have held on this
topic in this subcommittee. The problem--it is obvious that
this is a pretty sticky wicket. And I would like to address
something that was just said.
One of the problems is that the public does have access to
a lot of information right now. The problem we, I believe, have
is that we have a financially illiterate population in the
United States of America. I think we need to also ask you all
to go back and do everything you can to teach people to protect
themselves with regard to some of these issues.
This is a very sticky wicket with people who want to have
credit. They want to get life insurance. They want to get
mortgages. And to do that, they are going to have to give up
some information.
But one of the interesting things here that Mr. Sanders was
just talking about was the fact that we need more transparency.
We need it in A, B, C. We need it so that people can read it,
understand it and grab hold of that information and use it in
the way it should be used.
My concern here goes to the other part and that is the
blocking of a certain amount of information. I believe that
when you order a credit report, there ought to be a way that we
can block certain specific things. One of them is the medical
information.
And I would like to ask you, Mr. Pratt, because I am
concerned about that, if, for example, if an employee okays the
information being delivered.
And that employee's investigation goes on into the credit
history by the employer. I would like to know what you think
about the trade lines for the health care providers that were
showing up, like a cancer center, or a substance abuse clinic,
don't you think that could create a possibility of
discriminatory treatment here?
And don't you think it would be possible for us to encode
things like that, so that, on the trade line report, so that it
gets the information that is necessary with regard to financial
information, gets there, but we are able to encode on the trade
line report the names that get provided to the users other than
the consumer?
Mr. Pratt. I think we share your concern about making sure
that information like that doesn't end up easily displayed on a
credit file today.
Very few health care providers are reporting any kind of
regular information to credit bureaus. The majority of data
that might have some medical information on it, I suppose,
would be through debt collection.
Even there, we provide advice to all data furnishers in the
marketplace about how to make sure that they do not give us
information that would otherwise be an indicia of some sort of
treatment that consumers, you and I both individually, would
prefer not to have on a credit report.
We also have tables of key words that are used to scan
incoming data to strip out data like that, so, for example,
psychiatric, cancer, and those sorts of tables are used today
to strip data out of the credit reports, which I think tells
you that we, in essence, share your concern about trying to
make sure that a credit report is for the decision at hand, but
that the medical aspect of it is not relevant, in our opinion,
either.
It would be up to lenders to decide how else they might
need to use medical information, but that would not be found on
a credit report, the way our credit reports operate today.
Mrs. Kelly. Having once in my very far distant past started
out programming on computers, it seems to me that there are
possibilities, we can do things with that type of information
as it is transferred around to help get the amount of
information to the people who need it without indicating
certain things about people that they would rather not have
known.
And I would like to work with you, if possible, on some
wording that I think might very well solve this problem. I
think that words are a nice thing, but I think there may be a
way that my concern also attends to the liability of who is
doing the reporting, and I want to make sure that we have very
clear indications of that liability, as well.
So perhaps you would be willing to work with me on some
language. We have some, and perhaps you would review it for
this.
Mr. Pratt. We would be happy to work with you to see----
Mrs. Kelly. I thank you very much. I really appreciate this
panel being here. Your testimony has been very interesting. It
is, as I said, a sticky wicket. I hope we can get there. I
think we have a pretty good bill here, it perhaps needs a
little more tweaking and this is one area where I would like to
do that.
Thank you. I yield back the balance of my time.
Mr. Gillmor. The gentlelady yields back. The gentleman from
New York, Mr. Ackerman.
Mr. Ackerman. Thank you very much, Mr. Chairman. I have a
quick question, I think, for Mr. Pratt. Under the Fair Credit
Reporting Act, the credit bureaus are required to remove
inaccurate information from a consumer's credit report, the
word is in the law, promptly.
Mr. Pratt. That is right, sir.
Mr. Ackerman. Is there a definition for promptly?
Mr. Pratt. Not that I am aware of. In other words, case law
might give you some indication of promptly, if there was case
law in that area. I just don't have that information at my
fingertips to be able to give you a more, a finer point, if you
will, on what that means.
But promptly means promptly. You need to get it into the
file, obviously, in order to ensure that the consumer's file is
brought back to a correct standing.
Mr. Ackerman. And you would be amenable to putting some
kind of reasonable definition in the law on what promptly might
mean?
Mr. Pratt. We would be happy to have that discussion with
you in order to understand how that would work.
Mr. Ackerman. If promptly meant taking it out as promptly
as the average for putting in negative information, you would
be in favor of that?
Mr. Pratt. Promptly for us means taking inaccurate
information out of the file in a timely manner in order to
ensure that the consumer's file is brought back to accuracy.
Mr. Ackerman. If somebody reports negative information and
that gets reported to the credit bureau and is made public
through the agency within a matter of two weeks or 60 days or
30 days, and that was the average, it is pretty prompt to get
it in there, would it be fair to say that we should be taking
it out if it is inaccurate----
Mr. Pratt. Well, I think the law----
Mr. Ackerman.----within that same time frame?
Mr. Pratt. Well, I think the law sets the outer limit. We
have got to get this done in 30 days. That was something that
was done in 1996, because prior to that----
Mr. Ackerman. So you would be in favor, if 30 days was not
the outer limits for promptly, you would be in favor of 30
days, at least?
Mr. Pratt. I think it is the wrong place for me to be
negotiating the details of an amendment, but if you are saying,
are you interested in looking at the issue of promptly, and is
there something better than the word promptly, we are happy to
have that discussion. But I can't start negotiating an
amendment here.
Mr. Ackerman. We will schedule it promptly, then. On the
FICO and other related scores, this is for the whole panel, I
don't know if anybody here can help me, I don't know if anybody
wants to, but it is still very perplexing as to what goes into
this, and why people are interested in it from other agencies,
such as the Transportation Security Administration.
I am in the process of refinancing some properties, and was
told that my FICO score was in the, let me just say, the high-
700s, and my wife's was in the mid-700s.
I don't know what went into my score that is different than
her score, because basically everything is, but this has caused
a lot of family tension, and she thinks I am holding out on
her.
[Laughter.]
And I don't know what is in her report that is not in my
report, but everything is joint, and all that kind of stuff.
And if it is the same formula by the same company, it gets
confusing to a lot of people, and to make her a better consumer
she would like to know what she would have to do to, because
she is very competitive, to at least have the same score that I
have, and nobody can tell me; although you can tell me the
ingredients, you can't tell me the exact recipe.
The use of the FICO and other scores like that by the
transportation people to make determinations as to who are
better risk to put on the transportation system is baffling.
I don't recall any question of it being asked when I
applied for a credit card or a mortgage or a car loan or
anything like that that would give away whether or not I ever
hijacked a plane or derailed a train or committed an act of
piracy on the high seas. I don't know that you put down that I
was late in paying for my latest shipment of nerve gas or
something. I could understand that being a clue to those
people.
But what is it in your reports, or the reports? Is it just
that people who are not as economically or financially
dependable are greater risks for terrorists? What is in--to be
terrorists? And if my score was so high, can I get upgraded to
first class? I mean, you know, what is their interest in this?
Mr. Spriggs. If I can, Congressman, I mean, what people
have done with the scores is the scores, in many instances,
have replaced the credit report. It is viewed as an objective
way of summarizing the information and taking away the
discretion that some people felt, maybe even me, was
discriminatory in the way that people might have evaluated that
information. In that sense, they may be putting a lot more into
the score than what deserves to be in the score.
The fact that it is proprietary, to me, again, if not
excuse enough, we need to have transparency. We need to have
the FTC scoring the scoring cards. Maybe if they understood it
over at TSA, they would rather have the credit report and not
have the credit score, because again, the credit score is going
to include judgments about whether in the future you would
default on the loan, which may be different than the type of
reliability, responsibility that was implicit in----
Mr. Ackerman. We are in total agreement. I just don't know
what people think is in there, and I don't know what is in
there because nobody is really telling me, that would indicate
that a person might be a greater risk to be a terrorist if he
missed a payment on his car loan.
Mr. Spriggs. And the score may not be telling that at all.
Mr. Ackerman. Darn, I missed that--they repossessed my car,
I think I will go blow up a boat.
Mr. Spriggs. But again, the score may not be even telling
you that you missed a payment. Your score can be lowered for a
number of factors dealing with how that model predicts your
total outstanding liabilities to your income whether you access
that credit line or not.
Mr. Ackerman. You cited before the Equal Credit Opportunity
Act and that prohibits discrimination. Now, why can--if that is
the case, why can the federal air transportation security
people discriminate against somebody with a low FICO score?
Mr. Spriggs. Well, again----
Mr. Ackerman. Is somebody going to, you know, make me take
my shoes off again because I missed a mortgage payment this
week or something?
Mr. Spriggs. The problem is I don't think that--given we
don't ask the right information of these credit scorers, I
don't think that we know whether they comply with the Equal
Credit Opportunity Act. Because the issue isn't just do they on
average not discriminate and have an average disparate impact,
to measure whether they have a real disparate impact, you would
have to know the mean prediction error by each subgroup that is
protected under the Equal Credit Opportunity Act.
And we don't have that kind of information. We don't have
information on how they use missing data. Many credit cards,
many mortgages aren't being reported.
Mr. Ackerman. Well, you and I are on the same wavelength.
There is a complete lack of transparency. But the people who
are looking into terrorism and, you know, blowing up planes and
things like that seem to think that there is a message in that
score for them. And I don't know that they just think that
poorer people or people with less credit or people who can't
meet their financial obligations as quickly are more
predisposed to be terrorists. I have not seen that study.
And you know, maybe those people who know what is in the
report here can tell us what the indication is that they are
looking for. What is it that helps them?
Anybody?
Mr. Duncan. Congressman, I cannot speak on the use of the
scores by the TSA. And it is quite possible that they are
misusing scores. But the broader issue is what is a score? And
I think Ms. Kelly was on the right track when she said we need
broader information and broader education for consumers.
Now, one way that might be accomplished is similar to
methods used in California, is to come up with a composite
score and explain how that composite score is developed so
consumers can get a sense of what the factors are they should
be looking at in seeing those scores develop and how your wife,
for example, might drop one of the credit lines that is in her
name and not in yours, and that might change your score.
But we don't need to have the specifics of each and every
score that is developed in order to provide general information
any more than we need to have each college that admits people
go into great detail about the factors they use in making a
decision as to whether to weight your grade point average
versus your SAT versus your outside academic activities.
So a general education is needed, but not this great
specificity.
Mr. Ackerman. Without beating this issue to death, it would
seem to me you are absolutely right. And we are not getting a
lot of help from the industry as to how one might improve that
score, as far as educating the public. I would like to know,
and I think this information that can be provided by some of
the people here, how many files of scores have been actually
requested and turned over to the Transportation Security
Administration?
You probably don't know that, anybody, off the top of your
head. But could I ask those of you who have access to that
information to provide it to the Committee? Not just FICO, but
any of the like kinds of scores.
Mr. McEneney. I can say that we would absolutely be willing
to follow up. I am not aware that TSA has access to any of
these scores, but be happy to follow up and see what we can
learn on that and get back to you.
They have interpreted the PATRIOT Act as allowing them not
just to access banking financial information, which was the
intent, but to go to any agency that does any kind of record-
keeping. And the Transportation Committee staff has been
briefed. And unless their member was on both that Committee and
this, they are much more in the dark about FICO scores. They
didn't even know what it meant.
But the answer to your presumed question is yes, they say
they have the authority under the law. They have found that
loophole. And being that the briefing took place, it is
presumed by us that they have made the request.
And my request to each and every one of the panelists is to
go back, find out what has been requested. We don't need the
names or any of the specific details, but how many files
actually were turned over.
I know that we can buy that list. If I wanted to get
everybody that was 65 or over, you probably will sell it to me,
with the names and addresses.
Mr. Gillmor. The gentleman's time has expired.
The Chair will recognize himself for some questions.
I want to deal with one area. And that is something which
surprised me and, I think, a lot of other people when I learned
it. That your score is lowered if somebody makes an inquiry
about your credit.
I guess to me, I see no relationship between somebody
making an inquiry about credit and the likelihood of repaying.
Could somebody explain to me or justify or condemn, as
appropriate in their view, why that happens and what is the
justification?
Mr. McEneney. I would be happy to respond.
There are, I think, questions about the circumstances under
which an inquiry will result in an impact on a credit score.
And there are variations in terms of how scoring models look at
those developments. But let me give you one example of how this
can be relevant to someone's credit history.
If a creditor has a relationship with a consumer, obtains a
consumer report on that consumer, and learns that the consumer
is applying for a variety of different credit accounts in
fairly rapid fashion in a short period of time, that may
indicate that the consumer is overextending himself or herself
and thereby presenting a risk to the creditors.
That is one situation where that can occur. Now in the
past, there have been concerns about issues that might occur
with somebody shopping for a home mortgage, for example. In a
home mortgage context, I may go to three or four or five
different lenders in a short period of time. And those lenders
may make inquiries to the bureau, separate inquiries to the
bureau.
What is happening today, as I understand it, is that
creditors are identifying those multiple inquiries of the type
I just described, that happened quickly, and treating them as
one, recognizing them for what they are, somebody shopping
around for the best deal, treating them as one and not creating
that adverse, potential impact on somebody's credit score that
might happen in other situations where the multiple high
velocity of inquiries suggests a risk.
Mr. Spriggs. Again, Congressman, because the models are not
transparent, neither you nor I can say with certainty what they
are really doing. And that is the problem.
If we saw their model and saw the explanation, then we
might agree with the explanation we just heard, that this is a
risk factor because this is someone who is trying to extend
their credit.
We might look at their model and go, You are kidding me?
But without the data to analyze the model and see whether
the introduction to that variable adds anything measurable or
not and what is the bias of that? Does it affect all subgroups
in the same way? Does it affect first-time home buyers as folks
who already have mortgages who are out refinancing?
We need that transparency. We need the FTC to have the
specific scores. It is not enough for consumers to get a
general process. I think most consumers can get the general
process quickly. But because of the type of question you just
asked, a lot of consumers will do some things like that because
they don't know specifically what is in the model. And you may
look at your credit score and go, I pay my bills on time. How
did this happen?
Because maybe it took you five months to look for a house,
and so it didn't clump. Maybe you had three inquiries here and
three there and three there, and suddenly you found your score
lowered.
Without the transparency, we can't have that kind of
debate. It would be the same as if the credit bureaus were
being asked, just to say, we got a report on you, and it was
blank. That would be the equivalent.
Well, the answer to the question was that it would only
apply if those inquiries were bringing out evidence of other
things, which is multiple application for credit. But we don't
have any assurance that that is true. It may be just somebody
inquired, or that different people inquired.
Do you want to respond to that?
Mr. McEneney. There are different types of inquiries. One
inquiry, for example, occurs when a consumer's file is accessed
for pre-screening. Another inquiry is an inquiry is registered
when an existing creditor, for example, obtains a consumer
report on the individual, not at the consumer's initiation, but
because the creditor wants to assess risk with respect to the
consumer.
Those two types of inquiries are set aside. The consumer
has access to those. But other creditors or other users of the
consumer report don't. So they do not impact in any way the
consumer's credit score or credit history. But obviously, the
consumer is entitled to see who is looking at the account.
So that leaves, in large part, the types of inquiries that
I talked about where the consumer initiates some contact with
someone is seeking to obtain some financial product or service.
And that organization, after being contacted by the consumer
makes an inquiry on the consumer.
Mr. Gillmor. But you cannot ensure me that in arriving at
these scores that nobody is just taking an innocent inquiry and
lowering the score, can you?
Mr. McEneney. If I understand the question correctly, is it
possible that there are some out there who have scoring models
that when I go and visit one consumer, one creditor, rather,
and that creditor pulls a single report? If what you are asking
me is might it be the case that another creditor looking at
that single inquiry might have a scoring model that treats that
single inquiry as risky, I can't assure you that that doesn't
happen. I am not aware of it happening. I would be happy to
look into it and see if we can't find whether that is the case.
Mr. Gillmor. Well, suppose somebody wanted to--didn't like
you or somebody else and the orchestrated multiple inquiries
just to drive your credit down? You can't assure me that
wouldn't be successful, can you?
Mr. McEneney. Well, actually, I think the existing law
provides strong assurances that that doesn't happen. Under the
FCRA, a person is entitled to obtain a consumer report only for
limited permissible purposes. And the example you described
clearly would not be a permissible purpose. That would be
someone obtaining access to a consumer report without
permission and there are significant penalties under the FCRA
for doing so.
Mr. Spriggs. But again, Congressman, your question is no
point. If I am searching for a job and my employer, as we heard
about TSA, requires a credit report on me and it is not clear
whether the modeler is being fine tuned enough to say, you
know, here is a company making a credit request on this person.
They got five out there because I am looking at five different
potential employers. We don't know whether the modeler is
discerning those credit inquiries differently than they would
any other credit check on me.
So again, we have to have the transparency. We don't let
the credit bureaus give us blank reports, and we can't really
let the scoring companies give us the blank reports that they
give us. We have to have an understanding of is that what you
did? Is that in your model?
And then we could get into an agreement or a disagreement
with as to whether enough added reduction in error from adding
that variable was present so we could feel comfortable that
maybe we could live with the one or two times that might
happen. Maybe we might look at their model and say for the
increased accuracy of adding that, we think there are so many
more costs that we don't agree with why that is in your model.
That is why we have to have the transparency.
Mr. Gillmor. My time--over my time. I will just follow up
with one thing. Just very briefly, how would you assure that
transparency which you describe?
Mr. Spriggs. I think to give some respect to the
proprietary nature of the data, that the FTC was required to
run their model, was required to give us a report card and let
us know which variables were in, how those variables were
treated, what they do with missing values, what do they do with
discrepancies, if they get a report that says that the
delinquency was being disputed.
If we could get a report card so that we would have enough
information on the various models that are out there, how they
were making their decision, then we could be able to have a
better discussion about what would need to be regulated about
that industry.
Mr. Gillmor. Yes, I think nobody has any problem with
really relevant information. But when you have a bad score
partly dependent on irrelevant information, it is a real
injustice.
The gentlelady from Texas.
Ms. Lee. Thank you, Mr. Chairman.
And I would like to follow up with that line of
questioning. I don't want to be redundant, but I want to
continue to pursue this whole issue with regard to credit
scoring, and I guess it also could speak to financial literacy
in terms of the public, one, knowing up front that credit
scoring is proprietary information and that in fact this is a
product for sale.
Now, those who are financially literate may know that. But
I think that it is very important that somehow as we move
forward that those disclosures are somewhere on credit
applications so that a consumer who may or may not know this
may or may not want to apply for credit.
I mean, I would like to get, I guess from Mr. Pratt, your
feedback on that because certainly this is a business. Some of
us know this, many don't. And when you have such personal,
private information that is packaged for sale, certainly
minimally the consumer, I think, should know that it will be
sold.
Mr. Pratt. Well, I think we are going to probably revisit
some of the ground we have covered previously, but only because
I want to make sure I am answering the question properly along
the way.
The credit file that you and I have in the credit reporting
systems has all the information about how I pay my bills and I
suppose, how I don't pay my bills if I happen to be somebody
who chose to do that. And the scoring model is this
mathematical algorithm over here. And Dr. Spriggs has talked
quite a bit about how he would like to see or understand more
about that model.
And so when a lender orders a credit report and a score, or
orders a score, the score--the credit file data--is run through
the scoring model and a score then pops out on the other side,
if you will. That is sort of the layman's version of it, which
is good enough for me.
So the score itself doesn't contain personal information
about you. It just looks at your credit report and looks at
risk factors, statistically validated risk factors, and says
this is the level of risk we think you have with this consumer
based on the credit report.
Ms. Lee. But it is a formula that provides that
information.
Mr. Pratt. Well, the formula doesn't--the information that
is in your credit file, so in that sense, you have
transparency. You can look at your file, you have the right to.
We know that, we have it under law today. You can access your
file and you can see it and you can look at it and dispute it
and correct it and so on.
If you wanted to look at them, the mathematical model is
just that, it is just a formula on a page, or on pages and
pages, depending on how complicated it is.
It wouldn't tell you, you may be a mathematician, it
wouldn't tell me a lot, because it is just a mathematical
formula which is used to then analyze the data.
Ms. Lee. Yes, I understand that. All I am saying is that we
need to go one step farther, and at least provide information
to consumers that, in fact, this score is being sold. It is a
product.
Mr. Pratt. Or being used. Is your interest in the use of
it, meaning a lender using a score, or----
Ms. Lee. Well, how does the lender get the score? It gets
the score, it pays for it, right?
Mr. Pratt. Well, lenders may have scores on their own
technology platforms that they built themselves, lenders may
buy what might be called a credit bureau score, a credit score
from a bureau.
The bureau actually doesn't own that score in all cases,
sometimes that is a score developed by Fair Isaac.
Ms. Lee. Who owns the score?
Mr. Pratt. Fair Isaac, for example, would build a score,
and the credit bureau would, it would be built based on credit
history data, but FICO, the common term for the company, owns
the intellectual property, which is this mathematical formula.
And so, every time the bureau a file is ordered, the credit
bureau, in order to use that score, actually pays a royalty to
Fair Isaac.
Ms. Lee. All I am saying is don't we have a right to know
that? Don't consumers have the right to know that? Or shouldn't
they know that?
Mr. Pratt. I think the idea of making sure consumers
understand scores are used in the marketplace seems like a
good----
Ms. Lee. Yes, that is all I am saying.
Mr. Pratt. I don't, you know, we are working hard at this
to get there, but----
Ms. Lee. Yes, that is all I am asking. I would think that
people----
Mr. Pratt. Using scores are very common, and having
consumers understand that scores are used is very common. In
fact, there is a whole marketplace of Web-based, you know,
scoring systems where I can go and I can learn about a score
and I can----
Ms. Lee. So a notation saying that your credit score will
be, could possibly be, sold is very sensible.
Mr. Pratt. I don't----
Ms. Lee. Okay. What prevents the sale of credit reports
that are really faulty? I mean, how----
Mr. Pratt. Well, the Fair Credit Reporting Act does two
things. I mean, the FCRA has always said that a consumer
reporting agency must employ reasonable procedures to assure
the maximum possible accuracy of the report.
And that would be the liability, if you will. That is the
duty, and hence the liability for the credit bureau. In 1996,
the Congress enacted a new section of law which said that the
data furnisher, the company that provides data to the credit
bureau, and this would be the basis for your credit report,
those companies, too, have a liability for the accuracy of the
information.
Ms. Lee. So can a consumer seek injunctive relief now? Can
they go to court?
Mr. Pratt. Well, they do have private rights of action
under the FCRA for willful and negligent standards, and states
attorneys generals all have enforcement rights under the
federal FCRA, as well. And the FTC has enforcement.
Ms. Lee. Mr. Brobeck, let me ask you, what is your response
to that in terms of consumers seeking injunctive relief through
the court system for the----
Mr. Brobeck. My understanding is that they have to prove
damages, and that is very difficult to do in many cases. And so
it doesn't happen. And as a result, there are massive amounts
of inaccurate information that is distributed, despite the best
efforts of the repositories.
Ms. Lee. Okay, and finally, Mr. Chairman, let me just close
with regard to going back to the multiple applications, or
multiple inquiries. I know there is a difference between
multiple applications and multiple inquiries.
But in terms of adverse actions, again, Mr. Spriggs, I
understand what you are saying in terms of transparency, and I
certainly think we need to get there, but I also think we need
to know sooner or later, I mean, before, because this is going
to take a while, but I think very soon, and maybe with this
bill we should at least provide the consumer the ability to
understand the fact that if they do apply three or four times
within two weeks they are going to get an adverse action on
their credit report. Or how do we make sure that people know
that they will get dinged if, in fact, they are trying to find
the best interest rate, the best terms, if, in fact, they do
apply to Visa, Discovery, MasterCard, to see which credit card
company has the best terms?
I mean, that is a reasonable way to live. You are, I mean,
right now, it is assumed that the consumer, it is on the
negative, they are overextending themselves, they may be a
risk, without giving them the benefit of the doubt.
I mean, this gives the credit card company, or the
financial institution, the benefit of the doubt. And so I am
trying to figure out how we can make sure that in this bill we
change that.
Mr. Spriggs. The language currently asks for a credit score
with the waits and the explanation of how you might improve the
score. And if the language gets, I don't think you want the
language to get too specific, because these models do change.
The Fair Isaac model today isn't the Fair Isaac model 5
years ago, so I don't know that I want to have you get too
specific. But you may want to get a little more specific as to
what you mean by waits and what the consumer could do to
improve their credit score.
Now, the other problem you have, though, is that, as Mr.
Pratt pointed out, they don't, the credit bureaus, don't always
own the score. They don't own the FICO score.
And so I think you may want to look for a provision that
said, if a negative action was taken because of the score, and
you have to get creditors to, try to get lenders, to be more
honest about whether they were looking at the credit bureau
report or whether, as many of them are doing now, getting much
more mechanistic and looking at the score, if a negative effect
was taken on the score then you got to give me the score----
Ms. Lee. But I am not talking about----
Mr. Spriggs.----and tell me what were the waits and what do
I need to do. Because if they did that, then when I get my
report I would see these are negative factors, applying too
many times for credit, having too many balances, even if they
are zero balances, even if you pay them all on time you have
too many balances out there.
I mean, those types of things should be with that score to
the consumer, so I just don't know how specific I would want
you to get in that language.
Ms. Lee. But that is after the fact, after a consumer has
been denied. What I am saying is, on the front end, Madam X
wants to apply for a mortgage from financial institution A, B,
C and D, to see which financial institution provides the best
rate and terms.
By the time Madam X gets the to financial institution four,
financial institution five that she is getting ready to apply
to says, Oh, you have already, you know, put in four
applications, and so you are a credit risk.
And at that point I would have to----
Mr. Spriggs. If the FTC gives us that report card sooner
rather than later, we can have that information out there.
Mr. McEneney. Congresswoman, I actually think the level of
detail that Dr. Spriggs is talking about could, if you give it
to the consumer, be counterproductive, but I hear exactly what
you are saying, and I think the key is educating consumers.
Now, there are a variety of ways to do that, but if you
look at the protections that exist under the FCRA, the
consumers actually are empowered today to do almost everything
you are talking about.
They can go and whenever they want gain access to the
information the credit bureaus have on them, and it is that
information that forms the basis for the credit scores.
So they can look at that. There are products out there that
help educate consumers on what a score means. Today, and I know
this is after the fact, but today if a consumer gets denied
credit, and it is based on a score, the creditor has to make
available to that consumer the principal reasons that went into
the score, so that the consumer can do two things, one, figure
out whether there is any discriminatory issue that resulted in
the decline, but two, in this context focus on those aspects of
their credit history that are causing the score to decline.
And just to use your example, if one of the reasons that
the score failed to enable the consumer to get credit was too
many inquiries, the consumer would have to be told that.
Ms. Lee. That is after the fact. They have been denied.
Mr. McEneney. Absolutely, so then I think the key is----
Ms. Lee. The purchase of a home would be put on hold.
Mr. McEneney. I agree with you, Congresswoman. The key is
educating consumers on what tools they have under the FCRA
today, because I think it gets them pretty much where you want
them to go on this under existing law.
Mr. Gillmor. The gentlelady's time has expired.
Mr. Brobeck. Could I----
Mr. Gillmor. Very briefly.
Mr. Brobeck. I am going to address your question, as well,
Congressman.
There is a fundamental issue here, and that is the
actuaries are really interested in establishing strong
correlations, not causal relationships. And though it may be
beyond the scope of the legislation, and we have had this
debate in the insurance area for decades--we need to establish
the principle. That there needs to be causation before a factor
is considered to be a risk factor that affects pricing.
Ms. Lee. Thank you.
Mr. Gillmor. Thank you.
The gentleman from Texas?
Mr. Hensarling. Thank you, Mr. Chairman.
As a veteran of the subcommittee, I have sat through six
different hearings and this full committee hearing will be my
seventh. I have heard a wide range of testimony as we consider
the reauthorization of FCRA. Obviously the Committee is focused
on a number of consumer protections.
Paramount to me is the consumer protection of having a
competitive market place for the extension of credit. I think
the testimony has been overwhelming that we do enjoy the
greatest access to credit at the least cost of any nation in
the world.
That one principally seems to be off the table.
Another concern we have obviously is identification theft.
I have said before that I am a member of this Committee who has
actually been victimized by this. It is something I take very
seriously.
But at least at the subcommittee level we have heard
testimony from a number of different law enforcement officials,
as well as the Federal Trade Commission, all who seem to be of
the unanimous opinion that we are better off with the
reauthorization of FCRA as a tool to combat identity theft.
Perhaps there is still some debate on that.
That really leaves us to the questions of accuracy and
privacy. I would like to focus, Mr. Pratt, as representing the
credit reporting industry, on one of the questions I asked at
the subcommittee level. I am still grappling with this
somewhat, but you hear a variety of opinions on the extent of
inaccurate information contained in these credit reports.
And so from the credit reporting industry standpoint, what
measurement do you have?
Mr. Pratt. We actually recently have looked at a couple of
different measurements. Let me share those with you. And if you
would like me to provide more information in writing, we can do
that for the record or in some way that you might like.
We recently asked one of our resellers or several of our
resellers who are in the mortgage reporting area to look at
credit reports as they went through their systems, because they
are in fact in this situation where there is greater
involvement with the mortgage broker, the realtor, the loan
officer. It is more labor intensive. It is a different system,
although maybe more mechanistic than it has been historically.
And we had--we asked the reseller to do two things. One was
to say, How often are you dealing with the file because
something is accurate that needs to be updated, versus, how
often is it really wrong because it was just reported wrong in
the first place? The account never should have been on the file
or the balance was never right, or I never missed a payment,
according to the consumer?
Out of the 500 and some odd files that were reviewed, about
32 percent of the time there was an update of information that
the reseller was engaged. And I think that speaks well for our
reseller members in our association, who provide a valuable
service of making sure in the mortgage lending process data is
as updated as possible.
But it also--in only 1 percent of the cases was there an
actual identified inaccuracy.
We then went back and looked at several populations of
consumers, because similarly the consumer groups have often
said, Well, let us sit down with consumers and have consumers
look at reports and see how those reports look. And let us try
to identify what is right or wrong with those. And in this
case, we picked out several sets of data, gathered one over a
24-month period of time. And these were consumers who, at the
rate of 100,000 a month were in fact ordering credit files,
their file disclosures, because they were concerned about
fraud. And we asked the question, How many ever contacted us
afterwards?
In other words, these are consumers who really looked at
their files. That is a good measure. And only 10 percent of the
consumers ever called us back, even called us back, not
necessarily disputed something, but called us back to ask a
question.
We looked at another population of consumers, 180,000
consumers. And we asked the same questions and we said how--
they got their files. They literally ordered them. They were
not adverse action oriented. In other words, these aren't
consumers who got a negative notice saying that, You are
getting this file because of adverse action.
And again, we asked the question, How many of you called us
back? The rate was 5 percent.
Now we drill down and look at the rate of disputes and then
you can--there is a lot of other data. And I don't now how far
you want me to go into this. We aggregated those several sets
of data to begin to get a better sense of what accuracy really
means. And we did it from a market perspective with mortgage
reporting. We did it from a consumer's perspective, using
populations of consumers who literally order their files,
exercise their rights under FCRA and looked at their file.
They had access to toll-free numbers. They had access to
live personnel. It was not a complicated process for them to
have disputed information. And again, the percentage response
rates were quite small in these two populations.
Mr. Hensarling. Mr. Duncan, you represent the National
Retail Federation, which I assume has countless, countless
members across the nation. My assumption would be that those
who use credit reporting services, have an interest in those
reports being accurate. Do you perceive that there is has been
competition among the players in the marketplace, in the credit
reporting services?
In other words, would a company that consistently produced
inaccurate information to your membership, would they be
punished by the marketplace?
Mr. Duncan. There is actually quite a bit of competition in
the marketplace for accuracy of scores. And you are absolutely
correct, the major bureaus come to our members all of the time
arguing that their reports are slightly more accurate than the
next guys report, or much more accurate than the next guys
report.
And there is quite a bit of competition. And our members in
fact will sometimes pull two or three and compare them and run
models themselves to determine which might be more accurate.
And they may find that that varies slightly from area to area
within the country.
Mr. Hensarling. So the people who are using these reports,
like your membership, have an interest in accurate information
as well as the people who produce the report, assuming they are
logical profit-making ventures.
And assuming the consumer wants to receive the credit that
he feels he is due, he has an interest in seeing that there is
accurate information in the system. I guess I am trying to
figure out who has the incentive to put a lot of inaccurate
information in the system?
I see that my time is just about to run out. Let me ask one
more question.
And that is to you, Mr. Pratt. The issue of offering free
credit reports has arisen. And I believe you gave testimony
that, if I heard you correctly, the vast majority of credit
reports that are issued today already are free. Did I hear you
correctly?
Mr. Pratt. Yes, sir. About 95 percent of the 16 million
files that are given to consumers each year are given free of
charge.
Mr. Hensarling. Well, I certainly have an open mind on the
issue, but I am just curious, if that is indeed accurate data,
if this is maybe a remedy in search of a problem, considering
we already have 95 percent of the credit reports being issued
for free, in the first place. Obviously, identity theft is a
very serious matter, but increasing the cost in the system that
would raise the cost of our credit or make it less accessible
is still an open question in my mind whether this is a good
method by which to attack that problem.
And with that, I will yield back the balance of my time,
Mr. Chairman.
Mr. Gillmor. The gentleman yields back.
The gentleman from Washington.
Mr. Inslee. Thank you.
Just following up on what Mr. Ackerman brought up a while
back about access to credit reports for use by the
Transportation Safety Administration for deciding who gets on
airplanes, I just want to tell you at least one member has a
real concern about that because the whole TSA system is broken.
And we are keeping people off airplanes right now because of
the failures in our system?
We had a city administrator and a police chief from a
little town, Bothell, Washington, where I am from, couldn't get
on a airplane because the computer system is so fouled up with
the TSA and the airlines cannot guarantee the correct identity
of the decision whether to let you on an airplane or not. And
if you happen to have the name of somebody who is under
suspicion, you have had an identity theft and a sort of travel
theft by the U.S. government.
So I want to tell you there is real sensitivity about this.
And we are--at least I am going to try to work to make sure
that we don't allow this system to get out of hand as it is
right now preventing people from getting on airplanes.
But I want to ask you a deeper question and that is whether
the fair credit reporting system is really just going to become
a nullity, give the consolidation in the industry? And the
reason I ask you that question is that we have substantial
rights for consumers that are guaranteed by this act as long as
there are not affiliates involved in interpreting or scoring
their credit or providing their services.
But where we have--and which I believe we will now have
very significant consolidation in the industry where we have
affiliates both involved in lending and selling insurance and
providing securities and a whole host of other services, we
don't have that same level of protection, or any of those
protections for consumers, either from the sharing of
transactional experience amongst affiliates, which consumers
can't stop even if they wanted to, under federal law. And the
situation where they are going to get opt out notices that
nobody can read or understand.
And basically, all of the protections that all of the 60
members of this Committee that are assiduously trying to
protect aren't going to exist for a significant number of our
consumers once they become customers of a consolidated
industry.
Essentially, basically, what we have told consumers is you
don't have these rights vis-a-vis any credit authorizing or
granting organization that has affiliates as to transactional
experience. And as to all of your other experience, unless you
are smart enough to read a five page disclosure opt-out
statement to opt out of that, you won't have any rights in that
regard.
So we are really going to a two-tier system of consumers in
this country. Those who deal with non-affiliated credit
authorizing and issuing organizations, they have certain rights
under the statute. But those who deal with other consolidated
parts of the industry do not in real life.
Now, is that a valid concern? And if it is not, why not?
And if it is a concern, how do we move to a situation where the
general thrust of the whole credit reporting protecting system
will include those consumers who deal with what I believe are
efficient systems of consolidating these multiple
organizations?
It is a big question. I will just throw it open to the
panel.
Mr. McEneney. Congressman, if I may provide some feedback
on that.
First of all, I don't see a situation where affiliated
entities would ever be in a position to forego the information
that is provided by credit bureaus. And the reason I say that
is even the largest affiliated entities only have limited
contact with their customers. They need, for risk assessment
purposes, including identity theft and credit control purposes,
to access the other portions of a consumer's record which they
don't have. And the source of that information is the credit
bureaus.
So I don't see it being at risk for consolidation where
those with affiliated entities can forego the products that are
subject to the protections of the FCRA.
In the context of affiliate sharing, though, it is clear
that in 1996 Congress set up a mechanism where affiliates could
share information amongst themselves about individuals so long
as they gave those individuals certain rights, namely the
notice and opt out right that you mentioned.
Now, the FCRA notice and opt out right is a simple one. I
understand that there have been some complications as a result
of other disclosure requirements that perhaps have reduced that
simplicity. But in at least one respect, consumers in an
affiliate sharing context have a more powerful tool than exists
for them with respect to more traditional FCRA situations. And
that is the tool to opt out, to say, affiliated entities, you
may not share these types of information at all with your
affiliated entities. It is a very powerful consumer protection
tool.
The other thing I would point out is that the whole reason
for affiliate sharing is to try and enhance and expand customer
relationships. And so these affiliated entities have very
powerful incentives to make sure that the way they use this
information meets those goals. And I think that is a
significant impediment to the sorts of problems arising that
might arise in other contexts like where you have a credit
bureau that doesn't have customer relationship with the
individual.
Mr. Inslee. Let me--since you volunteered for this duty,
let me just ask you a follow-up question. What do we tell
consumers--I have just read some testimony in the Senate
Banking Committee by a particular financial group, I won't name
them here. And it says that ``It is able to use the credit
information and transaction history that we collect from
affiliates to create internal credit scores and models that
help determine a customer's eligibility for credit.''
Now, I understand what they are saying is that they are
able, if I understand the testimony, they are able to create
internal credit scores and models that determine credit
worthiness and whether or not to issue certain products,
whether to actually make a solicitation for a product, without
being subject to the protections to consumers that are outlined
in this act.
And I suspect that that will increase over time with the
further consolidation in the industry. If that is true,
shouldn't we be concerned to somehow expand these protections
to this increasing, what I understand to be, internalization of
this credit worthiness in the recording system?
Mr. McEneney. Well, I am familiar with the testimony of
which you speak. And my understanding of how that works is as
follows.
Yes, it is possible to use this information, shared among
affiliates, to develop models, for example, to decide who you
may want to market to. Now, the decision of whether or not to
solicit somebody for a product typically is not viewed as
adverse action. In fact, there are some consumers out there who
may view not being solicited as a positive thing.
I am also aware that what typically happens in the
affiliate sharing context is once the solicitation goes out,
there has been information that may be shared amongst
affiliates. And a consumer responds. Typically, what happens is
a credit report will be pulled from the credit bureau to make a
fresh assessment as to whether or not the consumer meets the
risk profile based on the consumer's entire credit history, not
just what was had by the affiliates up front.
And of course, under those circumstances, all of that
information in the credit report is subject to full protections
under the FCRA. And if that credit report results in adverse
action, the consumer receives an adverse action notice
indicating that the report was used for the adverse action and
tells the consumer the consumer's got the right to a free
report by going to the credit bureau that furnished the report.
Mr. Gillmor. The gentleman's time has expired.
Mr. Brobeck. There is a risk that among these large
financial institutions that they will try to identify sub-prime
borrowers, and they will use their own credit scores that may
not be accurate as a basis for targeting customers to try to
sell them high-priced loans. And then, if they do not utilize
the credit scores and the information in the repositories, the
consumers will not have the right to that information that is
in the repositories and they will not know that, perhaps, the
reason that they were only offered a sub-prime loan, is because
of inaccurate information within that large financial
institution.
Mr. Gillmor. Mr. Dugan.
Mr. Dugan. The premise of the question is that it is
somehow a bad thing to share information from one affiliate to
another to offer another product to the consumer. And I think
that is the thing that our industry would take issue with.
Mr. Inslee. I am not saying that.
Mr. Dugan. Well, I guess the kind of thing that we see is
someone has a loan with a bank, for example, and realizes that
if they share that information with their mortgage lending
affiliate, based on the information that they know about their
consumer, they could put them into a loan, a home equity loan,
say, at a lower interest rate that is tax-deductible, that is
in the consumer's interest. And that is exactly the kind of
thing that affiliate sharing allows. It is a good thing.
And the distinction between the bank and its affiliated
mortgage bank is not one that we think the consumer is aware
of, thinks is a meaningful distinction, treats it all as one
entity, and is appropriate. That is the reason why diversified
companies are able to offer those sorts of products. And we
think it is a good thing, not a bad thing.
Mr. Duncan. If I may amplify on just one point that Mr.
McEneney made. And that is typically retailers use affiliate
sharing to extend their reach to the customer, to expand on the
services offered.
I am aware of one retail creditor, a traditional retailer
who has credit in the back operation. They have an affiliated
catalogue operation. What they will do is that if a consumer
who doesn't quite have a high enough score to qualify for a
credit card with them, they will look at their affiliated
entity, in this case the catalogue operation, and say, This is
someone who has been shopping with us regularly through the
catalogue. This is someone we would like to have a long-term
relationship.
And they will give them a few extra points so that they
will qualify, thus bringing more people into the credit market
and more people into the system.
The goal in affiliate sharing is to become closer to your
customer, certainly for retailers and I know it is true for
others in the business as well.
Mr. Inslee. Sir, can I make one brief comment.
I respect all you said about the benefits of affiliate
sharing and the marketing incentive that folks have. I just
think there is a valid concern here while the combination of
greater use of transactional information together with what I
consider sort of a defective process of opting out will not
assure the consumer that the correct information is used in
credit, life insurance and other decisions. And I just think
there is some fat process we need to go into to assure that.
Thank you.
Mr. Gillmor. I thank the gentleman. The gentleman's time
has expired. All time for this panel has expired.
And I want to thank all of our panelists for your very
helpful testimony. And we will proceed to the third panel.
I would like to welcome panel three. And without objection,
all of your written statements will be a part of the record.
And you will be recognized for five minutes to summarize your
testimony.
Mr. Joe Belew?
STATEMENT OF JOE BELEW, PRESIDENT, CONSUMERS BANKERS
ASSOCIATION
Mr. Belew. Thank you, Mr. Chairman.
In the interest of time, I am going to drastically shorten
my testimony.
Mr. Gillmor. All will be very grateful and appreciative.
Mr. Belew. My name is Joe Belew.
Mr. Gillmor. And give your testimony much more weight
because----
[Laughter.]
Mr. Belew. I thought it might be taken more seriously.
My name is Joe Belew. I am President of the Consumer
Bankers Association here in Washington. Our members include
most of the nation's largest bank holding companies, as well as
regional and super-community banks. Those members collectively
deliver about two-thirds of all bank-issued consumer credit in
the United States.
Thank you very much for the opportunity to testify on the
importance of extending and improving the Fair Credit Reporting
Act. This is one of CBA's top priorities, if not the top
priority this year.
We do have numerous suggestions for improvements in the
bill to refine it. But the authors and co-sponsors really are
to be congratulated for the incredible amount of time and
effort that has gone into this so far. They are also to be
congratulated for trying to move this piece of legislation
which is so critical because of the sunset provisions.
The two most important items for us are that the bill
recognizes the need for an efficient, nationally uniform credit
reporting system, and it also provides new tools to fight
identity theft. We also are pleased that the bill addresses the
ways that disputed credit information is handled, the accuracy
of credit files and the issue of credit scores. We should note
that we have also written a letter to Speaker Hastert asking
that he be on the ready to provide floor time in a speedy
fashion when the Committee has, with all due process,
considered the legislation and hopefully passed it out.
Let me talk for a moment just about national uniformity and
rules governing credit information and procedures, because they
truly are essential. They ensure that lenders have consistent
information about consumers throughout the country that can be
used to make fair and equitable credit decisions on highly
competitive prices and terms. Without preemption, the States
could establish different rules for the reporting of late
payments, defaults or other information in a well-intentioned,
but mis-directed, effort to protect their consumers.
Lenders today can rely on the accuracy of reports, and that
is why we have record rates of home ownership and greater
access to credit by all sectors of society. This is especially
true for low and moderate income borrowers.
I do want to go on the record as pointing out that far from
being a ``grab of power'' by the federal government, there is
no new preemption. We are simply extending the status quo.
There are no new restrictions on the States.
Secondly, thank you very much for addressing the issue of
identity theft. CBA and its members have been actively working
with the Treasury Department, the banking agencies and other
industry groups on this critical subject. We would remind the
members that we have financial concerns, as well as altruistic
ones, since our members must absorb the losses from these
frauds. We also want to spare our customers the serious
problems that follow ID theft. And regrettably, we also must
make sure that the solutions we end up with don't actually aid
the fraud artists.
The bill's formalized system for fraud alerts on credit
reports is an important part of any solution. They will warn
financial institutions and other lenders of past identity theft
and we endorse this concept.
Again, however, there is a cautionary note. Consumers must
be forewarned that fraud alerts are serious and they should
only be used where it appears that ID theft has actually
occurred. These alerts will likely impede the consumer's
ability to get the fast credit that they have become accustomed
to. Still, we support the concept.
The bill helps consumers keep fraudulent information from
being placed in their file, which is good, through Section 205.
Again here, CBA members have one caution. We also must
acknowledge the existence of unscrupulous so-called credit
repair clinics that try to delete accurate but unfavorable
information in credit files. This area may need still more
scrutiny.
We support and encourage the development of best practices
and especially enhanced efforts for consumer education. CBA in
particular has been in the forefront of tracking and
encouraging financial literacy efforts by financial
institutions. And in this regard, the Federal Reserve Board
should also be recognized, along with the FTC, for their good
work to date.
Third and last, we would ask that particular attention be
given to coordinating this bill with existing law and with the
banking regulators' roles. For example, one section directs the
federal banking agencies to establish procedures for banks to
spot possible identity theft. We really need, as has been
mentioned earlier today, to coordinate that with Section 326 of
the PATRIOT Act.
And I will offer one other example: in Title 3, banking
regulators, and not just the FTC, should be charged with
developing model procedures for consumers to contact creditors
and agencies regarding fraudulent information in their files.
Mr. Chairman, as you know, we have a great number of other
comments. They are in the written record. But we congratulate
you and the Committee and will certainly take questions when it
is appropriate.
Thank you.
[The prepared statement of Joe Belew can be found on page
102 in the appendix.]
Mr. Gillmor. Thank you.
Ms. Kayce Bell?
STATEMENT OF KAYCE BELL, CHIEF OPERATING OFFICER, ALABAMA
CREDIT UNION, ON BEHALF OF THE CREDIT UNION NATIONAL
ASSOCIATION
Ms. Bell. Thank you, Chairman Gillmor.
Good afternoon. And as did Mr. Belew, I will strive for
brevity.
It is an honor to be here to present testimony for you
today on the Fair and Accurate Credit Transactions Act of 2003.
I am Kayce Bell, the chief operating officer of Alabama Credit
Union in Tuscaloosa, Alabama. I am here on behalf of the Credit
Union National Association, which represents more than 90
percent of the nation's 10,000 credit unions and their 84
million members.
My written statement submitted earlier addresses most of
the provisions of this important legislation in full detail.
But because of time constraints, I would like to address only
certain portions of the bill.
CUNA and America's credit unions wholeheartedly support
Title I of H.R. 2622, which makes permanent the reauthorization
of the expiring uniform national standards of the Fair Credit
Reporting Act. If the broad set of preemptions that apply to
the seven key provisions of FCRA are not reauthorized,
consumers will be subject to a confusing and overwhelming
patchwork of requirements.
Consumer's personal information would be less accurate and
secure in a Balkanized, patchwork national system. And there
could be proportionately greater harm by lack of access to
credit for those of low to moderate incomes and for small
business owners.
CUNA therefore applauds the Committee's efforts to make the
uniform national standards permanent. We also commend the
sponsors of this legislation for addressing the very serious
problem of identity theft. We support the identity theft
provisions of H.R. 2622 in general and think that they will
significantly reduce the occurrence of identity theft. With
regard to some of the specific provisions, the Section 201
investigation of changes of address will be a sound identity
security practice. However, we will need some time to change
our systems and would recommend 1 year before this provision
would become effective.
Section 202 requires the consumer reporting agencies to
include a fraud alert in the consumers file, when requested,
and to notify all users of the existence of that fraud alert.
We support this provision because it provides protection to
consumers.
However, we would like to draw your attention to the fact
that Section 202 does not address under what circumstances and
procedures the fraud alert would be removed and the users would
no longer be subject to Subsection 3.
Section 203 calls for the truncation of credit card and
debit card account numbers, and we feel this is another sound
security practice.
Section 205 calls for the blocking of information by the
consumer reporting agencies resulting from identity theft. We
support the provision, but we are concerned that some consumers
may file bogus police reports to either remove or correct
derogatory information on their credit report to obtain credit.
We recommend that the consumer reporting agency also be
required to notify the furnisher of information when the agency
declines or rescinds the block under this section.
Section 206 requires the establishment of procedures for
depository institutions to identify possible instances of
identity theft, i.e. red flag guidelines.
The red flag guidelines will be a very useful tool, but we
request that there be a good-faith standard in any compliance
requirement imposed on depository institutions to protect
against unwarranted liability.
Section 301 requires the FTC to prescribe rules for the
coordination of consumer complaint investigations. We think
this idea is an excellent one, particularly if it results in a
system whereby the victim need only report the identity theft
to a single entity.
We support Title IV, as well, pertaining to accuracy of
consumer records in general. Section 402 provides that
furnishers may not report information to CRAs if the furnisher
knows or has reason to believe it resulted from fraudulent
activity, including identity theft.
While we certainly understand the intent, we are concerned
that the reason-to-believe language is problematic and may well
result in an interpretation that leads to more lawsuits and/or
enforcement actions.
We support Title V in general, too, and commend its
sponsors for providing consumers, upon request, with a credit
report and credit scores, including a summary of how the scores
were derived and how the consumer can improve the scores at no
charge and on an annual basis.
We fully recognize that providing consumers upon request
with the aforementioned information will result in indirect
costs. We believe, however, that such costs will be
significantly outweighed by the benefits to our members in
terms of a better understanding of their credit status.
In conclusion, CUNA strongly supports the permanent
extension of the preemptive provisions of the Fair Credit
Reporting Act. In that regard, we also welcome the
Administration's support of this important goal, as well as
several of their ID theft suggestions.
Although the consumer groups do not support preemption,
their testimony does include several suggestions worth serious
consideration. But making these national standards permanent is
a critical claim in assuring that our nation's consumers have
easy access to credit, and to ensure that they receive fair and
appropriate protections of their financial information, is
extremely important to us.
And nearly as important are the provisions to provide
greater protection to our consumers against identity theft. Our
economy depends on it, and our citizens deserve it.
Thank you, and I will be happy to answer any question of
the Committee.
[The prepared statement of Kayce Bell can be found on page
111 in the appendix.]
Mr. Tiberi. [Presiding.] Thank you. Mr. Hilary Shelton,
thank you.
STATEMENT OF HILARY SHELTON, DIRECTOR, NAACP, WASHINGTON BUREAU
Mr. Shelton. Thank you. Thank you for inviting me here
today, Chairman Oxley, ranking Member Frank, ladies and
gentlemen of the Committee. As you mentioned, my name is Hilary
Shelton, director of the NAACP's Washington bureau.
The NAACP is our nation's oldest and largest and most
widely recognized civil rights organization in our country.
Over 2,200 membership units across our country, 500,000 card-
carrying members and branches in each of the 50 states in our
nation.
Credit and the ability to obtain credit is crucial to our
nation today. Thus, I was especially pleased to be invited by
the Committee to talk to you about the unique problems faced by
racial and ethnic minority Americans in obtaining and
maintaining a solid credit rating.
Despite years of civil rights progress, laws and education,
racial bias and discrimination are still crucial problems in
the United States today.
It is in our nation's financial arena that this is
especially true. Race, national origin and gender continues to
control the type and terms of credit availability to any
individual.
Unfortunately, there seems to be a quiet acknowledgment and
acceptance on the part of credit report providers that credit
scorers, the lenders and the regulators that racial and ethnic
minorities on average have significantly worse credit reports
and lower credit scores than their Caucasian counterparts.
This, in turn, means that lenders today disproportionately
reject racial and ethnic minority applicants, or on the whole
racial and ethnic minority Americans end up paying more for
credit.
In the spring 2000 edition of the Federal Reserve of
Boston's newsletter, Peter McCorkell, the executive vice
President and General Counsel of Fair Isaac and Company, was
asked if credit scoring resulting in higher rejection rates for
certain racial and ethnic minorities than whites.
His response was, yes. He then went on to justify this
response by stating that, unfortunately, income, property,
education and employment are not equally distributed by race or
national origin in the United States.
Since all of these factors influence a borrower's ability
to meet financial obligations, it is unreasonable to expect an
objective assessment of credit risk to result in equal
acceptance and rejection rates across socio-economic or race,
national, origin lines.
This assumption, that low-income and racial and ethnic
minority Americans are less likely to meet their financial
obligations, is simply wrong.
Studies have shown that the majority of low-income people
pay their bills on time, and that, in fact, low-income
Americans have lower default rates on their loan and credit
card bills than their wealthier counterparts.
This acceptance of the existing racial bias furthermore
also failed to recognize the fact that many middle-and upper-
class income Americans are subject to predatory lending at a
higher rate than low-income white Americans.
When racial and ethnic minority Americans are blocked out
of receiving loans or are charged more in interest, they have
less to invest and their wealth-building capacities are
diminished.
Thus, not only is the current system blatantly unfair to
racial and ethnic minorities, but it is self-perpetuating, as
well.
In my written testimony, I have provided just a few of the
many reasons that we can identify that are behind the racial
and ethnic disparities that exist in credit reporting and
credit scoring.
For the sake of time, I will not repeat them here. But I
hope that all of the members of this Committee will take the
time to review my written submission.
In summary, let me just say that disparities in credit
reporting and credit scoring is becoming more and more
problematic as credit reports and credit scoring are being used
increasingly for more than mortgages. They are also being used
now to determine if homeowners or automobile insurance will be
underwritten and at what rate, for car loans, house or
apartment rentals, utilities and in some cases, even hiring
decisions.
Lastly, while I was invited here today to primarily discuss
the impact of credit reporting and credit scoring on racial and
ethnic minority Americans, as well as some of the reasons
behind the unfairness, the NAACP would also like to make a
recommendation for improving the process.
It has long been the contention of the NAACP that openness,
transparency and sunlight help us understand what we are up
against. It also intends for companies to be more sensitive to
the needs of racial and ethnic minority communities.
The NAACP would love to see the process behind credit
reporting and credit scoring more open, better regulated and
better understood by the American public, the people being
rated and scored.
Specifically, the NAACP joins other groups such as the
Center for Community Change in recommending that the Congress
establish an effective federal oversight process of all
statistical scoring systems. Such oversight should be conducted
on a regular basis, and should focus on fairness and the
validity of all systems. We also support any and all
initiatives that create credit reports making them more
available to individuals on a consistent basis.
If we are a nation--if we as a nation are going to meet our
full potential, we need to ensure that the opportunities are
made available to all Americans regardless of their race,
national original, gender or age.
Ensuring that they have access to credit would be a big
start.
I would like to again thank the Committee for the
opportunity to be here with you today and to discuss the impact
that credit reports and credit scoring has on racial and ethnic
minorities.
I join with the leadership, the staff and the general
membership of the NAACP in offering my assistance to develop
national policy that will help all Americans regardless of
their race, age, gender, ethnic background or other to obtain a
solid credit rating.
I also thank you for the opportunity to be here today, and
welcome the opportunity for questions.
[The prepared statement of Hilary O. Shelton can be found
on page 238 in the appendix.]
Mr. Tiberi. Thank you, Mr. Shelton, for your testimony.
Mr. Taylor?
STATEMENT OF D. RUSSELL TAYLOR, CHAIRMAN, AMERICA'S COMMUNITY
BANKERS
Mr. Taylor. Yes, good afternoon. Thank you, Mr. Chairman.
And thank you to the Committee.
My name is D. Russell Taylor. I am the President and CEO of
a state-charted mutual savings bank located in New Jersey, a
$431 million state-charted mutual savings bank located in
Rahway, New Jersey, and have the privilege today of testifying
on behalf of America's Community Bankers, serving this year as
its chair.
I would like to thank you for the opportunity to testify
today on H.R. 2622, the Fair and Accurate Credit Transactions
Act of 2003. ACB wholeheartedly endorses H.R. 2622 and urges
Congress to pass this legislation expeditiously.
First and foremost, ACB supports Title I's permanent
reauthorization or the FCRA's uniform national consumer
protection standards. The preservation of these uniform
national standards is imperative to maintain the efficiency of
consumer credit markets and the competitiveness of the economy
as a whole.
FCRA is too often evaluated in the context of large
financial institutions. This does not paint the whole picture.
For example, the Rahway savings family of companies includes
both the bank and an insurance agency. We are by no means a
large financial institution. Yet FCRA's uniform national
standards helps small and medium-sized companies like mine
better serve our communities.
As both a bank executive and also a victim of identity
theft, I also appreciate the tools provided in Title II for
banks and consumers to address the growing problem of identify
theft. We are concerned, however, about the new legal
liabilities Section 202 would place on the users of credit
reports.
Credit reports currently include an alert facility allowing
consumers to indicate they have been victims of identity theft
and to caution lenders that credit applications could be
fraudulent.
Because their alerts have a variable degree of accuracy or
completeness, lenders should not be bound by specific
instructions found in the fraud alert.
Instead, lenders should be permitted to use whatever
reasonable and practical measures are appropriate to verify the
identify of the person, rather than blindly adhering to
specific instructions found in the fraud alert, which may or
may not be complete.
Section 202 should also be clarified such as the new
penalties apply only to credit fraud, and not to legitimate
credit applications.
ACB understands that the accuracy of credit report
information is the foundation upon which our national credit
reporting system is built.
It is in the best interest of all parties that information
be as accurate as possible, errors be corrected quickly and
consumers identified theft claims be handled in an efficient
and timely manner.
We believe that title four will help improve the accuracy
of credit information.
The continued integrity of the national credit reporting
system demands that credit reports be as accurate as possible.
In our June 12 testimony, ACR supported empowering consumers to
proactively manage their credit information by providing them
access to free annual credit reports. Such access is already
available in six States, including my home State of New Jersey.
We are pleased that this bill will offer this to all
Americans as well as provide consumers with information on how
a credit score is derived, and how their credit score may be
improved.
ACB also believes that H.R. 2622 should include a general
effective date of 1 year following the bill's enactment. For
provisions of the bill requiring the issuance of regulation,
the effective date should be 1 year after the regulations are
issued. The removal of the sunset provisions in Title I of the
bill should take effect immediately.
Given that the FCRA's uniform national standards for
consumer protections are scheduled to expire by the end of the
year, we sincerely hope that consideration of other issues will
not slow down or threaten the passage of this legislation.
One subject the Committee will likely consider is an issue
previously raised by Congressman Gary Ackerman. ACB and others
in the industry have significant concerns about the impact this
amendment would have on paperwork burden, operational costs,
and the continuing commitment of furnishers to provide accurate
credit report information.
We continue to work with members of the Committee to
resolve the concerns on both sides.
ACB believes that provisions in the bill, such as access to
free annual credit reports and the threat of stronger penalties
on both users of credit reports and furnishers of credit report
data, will help address the concerns raised by Representative
Ackerman.
In conclusion, ACB believes that H.R. 2622 strikes the
appropriate balance of protecting consumers and properly
regulating information sharing practices. We commend the
authors of this legislation for crafting a fair, balanced and
effective bill to improve FCRA and our nation's credit system.
ACB strongly endorses H.R. 2622, and urges the Committee in
the 108th Congress to pass this measure as expeditiously as
possible.
Again, we thank you for the opportunity on behalf of ACB to
be able to testify today, and we look forward to your
questions.
Thank you.
[The prepared statement of Hon. D. Russell Taylor can be
found on page 253 in the appendix.]
Mr. Tiberi. Thank you. You get bonus points for finishing
for under five minutes.
Thank you very much.
Mr. Hoofnagle?
STATEMENT OF CHRIS JAY HOOFNAGLE, DEPUTY COUNSEL, ELECTRONIC
PRIVACY INFORMATION CENTER AND MR. L. RICHARD FISCHER, VISA
U.S.A.
Mr. Hoofnagle. Thank you, Mr. Chairman, for extending us
the opportunity to testify today on H.R. 2622, the FACT Act of
2003.
My name is Chris Hoofnagle, and I am deputy counsel with
the Electronic Privacy Information Center. We are a Washington-
based research group that was founded in 1994 that concentrates
on privacy and civil liberties.
Our written statement for the record today has been
endorsed by the Privacy Rights Clearinghouse, Junkbusters
Corporation, Computer Professionals for Social Responsibility,
Privacy Times, Consumer Action, Privacy Activism, the
Electronic Frontier Foundation and the National Consumers
League.
We are unified today in stating that the FACT Act does not
go far enough to address the problems identified in the House
and Senate hearing records. The record shows that there is a
widespread public concern about the relationship between
information sharing and identity theft, that there is a desire
amongst the public for real protections for privacy, and that
there is a renewed concern that credit scores undermine the
openness principles of the FCRA.
We believe that the Congress can address these problems and
urge the Committee to go farther, to create more protections in
2622.
First, we recommend that Congress should not tie up state
legislators by preempting State law. We strongly believe that
the case has not been made for permanent preemption. As was
pointed out by previous witnesses this year in the hearing
record, the 1996 amendments themselves create an uneven State
landscape. The 1996 amendments specifically exempt three States
from some requirements. And they also allow the settlements of
the attorneys general to stand.
There is not a nationwide standard for credit reporting. We
should not pretend that it exists. Nor should we pretend that
creating a nationwide standard promotes consumer protection
principles.
We have heard a lot of talk about this issue today, but I
would point out that there are seven separate provisions that
are going to be preempted if this bill passes. And there hasn't
been an analysis of all these seven provisions and whether or
not all of them are appropriate for preemption.
Take the example of pre-screening, it would be very easy to
comply with an uneven landscape, where different states made an
opt-in standard for pre-screening. However, representatives of
the industry have made it sound like compliance with an opt-in
system would be impossible. And that is simply not the case.
We have also heard that the industry would like flexibility
and that they don't want a one-size-fits-all solution for
identity theft. But at the same time, they are asking consumers
to accept a one-size-fits-all standard for affiliate sharing
and for other preempted provisions.
They get flexibility whereas consumer protections are cut
off on their procrustean bed. Eliminating States' ability to
develop additional safeguards for privacy is a dangerous
precedent, and it has only occurred in a few privacy statutes.
By and large, federal privacy laws operate and allow
states, the laboratories of democracy, to develop innovative
safeguards as required. Accordingly, we strongly recommend the
Committee remove Section 101 from the bill in its entirety.
Second, substantive privacy protection should be added to
the FCRA to protect individuals against identity theft. H.R.
2622 does not include these protections. Let me suggest some
just briefly.
If credit grantors were required to spend just a little bit
more time before granting credit, evaluating accuracy of the
application, a lot of identity theft would be prevented. Beth
Givens of the Privacy Rights Clearinghouse estimates that,
perhaps, the majority of identity theft could be prevented if
credit grantors were simply required to inspect credit
applications more carefully and make sure that there are not
inconsistencies with information on the CRA file.
We also strongly recommend that consumers receive notice
whenever suspicious activity occurs on their report. Suspicious
activity includes multiple inquiries in a short period of time
or when negative information is furnished to the CRA. Giving
notice to the consumer will allow the consumer to take
proactive steps to protect privacy.
Our third recommendation is to make substantive
improvements to the credit reporting systems to minimize
inaccuracies. Documents obtained by EPIC under the Freedom of
Information Act indicate that the number of consumer complaints
to the Federal Trade Commission regarding the credit reporting
agencies is increasing dramatically.
In 2001, the FTC received over 8,000 complaints. Last year,
it received over 14,000. We received these documents just a few
days ago, and we request they be placed in the hearing record.
In our written statement, we detailed the frustration that
consumers face when dealing with the consumer reporting
agencies. In sworn statements before courts that we have
included in the record, former employees of the CRAs claim that
they were required to handle 100 consumer files a day. That
means that they only had four minutes to dispose of each
consumer's case file.
Clearly, investigation and reinvestigation cannot be done
in four minutes. We think that there is an opportunity in the
FACT Act to improve reinvestigation duties.
As I am running out of time here, let me conclude by urging
the Committee to carefully reconsider the record based on this
debate. We think that the FACT Act fails to even mention many
of the problems raised by the public interest community. It
simply tends to require studies, rather than the creation of
new rights and responsibilities. Consumers deserve and need
more to protect themselves from identity theft, to protect
their privacy and to ensure accuracy and fairness in the credit
reporting system.
[The prepared statement of Chris Jay Hoofnagle can be found
on page 175 in the appendix.]
Mr. Tiberi. Thank you.
Mr. Fischer.
STATEMENT OF L. RICHARD FISCHER, VISA U.S.A.
Mr. Fischer. Good afternoon. The last panelist in the last
panel.
My name is Rick Fischer. I am a Partner in the law firm of
Morrison and Foerster. I am pleased to be here on behalf of
Visa.
Visa is the largest consumer payment system in the world.
There are more than 1 billion Visa branded cards in use. And at
the present time, Visa transaction volume now exceeds $1
trillion annually.
I have submitted a very detailed statement, so that I am
not going to repeat it here. What I am going to do is focus on
two or three points and then comment on some of the things that
I have heard in this panel and other panels very briefly.
First of all, Visa supports the Committee's important work
on H.R. 2622, particularly Title 1, which we think is
essential, the reauthorization of the uniformity provisions of
the FCRA, for the many reasons stated earlier, which I won't
repeat.
Also, Title II establishing workable identity theft
prevention measures is critical. Visa has long been active in
protecting consumers from ID theft. You will see that set forth
in the statement and the attachment. And obviously, Visa
applauds the Committee strongly for its efforts in this area.
The fraud alerts, in particular, I think can be very
helpful in this regard. But I do want to post one warning in
that respect, because of the expectation that credit grantors
will not grant new credit if a flag is posted without first
talking with the consumer about it, or contacting the consumer
in some way.
I think that that is perfectly appropriate with respect to
new loans and new accounts. But with respect to existing
accounts, it really is impractical.
For example, currently, Visa handles as many as 4,000
transactions a second, every second of every day. And while
Visa successfully employs sophisticated neural networks to
detect fraud, and in fact, many of you probably received calls
at merchants or thereafter checking on fraud, it is simply not
possible to check fraud alerts and to contact consumers in some
separate fashion, certainly not 4,000 times a second.
Finally, in this respect, it is very important that the
rules established under Title II be uniform across the country.
It is simply not possible to have multiple rules dealing with
fraud alerts, customer notices, locking of accounts. If we
really want ID theft to be effective, then there has to be one
set of rules.
Now, in terms of comments by others, I want to actually
reemphasize a point that Mr. Hoofnagle raised just a second ago
when he said that the FCRA is not uniform nationwide. And I
applaud him, frankly, for saying that. That is absolutely
right.
The point here, though, is that there are seven key areas
of uniformity. Those are the ones up for reauthorization. I
think it is critically important that they be reauthorized. And
there still is plenty of room for the States to act in other
areas, enforcement, score disclosures, additional notices
beyond the seven areas. So there really is much room for the
States left by the federal government.
Now, also, Mr. Shelton mentioned a Pete McCorkell study. I
am familiar with that study. It is actually a statement that
was made by Mr. McCorkell that was published on the Web site of
the Federal Reserve Board--Federal Reserve Bank of Boston, I
should say. I think it is very important that the Committee
consider that report in its entirety.
The principal focus of the report was whether credit
scoring is accurate even for minorities. And went into great
detail to establish the fact that it is. And that, I think, is
the critical factor here.
What is also important is what we heard earlier from
Secretary Snow, and that there has been on the increase in the
availability of credit for minorities. You have heard that
repeated. There are also studies by HUD and the Federal Reserve
Board that go to this point directly, which I think are very
important.
But Mr. Shelton said one point that is very important. And
that is we have not done enough. And that frankly, I believe is
true. He focused on predatory lending. And I would like to
correlate predatory lending with ID theft, because they both
get to the same point.
You both have wrongdoers. The predatory lender, the ID
thief, they both hurt consumers. They both impact on consumer's
credit bureau files. And therefore, they both impact adversely
on credit scores. But I think the goal here really should be to
get to the evil: the predatory lenders and the ID thieves and
not really to focus on credit scoring as a wrong in this
context, because, in fact, it is accurate.
Until we get at that, we won't get scores, that are equally
appropriate for all. In this context, for example--and there
have been questions that have been raised about who is looking
at the credit scores in this particular context--I think the
primary answer to that are the regulators. That the banking
regulators, at least for financial institutions, will look at
them regularly.
Thank you.
[The prepared statement of L. Richard Fischer can be found
on page 157 in the appendix.]
Mr. Tiberi. Thank you for your testimony, last but not
least.
Mr. Fischer, expand on something that you have in your
written testimony. And you say that, in your written testimony,
that banks have ``an adequate incentive to prevent identity
theft.'' Don't banks just internalize the cost of identity
theft? Can you expand upon that?
Mr. Fischer. I would be happy to.
Without any question, if a bank suffers a loss, then it
must absorb that loss. So in that sense, they are going to
internalize the loss. And for example, Visa has a zero
liability rule. If there is fraud on credit cards or debit
cards, zero liability. And that was mentioned earlier today. So
banks are going to suffer those as well.
But to suggest that ID theft and fraud losses are
acceptable because they are a cost of doing business, I think
is not correct. And that is one of the reasons, for example,
Visa strongly supports Title II. There are two victims. In
fact, Chairman Bachus mentioned this, as did Chairman Oxley,
the banks and the consumers. In this case, the banks need Title
II as much as the consumers do.
Mr. Tiberi. I apologize for coming late to this hearing.
Mr. Fischer, just one more question for you.
Past hearings we have heard from witnesses somewhat--and
this is about the evils of affiliate sharing--can you comment
on your perspective of affiliate sharing? How it might be evil
and how it might be harmful if we eliminate the ability to
affiliate share?
Mr. Fischer. I would be pleased to.
First of all, I will give you just a couple of examples.
Obviously, given the industry that I represent, it is not
surprising that I support affiliate sharing, and, in fact,
support it strongly.
The example that I will give you is a client, of course
that I will not name, that came to me many years ago with the
ultimate program that they had set up for a single unit within
the holding company that would service customers from all of
the companies and then could cross market at the same time.
Consumers called in and one unit could handle it on behalf
of all.
And of course to do that they would need information from
all of the organizations. And I said, Well, I am sorry, but it
doesn't work. This was in 1992. It doesn't work--this was
before the 1996 amendments--because either you are going to
take all of this information and use it only for permissible
purposes under the FCRA, and therefore you can't use it for
marketing, or you can't have the information at all.
And I think one of the wonderful things, the benefits of
the 1996 amendments, is the customer management, relationship
management systems that exist today that could not exist
otherwise.
In terms of possible evils, I think most of those were
addressed in the 1996 legislation itself. There was a concern
that people would not be told if decisions were made, adverse
decisions, based on information from an affiliate. And that was
corrected in the legislation. There is a notice requirement in
that respect.
And the concern that perhaps information in those files
might become stale over time--and I think that that was
addressed in part in the last panel by the fact that financial
institutions know that--to the extent that they have this
information, they can make initial decisions about someone's
possible qualification. But they really can't make decisions at
all until they go back, get a new credit report or credit
score, to make that decision.
And so I think the combination of possible evils, if you
will, or problems that might develop have been addressed.
Mr. Tiberi. Thank you.
Mr. Belew, I am sorry I missed your testimony. Can you kind
of, expand upon the issue of your companies--your member
companies interest in fighting identity theft?
Mr. Belew. On what?
Mr. Tiberi. Identity theft, fighting identity theft.
Mr. Belew. Identity theft, indeed.
To amplify what Mr. Fischer just said, it goes beyond just
the cost of doing business. Our members oftentimes are in the
position of trying to help their customers, their good
customers, get through this. We have been very interested in
finding additional expedited procedures, both through our
member banks using the credit bureaus and the entire system.
I have here something I would be happy to give you for the
record. We did a little survey, certainly not statistically
accurate, but a summary of some of the major banks' efforts.
They have undertaken work in three areas: prevention, serving
the customer needs and monitoring inside the bank.
In prevention, they are looking at all of their
authentication practices and looking at record destruction. For
the customers, they are doing ID theft awareness kits and
remedial and preventative advice. And then they are also even
doing what they call footprinting, which is fencing off
employees on a need-to-know basis, almost like the Central
Intelligence Agency.
There is a lot going on out there. We take it very, very
seriously.
Mr. Tiberi. Thank you.
Final question for Ms. Bell. We have credit unions
throughout the Hill complex here. If a member of a credit union
today, if I went to apply for a car loan, my understanding, and
I haven't done that here, my understanding is I could get it
pretty quickly done if my credit was okay.
What happens for a typical credit union member if we don't
extend the preemptions past the end of this year? If they
expire and I go in and get a car loan, or try to get a car
loan? Can you talk me through the process?
Ms. Bell. Unfortunately, it will delay that process.
Mr. Tiberi. By how long?
Ms. Bell. For example, just as you maintain a permanent
residence in another state, so do many of our other members.
The credit union then would have to have a relationship with
credit reporting agencies, that could be up to three credit
reporting agencies in that state, plus any other states where
you may have conducted business. Unless you disclose those
states to us, it may suppress important information that we
need to use to make a credit decision, or credit pricing
decisions.
So although the loan would still be obtainable, it could
slow down your opportunity to buy the car that you just saw
that you would really like to have for the weekend, or to take
advantage of a cruise that you would like to give to your
spouse for an anniversary gift. It slows the process down. It
could be extensive.
Mr. Tiberi. How long does it take for an average credit
union member to get a car loan today?
Ms. Bell. They can occur instantaneously. Our Internet
lending site, for example, returns a response in as few as 15
seconds.
Mr. Tiberi. That is pretty quick.
Ms. Bell. We strive to be fast. Our members ask us to make
credit available to them quickly and inexpensively.
Mr. Tiberi. Thank you.
I had more questions. I ran out of time and I am going to
yield five minutes to the gentleman from New York.
Mr. Ackerman. Thank you very much, Mr. Chairman.
I have a question for Mr. Taylor, actually, who referenced
the likelihood of an amendment that I would be offering to the
bill next week, and the likelihood is very good that I will be
doing that.
And I am sorry I missed your presentation, but I did read
your testimony. Could you be specific as to what the concerns
are that you have that you can----
Mr. Taylor. Certainly, Congressman.
To begin with, let me say we think that you have identified
an issue. So it is not to suggest that the issue doesn't exist.
It is a concern that is raised about how we might deal with the
issue.
To begin with, for example, within the FCRA, there is the
provision that consumers would have access to their credit
reports. We are seeing that happen in New Jersey over the last
few years. And we recognize that that has worked quite well. We
feel it has worked quite well in New Jersey. When consumers
have the ability to look at that credit report and judge
whether or not anything----
Mr. Ackerman. We are on the same track there. But
specifically, what are the problems in----
Mr. Taylor. Okay, specifically on that would be that there
are certain operational issues within different institutions
which may not allow that easy implementation. For example, I
may have some loan products that I do not send out a monthly
statement on, so I may not be able to provide that without
additional costs or additional operational setup.
I may have another mechanism. Example, in my institution,
not meant to be representative of the industry, but I would
send out a late notice, perhaps, which I do, in letter form. In
that letter I can certainly advise the consumer, and I already
do, that what they are doing with their loan by not paying it
on time could adversely affect their credit.
So it may be the mechanism or the manner in which consumers
get that information that we just would like to deal with you
and your staff on and talk a little bit more about it.
Mr. Ackerman. Let me in return say that you have
identified, as well as others in the industry, some concerns
that we did not anticipate in the drafting of the amendment.
And we greatly appreciate the cooperation we have been having
from various parts of the industry that have been sitting down
and meeting with us. And as a matter of fact, Mr. Davis of your
organization has been a part of that ongoing discussion, Bob
Davis, and expressing what those concerns are.
And I think we have basically come to a point--and it is
good that we are in the same room at the same time today
because maybe we can come to a better understanding of where we
are on this--the point you raise in your written testimony is
the paperwork burden, the operational costs.
And I think those are the two.
Mr. Taylor. Yes, those are the main issues. Just that----
Mr. Ackerman. Let me just tell what we have done on that
and where we are. And we are just waiting for a sign-off from
you and a couple of others on specific language that would be
suggested to be reported.
We have obviated the necessity of any costs of mailing
other than the mailings that are currently done. And we have
basically said in the legislation as contemplated, the
amendment as contemplated, that in the statement prior to
notifying the credit bureaus or even within 30 days after the
credit bureaus have been notified, if I were on the business
end of this, on your end, or on Mr. Fischer's end, and he was
sending out a statement to somebody he wasn't getting paid
from, that last statement, then I would even put it under the
last three statements, leading up to the final time that I am
about to report you to the, you know--if we don't get payment,
and if you are not in compliance by such and such a date, we
will report you to the credit agency.
I look at this not as punitive, but as a businessman. I
used to be on that side of the table. But as businessman, you
have got to be bottom line focused, and not say, The son of a B
didn't pay me and I am going to get him somehow.
But the object is to get my money. And if you put in a
statement in there that I am about to turn you over, people get
into compliance a lot quicker knowing that there is a date
certain. And they all know the rules and regulations. They all
know it is going to affect their credit. They all believe
somehow you are not going to pull the trigger on it.
So if there is some kind of a statement, which clearly I
put it in a neon sign in the biggest light that I could shine
on it, and even on the envelope saying, On August 2, we are
turning you over to the credit bureau if we don't hear from
you.
And the worst thing that is going to happen is you are
going to get paid.
It is the same effect of putting a police car on the side
of a highway that has ongoing traffic. Everybody gets into
compliance. You know it is about to happen.
So additional mailing is necessary. Put it on the same
statement. Not even an additional piece of paper.
The entire statement is computerized. They program it; you
know how late the guy is. There will be a statement there in
some form where people will see it that says, Hey, you ain't
going to pay this bill, good things are not going to happen
next week.
But we have taken care of the cost of all that, the
paperwork, et cetera. And it is just a computer function that
gets done automatically just as everybody's individual interest
and payment, the number and what they do is report it.
Mr. Taylor. I couldn't agree with you more. It is a good
business decision and one that we practice in my institution to
make sure that those concerns are alerted. The only thing we
wish to bring up with that was to make certain that there
wasn't a mechanism in place that put some at a disadvantage,
i.e., those that might not do a monthly statement. They may do
something that alerted the consumer, but make sure that we
weren't in a technical non-compliance situation----
Mr. Ackerman. If you send out statements every two months,
it could be two months, that could before--I would do a
countdown, three months before, two months before. You know,
Your time is up, buddy.
Mr. Taylor. Right.
Mr. Ackerman. You know, we are turning you over. You know,
the idea is for you on the lending end is to get your money out
rather than secretly turn the guy in----
Mr. Taylor. Absolutely.
Mr. Ackerman.--to somebody that is not going to help you,
because he is not going to pay it if he doesn't know you have
reported him, and probably believes half of the time that he is
getting away with it.
Mr. Taylor. Yes.
Mr. Ackerman. So I think that you will find that very
helpful, like the insurance people now who fought second
opinions before going for surgery now won't even let you do
anything until there is a second opinion, because they
discovered the bottom line is helped tremendously by that which
was forced upon them at a time.
But I thank you and others in the industry who have brought
all of these kinds of concerns to the table that we didn't
anticipate. We want this to be as quest free as possible, and
as bottom line productive as it can be.
Mr. Taylor. Thank you.
Mr. Ackerman. Thank you very much.
Mr. Tiberi. Thank you, sir.
The Chair notes that some members may have additional
questions for this panel which they may wish to submit in
writing.
Without objection, the hearing record will remain open for
30 days for members to submit written questions to these
witnesses and to place their responses in the record.
I would like to thank all six of you for patience and for
your testimony today. And we begin next week marking up this
bill in subcommittee.
But for this day, this hearing is adjourned.
[Whereupon, at 5:05 p.m., the subcommittee was adjourned.]
A P P E N D I X
July 9, 2003
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