[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
FAIR CREDIT REPORTING ACT: HOW IT
FUNCTIONS FOR CONSUMERS AND THE
ECONOMY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 4, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-33
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2004
92-232 PDF
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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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
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
STEVEN C. LaTOURETTE, Ohio, Vice BERNARD SANDERS, Vermont
Chairman CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
SUE W. KELLY, New York DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio CHARLES A. GONZALEZ, Texas
JIM RYUN, Kansas PAUL E. KANJORSKI, Pennsylvania
WALTER B. JONES, Jr, North Carolina MAXINE WATERS, California
JUDY BIGGERT, Illinois DARLENE HOOLEY, Oregon
PATRICK J. TOOMEY, Pennsylvania JULIA CARSON, Indiana
VITO FOSSELLA, New York HAROLD E. FORD, Jr., Tennessee
MELISSA A. HART, Pennsylvania RUBEN HINOJOSA, Texas
SHELLEY MOORE CAPITO, West Virginia KEN LUCAS, Kentucky
PATRICK J. TIBERI, Ohio JOSEPH CROWLEY, New York
MARK R. KENNEDY, Minnesota STEVE ISRAEL, New York
TOM FEENEY, Florida MIKE ROSS, Arkansas
JEB HENSARLING, Texas CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
RICK RENZI, Arizona
C O N T E N T S
----------
Page
Hearing held on:
June 4, 2003................................................. 1
Appendix:
June 4, 2003................................................. 107
WITNESSES
Wednesday, June 4, 2003
Beales, Howard, Director, Bureau of Consumer Affairs, Federal
Trade Commission............................................... 6
Bennett, Leonard, Member, National Association of Consumer
Advocates...................................................... 41
Brill, Julie, Assistant Attorney General, State of Vermont....... 11
Brough, Wayne T., Chief Economist, Citizens for a Sound Economy.. 66
Ford, John A., Chief Privacy Officer, Equifax, Inc............... 84
Green, Flora, National Spokesperson, The Seniors Coalition....... 57
Le Febvre, Richard, President, AAA American Credit Bureau........ 87
Lizarraga, David, Chairman and CEO, TELACU....................... 63
Mierzwinski, Ed, Consumer Program Director, U.S. Public Interest
Research Group................................................. 60
Rodriguez, Anthony, Staff Attorney, National Consumer Law Center. 93
Rodriguez, Ramon, Chief Operating Officer, United States Hispanic
Chamber of Commerce............................................ 37
Serio, Gregory V., Superintendent of Insurance, State of New
York, on behalf of the National Association of Insurance
Commissioners.................................................. 9
Smith, Dolores, Director, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System...... 8
Smith Joseph A., Commissioner of Banks, State of North Carolina,
on behalf of the Conference of State Bank Supervisors.......... 13
Smith, Julie A., President, Buzzuto Management Company, on behalf
of the National Multi Housing Council and the National
Apartment Association Joint Legislative Program................ 43
Smith, Shanna L., Executive Director, National Fair Housing
Alliance....................................................... 61
Spainhour, Tim, Legal Compliance Leader, Acxiom Corporation...... 91
St. John, Cheryl, Vice President, Fair Isaac Corporation......... 86
Sullivan, Kevin T., Vice President and Deputy General Counsel,
Government Relations, Allstate Insurance Company............... 40
Walker, Clinton Jr., Chief Administrative Officer and General
Counsel, Juniper Bank.......................................... 45
Wohkittel, Paul J. III, President, Lenders' Credit Services,
Inc., Director and Legislative Chair, National Credit Reporting
Association.................................................... 89
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 108
Ackerman, Hon. Gary L........................................ 111
Gillmor, Hon. Paul E......................................... 112
Hinojosa, Hon. Ruben......................................... 114
Hooley, Hon. Darlene......................................... 116
Kelly, Hon. Sue W............................................ 118
Tiberi, Hon. Patrick J....................................... 119
Beales, Howard............................................... 122
Bennett, Leonard............................................. 150
Brill, Julie................................................. 161
Brough, Wayne T.............................................. 229
Ford, John A................................................. 234
Green, Flora................................................. 264
Le Febvre, Richard........................................... 271
Lizarraga, David............................................. 297
Mierzwinski, Ed.............................................. 302
Rodriguez, Anthony........................................... 323
Rodriguez, Ramon............................................. 332
Serio, Gregory V............................................. 340
Smith, Dolores............................................... 423
Smith Joseph A............................................... 436
Smith, Julie A............................................... 443
Smith, Shanna L.............................................. 450
Spainhour, Tim............................................... 459
St. John, Cheryl............................................. 464
Sullivan, Kevin T............................................ 473
Walker, Clint................................................ 484
Wohkittel, Paul J. III....................................... 490
Additional Material Submitted for the Record
Ford, John A.:
Written response to questions from Hon. Gary L. Ackerman..... 496
American Insurance Association, prepared statement............... 497
FAIR CREDIT REPORTING ACT: HOW IT
FUNCTIONS FOR CONSUMERS AND THE
ECONOMY
----------
Wednesday, June 4, 2003
U.S. House of Representatives,
Subcommittee on Financial Institutions and
Consumer Credit
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:08 a.m., in
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[Chairman of the subcommittee] presiding.
Present: Representatives Bachus, Castle, Royce, Kelly,
Gillmor, Ryun, Biggert, Hart, Capito, Tiberi, Kennedy,
Hensarling, Murphy, Brown-Waite, Barrett, Renzi, Sanders,
Maloney, Watt, Ackerman, Sherman, Meeks, Gutierrez, Moore,
Gonzalez, Waters, Hooley, Carson, Lucas of Kentucky, Crowley,
Israel, Ross, McCarthy, and Davis. Also attending was
Representative Lee.
Chairman Bachus. [Presiding.] Good morning. The
subcommittee will come to order.
Our hearing today is about the Fair Credit Reporting Act,
FCRA, and how it functions for consumers and the economy. It is
another in a series of hearings the subcommittee is holding
with respect to FCRA, and how secure consumers feel with
respect to their personal information. At our last hearing, we
had a representative of the Treasury Department and others who
discussed the FCRA's importance to consumers and the economy.
We also heard a number of views on the importance of the
provisions in the FCRA that ensure national uniformity for
certain core issues regulated by the FCRA.
Today, we will learn why and how the FCRA is important to
consumers and the economy and how the national standards
established by the FCRA relate to the law's importance in these
respects. I believe that the diverse group of witnesses
testifying today will assist us to better understand how and
why the FCRA benefits consumers and the economy.
The FCRA is a comprehensive and complex law. Those who are
familiar with the FCRA know that it governs the credit
reporting process. For example, the FCRA governs those who
furnish information to consumer reporting agencies or credit
bureaus. It governs the credit bureaus themselves, and it
governs those who use credit reports obtained from credit
bureaus. However, it is important for us as a subcommittee to
examine exactly how each of these entities is governed by FCRA
and how the end result benefits consumers and the economy.
It is my hope that we will also have a thorough discussion
with respect to provisions in FCRA that establish a uniform
national standard such as those governing furnisher
obligations, the content of a credit report, reinvestigation
time frames, adverse action responsibilities, affiliate
sharing, and pre-screening. The witness panels have been
divided into four general groups. Our first panel consists of
federal and state regulators, with experience in enforcing
FCRA, or regulating institutions governed by FCRA. Our second
panel consists of users of credit reports and furnishers of
information to credit bureaus. The diversity of this panel
reflects the diversity of interests in and application of FCRA.
Our third panel is intended to provide the perspective of
individuals, i.e. consumers, as represented by some of the
national organizations representing various groups of people.
This panel should provide a lively debate and include the full
spectrum of viewpoints. Finally, we will hear from those who
work behind the scenes in the credit reporting process.
We must hear from all these witnesses if we are to evaluate
the impact of FCRA. For example, we will hear from a state
banking supervisor who may in this rare instance agree on the
need for national uniformity with respect to FCRA. We will hear
how the pre-screening process has resulted in lower costs to
consumers. Also, we will hear the perspective of the Hispanic
Chamber of Commerce, of senior citizens, and of consumer
attorneys in the FCRA debate.
As I have mentioned in the past, Congress will have a
choice to make in the very near future. The provisions of FCRA
that guarantee a single national standard with respect to many
of the FCRA's provisions are set to expire on January 1, 2004.
My focus throughout this debate will remain on providing
consumers and the economy with strong benefits and protections.
I believe this can and should be done at the federal level in
order to avoid a patchwork of state laws that may affect the
cost and availability of credit, and therefore the economy as a
whole.
I look forward to our witnesses testimony on this important
topic. In closing, I would again thank Chairman Oxley and
Ranking Member Frank for working together on this important
issue and making it a priority for the committee. I would also
like to thank the Ranking Member of the subcommittee, Mr.
Sanders. Before I recognize him for an opening statement, I
will say that the minority requested 11 witnesses, and because
of the number, we have eight of those witnesses here today. So
this by far reflects a bipartisan selection of panels.
The chair now recognizes Mr. Sanders for his opening
statement.
[The prepared statement of Hon. Spencer Bachus can be found
on page 108 in the appendix.]
Mr. Sanders. Thank you, Mr. Chairman. In fact, I thank you
and your staff very much for helping us bring our witnesses
here today.
Mr. Chairman, I am particularly delighted that you agreed
to my request to have our Assistant Attorney General Julie
Brill here with us this morning, and I look forward to her
testimony, as well as the testimony of all the other guests.
Let me very briefly mention, Mr. Chairman, my three top
concerns as we debate this issue. First, I believe that every
consumer in this country should have the right to a free credit
report at least once a year from all three major credit
bureaus. Currently, consumers in six states enjoy this right:
Colorado, Georgia, Massachusetts, Maryland, New Jersey and
Vermont. In Georgia, in fact, consumers are entitled to two
free credit reports a year. Mr. Chairman, as you recall during
our first FCRA hearing, I asked Assistant Treasury Secretary
Wayne Abernathy about his views on the subject. He told me that
he believed, ``there is a lot of merit to providing free credit
reports,'' and I would hope that both sides could agree to
that.
But we should not stop at the credit report. Since a
consumer's credit score is the basis that credit is used in
determining whether you qualify for a mortgage, car loan or a
credit card and what interest you will be paying, I believe we
must also allow each consumer in this country to receive a free
credit score from all three major credit bureaus, and a
description of the key factors that may have adversely affected
the consumer's credit score similar to California State law.
Currently, many consumers have to pay a fee of $9 for a
copy of their credit report and a fee of $13 to get their
credit score from each of the three major credit bureaus. Since
these credit bureaus can vary, it is important for many
consumers to purchase all three credit reports and all three
credit scores. This can add up to $66. Some Internet outfits
charge fees that are even higher. Allowing consumers to receive
free credit reports and free credit scores would be a win-win
situation for both consumers and the industry. For consumers,
they would be able to quickly identify errors in their credit
reports and resolve them before they become a major problem.
Most consumers do not even know they have errors in their
credit reports until they are turned down for a loan.
Correcting these errors would benefit the industry as well. For
example, Financial Insights, an industry research firm,
estimates that losses related to identity theft among U.S.
financial institutions could reach close to $9 billion in 2006.
Allowing consumers free access to their credit reports could
substantially improve the accuracy of credit reports and cut
down on identity theft. The current situation is bad for both
consumers and the industry. We can begin to correct this
problem through free credit reports and free credit scores.
Secondly, I would like to focus on what the credit card
industry refers to as risk-based pricing. Some of you may have
seen a front page story in the New York Times and last week ABC
News also carried this. To my mind, if you look at this issue,
it is an absolute outrage. When consumers pay their credit card
debts on time, they can still see up to a tripling, up to 30
percent interest on what they are paying despite the fact that
they have paid the company on time. The reason for that is that
the company has determined that they may have paid their car
loan late, or two years ago they may have paid their rent late,
and suddenly they have seen a doubling or tripling of their
interest rates. It is a rip-off of the worst kind and this
committee I hope will deal with it. It is fraud. It is a bait-
and-switch practice by some of the largest credit card
companies in America.
Finally, the third issue we must focus on is the ability
for States to pass stronger consumer protection laws on FCRA.
It is my understanding that there will be several witnesses
today who will testify in support of reauthorizing the seven
FCRA state preemptions because they believe that preempting the
states from passing stronger consumer protection laws somehow
benefits consumers and the industry. Well, if the 1996 state
preemptions have benefited consumers, I would like to know why
identity theft complaints nearly doubled in 2002.
The issue here is a fundamental philosophical issue. Those
of us who are conservatives believe in states's rights and the
rights of states to be the laboratories of change. Our big
government friends over here think that the big federal
government has all of the answers, and they want to tell every
state in the union what they should do. So some of us who
believe in Newt Gingrich's victims, we want to see the states
continue to have the power to protect consumers.
I thank you very much, Mr. Chairman.
Chairman Bachus. With that, I guess we will introduce our
witnesses.
Mrs. Kelly. Mr. Chairman?
Chairman Bachus. Any other opening statements?
Ms. Kelly?
Mrs. Kelly. Thank you, Mr. Chairman. I thank you for
holding the hearing today. This is an issue that is of great
importance to this committee and Americans across the country.
Last month, we heard testimony from the Treasury Department
and a diverse panel of witnesses endorsing the extension of
FCRA's uniform standards. Several witnesses testified that the
failure to reauthorize FCRA will have a negative impact on the
flow of credit and our economy. I share these concerns and
believe that we must reauthorize FCRA to ensure that we
continue to offer millions of Americans greater access to low-
cost credit. I would also like to stress the importance of
reauthorizing FCRA in our efforts to combat identity theft and
help law enforcement officials track down illicit money under
the Patriot Act. In numerous hearings, including several in my
Subcommittee on Oversight, we have found that criminals and
terrorists use complex and sophisticated schemes to manipulate
our laws and financial systems. This law is essential to
protecting the American people by detecting this activity and
helping us weed out the wrongdoers.
Today, we continue this work and will hear testimony from
another diverse group of witnesses. I am honored to have the
opportunity to introduce one special witness from the great
State of New York, Superintendent of Insurance Greg Serio. As
the committee continues to examine FCRA reauthorization, there
are many important issues we must address, but none more
important than protecting consumers. This is an endeavor that
Mr. Serio has been very effectively focusing on while carrying
out his duties as the New York Superintendent of Insurance.
This is one place where our Ranking Member should be aware
our State has been in the forefront, continues to be in the
forefront, and we are one of those laboratories without any
authorization from the federal government. Mr. Serio has gone
ahead on his own and done a lot of these very interesting and
very, very specific things that are helping our consumers in
New York State.
So Superintendent Serio, it is a great pleasure to see you.
This committee is going to undoubtedly benefit from your
expertise. I look forward to hearing your testimony, and I
thank you very much, Mr. Chairman, for holding the hearing.
Chairman Bachus. Thank you.
Mr. Watt. Mr. Chairman?
Chairman Bachus. Yes, sir, Mr. Watt?
Mr. Watt. I know we have four panels, and I do not want to
prolong this. I just wanted to thank our State Banking
Commissioner, Mr. Joe Smith, for being here and welcome him
I yield back the balance of my time.
Chairman Bachus. Thank you, Mr. Watt.
Ms. Hooley?
Ms. Hooley. Yes, thank you, Mr. Chairman. Hopefully I can
get a couple of concerns out on the table now so that people
can try to answer as we go along.
I am glad that we are doing this series of hearings. I
think we have one of the best credit reporting systems in the
world, and I hope to keep it that way. There are some areas,
however, where I think we need some improvements. One is
identity theft, which is the fastest growing crime. But the two
issues I hope that our panelists would think about today is
inaccurate credit reports. When you have people depending on
getting a job and having an accurate credit report, or getting
insurance and maybe on that report they have the father's name
who has defaulted on a loan, and all of a sudden that father's
defaulted loan is on the son's, and the son now cannot get
insurance for his home; or the person who has been out of work
and finally gets a job only to find out for some reason or
another that some bad loans are still on his credit report, I
think those are issues that we need to deal with.
The other issue is, how does a person that has had an issue
with identity theft, how do they get through the process
without taking a year and a half or up to 4 years, which I have
heard about in many stories, where it takes forever and it is
so frustrating to get through that process of cleaning up their
credit report and getting their identity back.
So the issue is inaccurate reports, and I know we have a
lot of accuracy in our reports, but if you are on the other end
of an inaccurate report, then how do you get through the
process?
With that, I yield back the remainder of my time.
Chairman Bachus. Thank you.
Are there other members that wish to make an opening
statement? If not, we will proceed to the first panel.
Ms. Kelly, did you want to introduce Mr. Serio, or are you
through with your introduction?
Mr. Sanders?
Mr. Sanders. I will be very brief in introducing Julie
Brill, who has been an Assistant Attorney General for the State
of Vermont since 1988. She is co-chair of the National
Association of Attorneys General Privacy Working Group. Julie
has spearheaded Vermont's litigation and legislative efforts in
a wide variety of areas affecting consumers, including privacy,
fair credit reporting, tobacco and antitrust. We are delighted
to have her with us today.
Chairman Bachus. Thank you.
Our other three witnesses on the first panel are Howard
Beales, Director of the Bureau of Consumer Affairs at the
Federal Trade Commission. We welcome you, Mr. Beales; Dolores
Smith, Director of the Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System, who
has testified before us on other occasions. We welcome you
back.
Ms. Kelly has introduced Superintendent Serio. Assistant
Attorney General Brill, Mr. Sanders has introduced you. And our
fifth panelist is Joseph A. Smith, Commissioner of Banks, State
of North Carolina, on behalf of the Conference of State Bank
Supervisors. Mr. Watt welcomed you. We want to welcome you
again.
At this time, we will proceed to opening statements. We
will start with you, Mr. Beales.
STATEMENT OF HOWARD BEALES, DIRECTOR, BUREAU OF CONSUMER
AFFAIRS, FEDERAL TRADE COMMISSION
Mr. Beales. Thank you, Mr. Chairman and members of the
committee. My name is Howard Beales and I am the Director of
the Bureau of Consumer Protection at the Federal Trade
Commission.
I am pleased to have this opportunity to provide background
on the Fair Credit Reporting Act. Although the views expressed
in the written statement represent the views of the commission,
my oral presentation and responses to questions are my own and
do not necessarily reflect the views of the commission or any
individual Commissioner.
Since World War II, the American population has become
vastly more mobile, and consumer credit outstanding has grown
exponentially. Indeed, consumer spending accounts for over two-
thirds of U.S. gross domestic product, and consumer credit
markets drive U.S. economic growth. Early on, credit reporting
was local or regional. The amount of information collected was
limited and not standardized. Credit bureaus, also known as
consumer reporting agencies, manually recorded consumer
information on index cards, updated the information
irregularly, and often retained it indefinitely.
Over time, however, small credit bureaus grew to become
larger repositories of consumer information, relying on
sophisticated computer systems to store, process and transmit
large amounts of data. Today, the credit reporting system
consists primarily of three nationwide credit bureau
repositories, containing data on as many as 1.5 billion credit
accounts held by approximately 190 million individuals.
Creditors and other so-called furnishers provide information to
credit bureaus voluntarily. There is no direct payment to
furnishers for providing this data, but the cooperative
database enables credit grantors to make more expeditious and
accurate credit decisions. Quick credit decisions are important
for many consumers who are in the market for new credit. A
recent Federal Reserve Board study found that one in five
active credit accounts were opened within the last year.
Because of the national credit reporting system, the credit
application process has evolved from a relatively time
consuming individualized procedure that relied on loan
officers's case-by-case judgment, to a more sophisticated and
impartial system that relies on consistent assessments of
credit history information. Because of the prevalence of credit
reports, consumers today can use the Internet to comparison
shop for a wide array of credit products and get virtually
instantaneous offers, or they can get a five-figure loan from a
car dealer they have never been to before, and drive a car out
of the showroom the same day.
The FCRA provides consumer protections in two vital areas:
privacy and accuracy. The FCRA protects consumer privacy by
limiting distribution of credit reports to those with specific
permissible purposes. Congress also has given consumers the
right to opt out of the use of their credit information for
pre-screening, and to opt out of the sharing of certain
information, including credit reports among affiliated
companies. In addition to privacy, credit report accuracy is a
core goal of the FCRA. The FCRA seeks to achieve optimal
accuracy in part by providing that consumer reporting agencies
must follow reasonable procedures to assure the maximum
possible accuracy of the information they report. The FCRA also
gives consumers the right to know what information the credit
bureau maintains on them, and the right to dispute errors,
facilitated by the FCRA's adverse action notice requirements.
The self-help mechanism embodied in the scheme of adverse
action notices and the right to dispute is a critical component
in the effort to maximize the accuracy of consumer reports. The
commission has given high priority to assuring compliance with
these provisions.
I would like to briefly discuss the commission's efforts to
administer the statute since 1970. The law provides that the
commission would be the principal agency to enforce it. A
number of formal actions have been brought to enforce the law,
including cases to ensure compliance by creditors with the
adverse action notice requirement, compliance by credit bureaus
with privacy and accuracy requirements, and compliance by so-
called furnishers with accuracy requirements.
Most recently, the commission settled an action against an
Internet mortgage lender that failed to give adverse action
notices to consumers who did not qualify for online pre-
approval because of information in their credit reports. The
commission is also engaged in extensive consumer and business
education, including the commission's 1990 commentary on the
FCRA, and we are working on a revision of that as well.
The 33 years since passage of the Act has fully
demonstrated the wisdom of Congress in enacting the FCRA. The
FCRA helps make possible the vitality of modern consumer credit
markets. The consumer reporting industry, furnishers and users
can all rely on the uniform framework of the FCRA in what has
become a complex nationwide business of making consumer credit
available to a diverse and mobile American public. The Act,
along with the amendments, provides a carefully balanced
framework, making possible the benefits that result from the
free, fair and accurate flow of consumer data.
All of these benefits depend on the consumer reporting
system functioning as intended. That is why the FTC continues
to emphasize the importance of educating consumers and
businesses, and of enforcing the law to assure compliance by
all those who have a role in making the system work.
Thank you, and I look forward to your questions.
[The prepared statement of Howard Beales can be found on
page 122 in the appendix.]
Chairman Bachus. Thank you.
Ms. Smith?
STATEMENT OF DOLORES SMITH, DIRECTOR OF THE DIVISION OF
CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Ms. Dolores Smith. Thank you.
Mr. Chairman and members of the subcommittee, I appreciate
the opportunity to testify about the role of federal regulators
under the Fair Credit Reporting Act, and on how the Act
promotes the national operations of entities under the Federal
Reserve Board's jurisdiction. Today, the three national
consumer reporting agencies each receives more than two billion
items of information per month and issues roughly two million
credit reports each day. The agencies gather the information
from financial institutions and other creditors, from
collection agencies, and from public records. Participation in
the U.S. credit reporting system is voluntary. Creditors need
not obtain consumer reports before they extend credit, although
most creditors do so to manage risk. There is no requirement
that creditors furnish information to consumer reporting
agencies, but if they do they must ensure that the information
is accurate.
The FCRA contains important consumer rights and protections
to promote accuracy and to protect privacy. For example,
consumers have the right to dispute the accuracy or
completeness of information in their credit reports and to have
inaccurate information deleted or corrected, and to include a
statement of dispute in the report if the dispute is not
resolved. With respect to privacy, the FCRA restricts the
sharing of information among affiliates, unless the consumer is
given the opportunity to opt out.
The Federal Reserve Board and the other banking agencies
play an important role in interpreting and enforcing the FCRA
as it relates to credit. Banks are primarily users of consumer
reports and furnishers of information. The banking agencies
have the statutory authority to jointly prescribe regulations
that carry out the FCRA with respect to financial institutions.
The Federal Reserve enforces compliance through the examination
of state member banks and other entities subject to the Board's
jurisdiction.
In amendments to the FCRA adopted in 1996, the Congress
preempted states from enacting laws dealing with seven key
areas, including pre-screened solicitations, the duties of
furnishers of information, and information-sharing among
affiliates. Chairman Greenspan has testified that he supports
making permanent these preemption provisions which are set to
sunset on January 1, 2004.
The FCRA promotes interstate and nationwide operations in
important ways. Most significantly, the availability of
consumer reports containing nationally uniform data allows
banks and other financial institutions to make prudent credit
decisions quickly and inexpensively wherever they do business
and wherever their customers live and work. The Act's national
standards, including those governing data furnishers and data
users, enable banks to comply with a single set of rules for
all domestic operations, thus promoting efficiency.
The ability to engage in pre-screened solicitations enables
banks to effectively market their products to consumers who are
most likely to want them, which minimizes the cost of acquiring
new customers. Sharing information among affiliates enables
large financial enterprises to efficiently manage and use
consumer information across multiple account relationships.
A key consideration in an examination of federal preemption
is the impact that different state laws on credit reporting
could have on the availability and cost of consumer credit.
Maintaining a reliable national reporting system is essential
to the continued availability of consumer credit at reasonable
cost. Credit information from consumer reporting agencies that
is accurate and up-to-date benefits both creditors and
consumers. Creditors can make decisions quickly and in a fair,
safe and sound, and cost-effective manner. Consumers benefits
from access to credit offered by competing sources, quick
decisions on credit applications, and again, reasonable cost.
State restrictions in areas such as the furnishing of
information to consumer reporting agencies or the content of
consumer reports could affect consumers by decreasing the
availability of credit or increasing its cost. Additionally,
credit scoring is an important tool in credit granting, and the
predictive power of credit scores depends heavily on the
content and quality of the credit bureau data that are used to
construct the models.
State laws that lead to a lack of uniformity in credit
bureau data could undermine the utility of the data for
assessing credit worthiness. This, in turn, could compromise
the effectiveness of the scoring models that creditors rely on
for risk-based underwriting and for portfolio management. As a
consequence, creditors might have greater difficulty assessing
risk, which could lead to higher credit costs and could reduce
credit availability for some consumers.
Thank you.
[The prepared statement of Dolores Smith can be found on
page 423 in the appendix.]
Chairman Bachus. Thank you.
Superintendent Serio?
STATEMENT OF GREGORY V. SERIO, SUPERINTENDENT OF INSURANCE,
STATE OF NEW YORK, ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
Mr. Serio. Good morning, Mr. Chairman, members of the
subcommittee, and thank you to Mrs. Kelly for that kind
introduction.
I am Greg Serio, the Superintendent of Insurance for the
State of New York. I come before you today representing the 50
states and the District of Columbia, comprising the National
Association of Insurance Commissioners. It is our privilege to
provide you with our views on the Fair Credit Reporting Act and
the use of credit information in insurance transactions.
The States, the District, and other members of the NAIC, as
well as the NAIC itself and other groups representing state
insurance policymakers, have been hotbeds of activity in the
areas of evaluating and regulating the use and the protection
of consumer credit information. From Kansas and Texas and a
dozen other states where new laws governing credit scoring are
expected to be enacted this year; to Ohio and Washington where
regulatory action has already been taken; to Alabama where your
new insurance Commissioner, Walter Bell, has already made
credit scoring a top regulatory issue, there has been a near-
universal interest in and engagement on the matter of credit
scoring and safeguarding of consumer information.
The common thread running through the actions of the NAIC
and its members, and the state legislatures, of course, is the
Fair Credit Reporting Act, with its articulated goals of
preserving fairness and equity for consumers in the ways that
business utilizes consumer credit information, and its
objective of maintaining uniformity for ease for both business
and consumers alike. The Fair Credit Reporting Act has been the
core of all regulatory and enforcement activities undertaken in
recent years.
The subcommittee has been provided with a compendium of the
various state laws, regulations and legislative initiatives
relating to credit scoring, credit reporting and other uses by
insurers of this information in the underwriting and rating of
insurance policies. Our focus, it can be said, has been on
managing the use of consumer information or credit score
models, limiting or prohibiting them as sole determinants in
making insurance underwriting or rating decisions.
In those cases where credit data, either individual credit
information or scores are utilized, the states are routinely
requiring adequate disclosure of the source, format or
application of that data to the underwriting rating or renewal
processes, so that insureds may reasonably understand the basis
for an insurer's actions and act accordingly. While some states
such as California have not allowed the use of credit data in
underwriting or rating on some lines, including automobile
insurance, there is strong support for the notion that credit
history, that is the economic behavior of an insured, plays
some role and has some correlation to the procurement and price
of that economic commodity that we call insurance.
Actuarial reviews initiated by the NAIC lend support to
that notion. However, moderation in the use of such data, with
maximum practical transparency, is the goal and has allowed
insurers to utilize this data without running afoul of either
the Fair Credit Reporting Act or the state laws addressing the
use of credit information and the pursuit of fair and equitable
treatment for consumers, and the federal law's specific
requirements that adverse actions based on credit data analysis
be communicated to those against whom such actions are taken.
It should be remembered also that most states have either
their own fair credit reporting standards, such as New York, or
general insurance statutes prohibiting unfairly discriminatory
practices by insurers that also serve to protect the public
from unwarranted intrusions into or use of personal credit
data.
The work of the NAIC on the issue of credit scoring
continues under the leadership of our President, Mike Pickens,
the Arkansas Commissioner; of our credit scoring working group,
Joel Ario, our Commissioner from Oregon; and former Congressman
Mike Kreidler, the Washington State Commissioner. The NAIC will
also be giving final approval to our regulatory options
analysis in credit scoring to be used as a policy guidance
document for regulators, and also to a consumer education
brochure entitled ``Understanding How Insurers Use Credit
Scoring,'' both of which have been provided to the
subcommittee. The working group will also continue to consult
with the Federal Trade Commission on fair credit reporting and
enforcement issues.
Indeed, it has been the union of federal and state
regulators, together with members of this House, the Senate and
state legislators from across the country that should give
consumers, our shared constituencies, confidence that fair
credit safeguards will be continued. Thank you.
[The prepared statement of Gregory V. Serio can be found on
page 340 in the appendix.]
Chairman Bachus. Attorney General Brill?
STATEMENT OF JULIE BRILL, ASSISTANT ATTORNEY GENERAL, STATE OF
VERMONT
Ms. Brill. Thank you. Good morning. Thank you so much for
inviting me here today, Chairman Bachus, and thank you Ranking
Member Sanders for that kind introduction.
My name is Julie Brill and I am an Assistant Attorney
General from the State of Vermont.
I would like to make three points today. First, we do not
have a uniform national law for credit reporting. Rather, we
have a dual regulatory system which encompasses federal and
state laws. Second, the states that have more protective
consumer protection laws in the credit reporting area have not
been harmed. Their economies are thriving. Third, in light of
our dual regulatory system, Congress should sunset the very
limited preemption that currently exists in federal law as was
contemplated in 1996.
With respect to my first point, states have enacted a wide
variety of state credit reporting laws to address enormous
problems that have existed in this industry. In Vermont in the
early 1990s, entire towns were listed as tax deadbeats because
subcontractors for the credit reporting agencies were unable to
read our town records. This debacle affected the lives of
literally hundreds of Vermonters. As a result, our State
legislature enacted a very strong fair credit reporting law
that provided for protections that do not exist in federal law
and that go beyond the protections that are in federal law.
California faces enormous problems, like the rest of the
nation, in the area of identity theft. California, responding
to this enormous problem, has also enacted provisions in their
fair credit reporting law that go well beyond the provisions of
federal law. Other states have enacted laws that go beyond the
provisions of federal law. My written testimony outlines the
wide variety of laws that exist in the states to better protect
consumers in this critically important area of identity theft.
Congress has authorized this dual system of regulation. The
preemption that exists as a result of the 1996 amendments is
only in seven limited areas. But even with respect to those
seven limited areas, four of them allow state laws that were
already on the books in 1996. So with respect to preemption,
only three limited areas are truly preemptive as of 1996.
Otherwise, states are authorized to enact laws that are not
inconsistent with federal law.
With respect to my second point, the economies of the
states with more protective laws have not been harmed.
Professor Reidenberg provided some information to this
committee last month with respect to important data points
relating to mortgage rates and relating to bankruptcy filings
for the three states that are specifically exempted or
``grandfathered'' in the seven preemption areas. In my
testimony both written and here this morning, I am here to tell
you that there are other data points that demonstrate that the
economies of these states have not been harmed. We looked at
auto loan rates, and found that Vermont is next to lowest in
the nation with respect to auto loan rates. That is, we rank
50th out of 51 jurisdictions that are measured with respect to
our auto loan rates. You don't get much better than that.
In addition, we wanted to determine whether or not credit
was readily available in Vermont. We examined our three major
newspapers over a 10-day period and came up with these
advertisements which you see on the poster boards to my left.
They are also attached to my written testimony as an exhibit.
You will see if you look at these advertisements that zero
percent financing is readily available in Vermont; instant
credit is readily available in Vermont. So our more protective
laws have not harmed consumers.
With respect to my third point, the National Association of
Attorneys General urges Congress to allow the limited
preemption provision to sunset as originally contemplated. The
States should serve as laboratories of democracy in this
incredibly important area, to innovate with respect to fair
credit reporting laws, and to assist Congress in the ongoing
debate with respect to what works and what does not work for
consumers. The States are more agile and better able to address
local issues.
Finally, I know my time is just out, I just want to make
one closing remark. I will not be able to be here as you hear
further testimony today, and with respect to other hearings in
the future. Our office does not have people who can be here in
Washington to monitor the debate. I would just ask that this
committee on a going-forward basis ensure that the debate is
intellectually honest. With respect to Vermont's economy and
with respect to the economies in other places where more
protective laws are in place, please remember the poster
boards; please remember the auto loan rates; please remember
our bankruptcy rates and our mortgage loan rates; and remember
that our economies have not been harmed.
Thank you.
[The prepared statement of Julie Brill can be found on page
161 in the appendix.]
Chairman Bachus. Commissioner Smith?
STATEMENT OF JOSEPH SMITH, COMMISSIONER OF BANKS, STATE OF
NORTH CAROLINA, ON BEHALF OF THE CONFERENCE OF STATE BANK
SUPERVISORS
Mr. Joseph Smith. Good morning, Chairman Bachus,
Representative Sanders, Representative Watt and other
distinguished members of this subcommittee.
I am Joe Smith, North Carolina Commissioner of Banks, and
Chairman of the Legislative Committee of the Conference of
State Bank Supervisors. Thank you for asking us to be here
today to share our views on the Fair Credit Reporting Act.
States's rights was a keystone of CSBS's founding charter.
The organization has a long history of supporting states's
abilities to charter and determine the powers of financial
institutions. Nearly every innovation in banking services,
powers, structures, and consumer protections has come out of
the state system. Consolidation and centralization of authority
and rulemaking are not always the best answer for bank
customers and borrowers. State bank supervisors see the
benefits of allowing state innovations not only in bank powers
and structures, but also in the area of consumer protections.
CSBS does, however, recognize the benefit of a dual system that
serves national interests and national needs, as well as local
interests and local needs.
Since consumer needs can vary considerably among regions,
consumer protection is often best addressed at the state level.
Uniform nationwide standards, however, developed and enacted by
the Congress, by you, may be appropriate and desirable in some
specific areas. Technology has changed the world since the
original enactment of the Fair Credit Reporting Act in 1970.
This revolution has benefited both our financial institutions
and the consumers they serve. It has also changed the needs,
demands and expectations of both the industry and its
customers.
Congress's 1996 revision of FCRA included experimental
preemptions of state authority to enact laws in several areas
related to information sharing with, as has been previously
noted, some exceptions. These preemptions passed with little
debate at the time, and we welcome the opportunity to discuss
them today.
Bank supervisors have always demanded that institutions
make decisions based on solid data. Technology now allows
financial institutions to extend credit to individuals with
whom they have never before had relationships. Much of this
revolution has occurred since the 1996 FCRA amendments.
Theoretically, this revolution, supercharged by the Internet,
should benefit the prudent consumer of financial products as
institutions can compete for their business based on their
credit records. Underlying this $6 trillion market is a credit
information system supported by the FCRA.
CSBS holds federal preemption of state laws and authorities
to a very high standard. Recognizing that our rapidly
developing technology-based credit system has benefited
consumers and our economy, and that it depends on reliable
information and a consistent environment, CSBS adopted a policy
earlier this year to support the permanent extension of the
1996 FCRA preemptions, retaining the exemptions acknowledged at
that time. While we generally oppose federal preemption, we
believe that the benefits of uniformity to our credit-granting
system and the value of this system to consumers and our
economy outweigh our objections in this case.
The credit-granting system is so important to the health of
our financial institutions and their ability to serve their
customers that we believe Congress should take action before
the current FCRA preemptions expire. CSBS's support for
preemption in this area does not imply support for the growing
preemption of other state consumer protection laws. The Office
of Comptroller of the Currency and the Office of Thrift
Supervision continue to preempt state consumer protection laws
without the kind of public debate we are having today.
The States are increasingly concerned about the growing
pervasiveness and boldness of OCC and OTS preemption, which
they now claim extends to traditionally state licensed and
regulated operating subsidiaries of federally chartered
institutions. It is one thing for Congress to debate policy
openly and publicly, and then establish federal standards. It
is quite another when a regulator proposes quarterly-ordered
interpretations that a clear reading of the law would not
support. We hope that the Congress might extend its interest in
the legislative preemption of FCRA to other areas of consumer
law preemption by the Office of Comptroller of the Currency and
the Office of Thrift Supervision. CSBS is committed to working
with the Congress to address the needs of an evolving
nationwide financial services system in a way that respects the
interests of all our nation's financial services providers and
minimizes regulatory burdens, while also protecting our
nation's consumers.
I would be pleased to answer any questions members of the
subcommittee might have. I thank you for this opportunity.
[The prepared statement of Joseph Smith can be found on
page 436 in the appendix.]
Chairman Bachus. Thank you, Commissioner. Commissioner,
were you appointed this June, like three days ago?
Mr. Joseph Smith. No. Well, I was appointed to this
position three days ago. This is my first assignment, and I
thank the staff very much for this opportunity.
[LAUGHTER]
Chairman Bachus. Thank you.
Mr. Castle?
Mr. Castle. Thank you, Mr. Chairman. You have put together
a heck of a panel here, with people in similar positions
disagreeing with one another and covering the entire spectrum.
What I would like to do, and I only have 5 minutes, and I
know we want to enforce it today because there are so many
panels, so I am going to need very brief answers, if we can get
it. But I am very interested in what your recommendations are
about what we in Congress should do before January 1, 2004. I
understand the dual system. I understand the preemptions we
have now. My interest basically is establishing a credit
reporting system that will maximize the benefit to the
consumers.
I am interested in your specific recommendations on what we
can do. I doubt if I am going to be able to get through all of
you, but if you can briefly tell me, not just where you are,
because I think I understand where each of you are from your
testimony, but what you would specifically recommend that we do
with respect to the legislation that we have to take up, which
could be just continue the preemptions you have, expand the
preemptions you have, do something different, don't do it at
all, whatever it may be.
We will start with you, Mr. Beales, and we will try to go
down in order.
Mr. Beales. The commission has not made recommendations at
this time.
Mr. Castle. Do you have any specific recommendations?
Mr. Beales. No, we do not at this time.
Mr. Castle. Do you have a very brief statement, then, about
it so we can keep moving?
Mr. Beales. We do not have any specific recommendations.
Mr. Castle. Thank you.
Ms. Smith?
Ms. Dolores Smith. The Board itself has not taken a
position on the preemption issue. The Chairman has expressed
his strong support, and the Division of Consumer and Community
Affairs basically is taking that position here today, and would
make that recommendation to the Board.
Mr. Castle. Which is, in essence?
Ms. Dolores Smith. Which is, in essence, to make permanent
the preemption provisions that exist in the seven key areas
that were identified in 1996.
Mr. Castle. Any discussion of expansion by the Chairman?
Ms. Dolores Smith. No, nothing at this point.
Mr. Castle. Thank you.
Mr. Serio?
Mr. Serio. While the NAIC has not made a final decision on
this, personally speaking----
Mr. Castle. That is good enough.
Mr. Serio. If we are in a position where you look at this
as a whole, and there are enough safeguards down in the state
system, particularly with respect to insurance laws, it
actually creates a protective silo at both levels, so that the
preemptions as they are probably are providing enough security
in concert with the state laws where continuing the preemptions
as they are probably would be sufficient.
Mr. Castle. So they probably would be sufficient. Is there
a better answer than ``probably would be sufficient''?
Something else we should do?
Mr. Serio. No. I think it would be sufficient. It would be
adequate, and it would be good to continue that because you do
have these other laws that may not fit under the consumer
credit banner specifically, but under the state insurance
regulatory powers, at least in the insurance realm, we have
adequate protections around that.
Mr. Castle. Thank you.
Ms. Brill? Somehow I think you are going to have a little
different answer here.
Ms. Brill. Yes. In addition to sunsetting the preemption
provisions, we think that Congress should improve the national
baseline by requiring free reports, requiring disclosure of
scores, improve the pre-screening process, and allow for notice
and choice with respect to affiliate sharing, among the other
things we think Congress should do, but that will suffice for
this morning.
Mr. Castle. I may come back to you.
Ms. Brill. Sure.
Mr. Castle. Mr. Smith?
Mr. Joseph Smith. The CSBS has no additional recommendation
other than continuation. We would prayerfully suggest that you
could, in looking to additional----
Mr. Castle. You said that at the end of your testimony. Do
you have specifics on those different areas?
Mr. Joseph Smith. We would only suggest that if you are
looking for examples of other places you might act, that the
experiments in the states, the activities of states in this
area would be a good place to look for other policy
recommendations, but we have no formal position.
Mr. Castle. Ms. Brill, going back to you for a moment,
because I don't know if I agree with your position, but I don't
yet have enough knowledge to disagree, but I am concerned. It
seems to me that the preemptions work reasonably well. There
are problems. Obviously, individual consumers have had
problems, and there are things we should probably do to fine-
tune it. But it seems to me we have struck a fairly decent
balance with the dual system we have now. I am from a small
state, too. I am from Delaware, a little bigger than Vermont,
though, in population. But I am concerned about the ability of
our States to be able to do all of these things; that the
federal umbrella has perhaps been helpful.
In my judgment, consumer credit information is a lot more
accessible today and more easily obtained. There are huge bits
of information out there, and I worry about each individual
state doing this, and somehow discombobulating the system
altogether, and perhaps the dual system is the way to go. I say
it as a matter of debate, but I would be interested in your
views. I am surprised that you want to eliminate the
preemptions altogether.
Ms. Brill. Thank you for asking me to clarify that. The
problem is that in many respects, the national law is so poor
in so many of these areas and provides so few consumer
protections. For instance in pre-screening, supposedly there is
a notice that goes to consumers, but no consumers ever see
that. They do not understand how they can opt out of pre-
screening. Looking at affiliate sharing, Vermont does have a
law that requires consent before affiliates can share credit
reporting information, and we are the only state in the nation
that has that. That is because we believe consumers ought to
have some kind of notice and choice in that area; that it
should not be completely without any option.
So part of the debate over preemption is wrapped up in what
is the national standard. I do not think states are going to
jump in willy-nilly to seek to enact laws in every area just
because they are empowered to do so. States will closely
examine what the federal law is. They will look at local
problems, as we did with respect to Norwich, Vermont, and they
will ask, do the federal laws adequately protect? And if the
federal laws are not adequate, the states will jump in.
So I do not think there is a reason to fear that once the
limited preemption is eliminated--and again it is very
limited--once it is lifted that the states are going to start
enacting all sorts of laws. They are going to look at what the
federal government, what you here in Congress have established.
Mr. Castle. Thank you.
I yield back, Mr. Chairman.
Chairman Bachus. Mr. Sanders?
Mr. Sanders. Thank you, Mr. Chairman.
Sometimes this discussion sounds a little bit Orwellian to
me. As I mentioned earlier, I find it strange that folks who
every other day tell us how much they respect the rights of
states and those governments which are closest to the people to
do the best job for the people. That is every other day. But
then when the big corporations say, well, we want to crush the
ability of consumers to get protection, suddenly it is the big
bad federal government that has to run the show.
Then I hear people say, well, we are for the consumers; we
really love the consumers. I have never heard a member of
Congress say they dislike consumers. So let's be straight on
this. All of the consumer organizations do not believe that the
federal government has the right or should preempt state
governments's ability to protect consumers. U.S. PIRG agrees
with us. Consumer Federation of America agrees with us.
Consumers Union agrees with us. The National Consumer Law
Center agrees with us. So those groups who protect consumers
want strong consumer protection because they understand that in
50 states with good attorneys general and so forth, they can
get that action.
Those organizations, like the credit bureaus, like the
credit card companies, like the large banks, they want
preemption. Now, maybe some of you will now announce to the
world that the large credit card companies are really pro-
consumer. But if that is the case, then we are in an Orwellian
world.
I would ask Ms. Brill, give us some experience about what
it means for a state to have the flexibility to go forward to
protect consumers in a way that a federal government might not
be able to do.
Ms. Brill. Yes, thank you. I would be happy to.
What states need to be able to do is to address problems as
they arise. What happened in our State with respect to credit
reports was just something that the federal government, that
Congress was unable to deal with.
Mr. Sanders. That happened in Norwich. I remember that
quite well. How long do you think it would have taken for the
federal government, if ever, to address that problem which
really impacted hundreds of lives?
Ms. Brill. Well, they did not act for another five years.
We enacted our law that very next session, and it took Congress
another four years to enact its law. Frankly, one of the very
most important protections that consumers have with respect to
accuracy in their report is the ability to review their report
by having access to a free copy of their credit report at least
once a year. Congress did not give consumers that right. That
provision is one of the most important in our law.
Mr. Sanders. Am I correct in recalling that you just said a
moment ago that the Association of U.S. Attorneys General is
opposed to preemption?
Ms. Brill. Correct. The National Association of Attorneys
General urges Congress to allow the preemption to sunset.
Mr. Sanders. Okay. Just changing gears, a very brief
answer, if you could, I would like all of you very briefly to
tell us if you believe that Congress should pass legislation
allowing every consumer in this country to receive a free
credit report and free credit score from all three credit
bureaus.
Mr. Beales? Yes? No?
Mr. Beales. We do not have any position at this time. I
think it is an interesting idea, and one that is worthy of
careful consideration.
Mr. Sanders. Okay. Thank you. I have got to move. I am
sorry. We just do not have a lot of time.
Ms. Smith?
Ms. Dolores Smith. I would say no.
Mr. Sanders. Mr. Serio?
Mr. Serio. I do not think the NAIC has even addressed that
question, so I would not be able to weigh in on it.
Mr. Sanders. Ms. Brill?
Ms. Brill. Yes.
Mr. Sanders. Mr. Smith?
Mr. Joseph Smith. My association has not spoken. My
personal opinion is yes.
Mr. Sanders. Okay. Thank you very much.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you.
Mr. Murphy? Ms. Kelly?
Mrs. Kelly. Mr. Chairman, I have no questions of this
panel. It is going to be a long day, so I reserve my right to
question at a later time.
Chairman Bachus. Mr. Renzi?
Mr. Renzi. Pass.
Chairman Bachus. Mr. Kennedy is not here.
Mr. Barrett?
Mr. Hensarling?
Ms. Hart?
Ms. Hart. Thank you, Mr. Chairman.
I did not hear everything in great detail, but I guess I
have a quick question. It is basically regarding the credit
report procedure. This is probably something that some of you
might not be particularly interested in answering, but any
member of the panel.
One of the concerns that has been expressed by constituents
of mine, and it is a little outside some of your testimony, is
that they have serious concerns about what appears on their
reports. They have much difficulty in removing inaccuracies
from those reports. I am just interested in hearing a quick
perspective, especially out of the regulatory agencies, about
what you think we ought to do in this reauthorization of the
law to change that, or is there anything in it that can help
change the situation that is faced by the general public as a
result of some of the things that happened to them on those
reports.
Mr. Beales, you look like you are ready to answer.
Mr. Beales. Yes, ma'am. We think accuracy is really a key
goal of the statute, and it has been a key focus of our
enforcement activities. The provision that is probably most
important in the existing statute is the adverse action notice
to consumers because it is consumers that are the ones who know
whether or not there is a mistake. That has got to be the
starting point. I would add, when you get an adverse action
report, you can get a credit report for free under the existing
statute.
That said, we are constantly on the alert for ways that the
mechanism might be changed in order to improve accuracy,
simplify the process, or facilitate corrections when
corrections are appropriate. We do not have any recommendations
at this time, but I think that is an important thing to look
at.
Ms. Hart. Thank you.
Anybody else on the panel?
Thank you, Mr. Chairman.
Chairman Bachus. Thank you.
Mr. Ackerman?
Mr. Ackerman. Thank you.
On the adverse action report, just going down the line,
many consumers do not know an adverse action has been taken
unless they apply for credit and then receive an adverse action
report. In an attempt to get consumers to either straighten out
a problem or erroneous reporting, or to pay their bill, would
it be a good idea in your opinion to inform consumers that a
negatively impacting statement concerning their credit is going
to be placed in the report, other than an increase in their
credit, which most people do not consider negative?
Mr. Beales. I think that would result in an enormous flow
of information to consumers.
Mr. Ackerman. Is that bad?
Mr. Beales. Well, I think a lot of it would be information
that they already knew; that they missed the payment on the
mortgage or whatever.
Mr. Ackerman. Yes, but a lot of institutions do not report
them. It is a yes or no question. If your credit card company
or bank is going to at that point report you to the credit
bureau, or has reported you, should the consumer be notified or
not?
Mr. Beales. I don't think there is any significant benefit
in doing that.
Mr. Ackerman. Ms. Smith?
Ms. Dolores Smith. I agree that there is not a significant
benefit.
Mr. Ackerman. Mr. Serio?
Mr. Serio. We actually did that on the insurance side. In
the one case of credit scoring that we did allow in the rating
process, we required that Metropolitan Life consider it to be
an adverse action and then take the appropriate action in terms
of notifying the consumer of that.
Ms. Brill. Yes, we think that would be good information to
go to consumers, and I will note that Utah has such a law.
Mr. Joseph Smith. The association I don't think has a
position on this, and neither do I.
Mr. Ackerman. Could each of you, going down the line, tell
me if you can tell us what is in the FICO score, what the
components are? Would you tell us?
Mr. Beales. The FICO score is based on almost everything
that is in the credit report.
Mr. Ackerman. What is the formula? I am asking what the
formula is.
Mr. Beales. We do not know the formula.
Mr. Ackerman. You do not know the formula.
Ms. Smith?
Ms. Dolores Smith. Fair Isaac does not make that formula
available.
Mr. Ackerman. Mr. Serio?
Mr. Serio. I can only speak for New York, but that is why
we have not allowed black box statistical models to be used in
New York, because of the inability to get that information.
Mr. Ackerman. Thank you.
Ms. Brill?
Ms. Brill. None of the attorneys general knows that.
Mr. Ackerman. Mr. Smith?
Mr. Joseph Smith. I do not know it either.
Mr. Ackerman. We don't know it either.
Could you tell me if race is included in the FICO score?
Just speak out. Anybody know?
Ms. Dolores Smith. I would be surprised.
Mr. Ackerman. We all would.
Could you tell me if ethnicity or national origin is in
there?
Ms. Brill. I don't know.
Mr. Beales. To my knowledge, that information is not in
credit reports and therefore is not in FICO reports.
Mr. Ackerman. Disruptive behavior, is that in the credit
report? Prone to violence, is that in the credit report?
Mr. Serio. If I could address that from the insurance
viewpoint.
Mr. Ackerman. Arrest record, is that in the FICO score?
Mr. Serio. The reason why we have not allowed the black box
language is because it could be contrary to the state unfair
discrimination statutes, which is why we can allow it to be
used without having that information.
Mr. Ackerman. Okay. Now explain to me why the FICO score is
going to be important to the TSA to tell them whether or not I
can get on a plane.
Mr. Beales?
Mr. Beales. I think that would be better directed to the
TSA. I do not know.
Mr. Ackerman. Are you going to tell the TSA what is in the
FICO score?
Mr. Beales. We do not know what is in the FICO score. We
know how the FICO score was developed. We know what the FICO
score does. We do not know what is in it.
Mr. Ackerman. Ms. Smith? Is the FICO score going to help
the TSA keep me off the plane?
Ms. Dolores Smith. I don't think so.
Mr. Ackerman. You don't think so, that it is going to help
them?
Ms. Dolores Smith. That it would help them.
Mr. Ackerman. Mr. Serio?
Mr. Serio. I am not sure how it would work.
Mr. Ackerman. Ms. Brill?
Ms. Brill. I will leave that to the wisdom of the federal
agency.
Mr. Ackerman. Mr. Smith?
Mr. Joseph Smith. I have no idea, sir.
Mr. Ackerman. Does anybody know why the TSA thinks the FICO
score is going to help them? What is in there that would
indicate to them why a person should not be allowed on a plane
if their FICO score is high or low? Does a person with a low
FICO score have a greater proclivity for blowing up a plane or
committing an act of terrorism? Anybody?
I yield back my time.
Chairman Bachus. Mr. Baker, do you have any questions?
Ms. Carson?
Ms. Carson. Thank you very much, Mr. Chairman.
I just have a quick question. What happens if an individual
who has superb credit, but their credit lays dormant for a long
time and they do not use it at all? And then suddenly there is
a major activity underway in a person's account, which may
imply identity theft; a person not being able to use their
credit because they are disabled, and somebody is going out and
doing something. Is there any mechanism in place now that would
trigger some alert to somebody's credit report in that matter?
Mr. Beales. There are monitoring services that are
available that people can buy that will report any activity on
their credit report. But unless they chose to do it, it is not
something that would happen automatically. At the point at
which there was some denial or some adverse action affecting
the consumer, then there should be a notice.
Ms. Carson. Are you saying that the credit agencies do not
find any reason to be more sensitive to the activity on an
account if it has in fact been dormant for a long period of
time?
Ms. Dolores Smith. It would not be the credit agency, but
it very likely would be the creditor that is monitoring the
pattern of usage and would note that this is unusual relative
to the customer's behavior up to that point. In the same way
that currently even if an account is not dormant, if there is
an unusual pattern. For example, if the customer has been using
it for relatively small purchases and all of a sudden there is
a several thousand dollar usage, the creditor would get in
touch with the customer, typically to say, ``Is this a valid
transaction.'' That is something in which the creditor has an
interest because under the truth-in-lending laws, the
consumer's liability for usage is limited to $50, so the
balance would be on the creditor, and it is in the creditor's
interest to make sure that that transaction is valid.
Ms. Carson. So the creditor would know that this customer
has had very dormant credit for a long period of time?
Ms. Dolores Smith. The creditor should recognize that, yes.
Ms. Carson. But isn't it to the creditor's benefit to go
ahead and allow the transaction to occur?
Ms. Dolores Smith. It is not in the creditor's interest to
allow the transaction to occur if it is not a valid transaction
by the customer, because the creditor will basically have to
eat the loss.
Ms. Carson. Do you know of anything underway now that
catches identity theft more quickly than we have historically?
I know we went through a period where everybody was honest;
everybody had a high level of integrity, and then, boom, here
comes a lot of people who want to beat the system, if you will.
So do any of you have any mechanism in place that would
identify or quickly alert you to some possible misuse of a
person's identity?
Mr. Beales. We are very active on three fronts in attacking
identity theft. One front is working with law enforcement to
try to use our database of complaints from consumers who have
been victims, to try to locate perpetrators as quickly as
possible. A second front is consumer education to tell
consumers about what they can do to notify and recognize the
risk and to try to keep it as small as possible. A third front
is business education to encourage businesses to protect the
personal information that may form the foundation for an
identity theft, because that is often the source of information
that leads to the problem.
There are fraud alerts that consumers can place on their
credit reports if they have been a victim of identity theft, in
order to flag for the financial institution that this person's
name has been used in fraudulent transactions, and the
financial institution should take extra care to make sure that
it really is a valid transaction.
Ms. Brill. May I respond to that from the state's
perspective? Thank you.
With respect to fraud alerts, we have a consumer in Vermont
who attempted to have a fraud alert placed on his credit
report, but was unsuccessful. The fraud alert never appeared.
We think the voluntary nature of the credit reporting agencies
offering to do fraud alerts when contacted by consumers is
problematic. In other words, they do not have a requirement,
going back to your earlier question, to automatically do that.
They wait to be contacted either by the consumer or the credit
grantor. We think that that voluntary system needs to be made
mandatory.
I will also point out that the State of California has gone
way beyond what is happening both at the federal level and with
respect to many other states. They require a freeze. They
require the credit reporting agencies to place a freeze on the
consumer's credit report in the event that the consumer
requests that. With respect to the freeze, the consumer is in
complete control of their credit report and is able to
determine who will look at it and who won't. We think that is
one of the innovative solutions that this body should be
looking at with respect to identity theft.
Ms. Carson. But you indicated that you had a consumer in
your State that attempted to----
Ms. Brill. Yes, to have an alert placed on their credit
report and the alert did not appear, despite his request to
have it placed on his credit report. Correct.
Ms. Carson. Once the consumer did what the consumer should
have done, then who was responsible for ascertaining its
placement?
Ms. Brill. Because there is no law, either federally or in
our State, requiring the credit reporting agencies to act when
the consumer seeks to have the alert placed on their report,
there was no legal responsibility on the part of the credit
reporting agencies to follow up on that request. They claim
that they do it. My guess is it was an oversight or a slip-up,
but the point is if there was a law that required them to place
those alerts on reports when requested, then that slip-up
probably would not have happened.
Ms. Carson. Thank you.
Chairman Bachus. Is there anyone on the majority side that
wishes to ask questions?
Mr. Gonzalez. Mr. Chairman?
Chairman Bachus. Okay. I am going to swap back and forth.
Mr. Gonzalez. Thank you.
Chairman Bachus. Mr. Gonzalez, go ahead.
Mr. Gonzalez. Yes, sir.
I had an interesting question, but actually Mr. Ackerman
has something that is of greater interest, so I would yield to
Mr. Ackerman.
Mr. Ackerman. Thank you.
Just one brief issue, Mr. Beales and Ms. Smith. How long
does it take when a credit grantor wants to put an adverse
piece of information on somebody's credit report for that to
appear on the credit report?
Mr. Beales. It would depend on their reporting cycle. I
think once the information is received by the credit agency, it
would appear on the credit report within a matter of a day or
two.
Mr. Ackerman. Twenty-four hours, correct?
Mr. Beales. After the report was sent. Typically, creditors
would report on a particular cycle. They would report all their
accounts at a certain time of the month. So maybe it is 30
days.
Mr. Ackerman. Most do monthly.
Mr. Beales. Most probably do monthly, but it may be 30 days
before the next batch of reports goes.
Mr. Ackerman. The second question, how long does it take to
remove something from the credit report that is negative, that
the credit grantor even agrees has been erroneously placed
there, possibly as an error in identifying who the true
consumer was, or in the matter of a case of identity fraud? How
long does it take the agencies to remove that?
Mr. Beales. If the creditor agrees, it would be removed
automatically the next time the creditor reported it, because
they would not report it anymore.
Mr. Ackerman. Once it is reported, I beg to differ with
you, it stays on your credit report until somebody asks that it
be taken off. Nothing is removed until specific legal time
frames. If you report something and you are late three times
within the year, that stays on. That does not go off the second
month afterwards.
Mr. Beales. Yes, sir, that kind of information would
remain, and that is actually one of the reasons that for many
consumers there is inaccurate information.
Mr. Ackerman. And if the agency reports it, are you aware
of how long it takes the credit agencies to remove it?
Mr. Beales. If the information is disputed to the credit
reporting agency, it must be removed within 30 days.
Mr. Ackerman. That is not correct. Logic would tell you
that, because that is the cycle that is needed to take to put
it on. That depends on the cycle that the credit bureaus choose
to remove negative information.
Mr. Beales. That is the statutory requirement for the
period to reinvestigate. If they cannot verify within 30 days,
they must remove it.
Mr. Ackerman. I am the consumer that I am referring to in
New York. When Gary Ackerman was reported, not me, but it wound
up on my report, either as a case of mistaken identity for $200
that went to collection, that was abandoned, reported to the
attorneys, et cetera. When that appeared not on whoever the
other Gary Ackerman or the make-believe Gary Ackerman was, but
on this Gary Ackerman's report, and I asked that it be removed
and spoke to the credit grantor, and they recognized that they
had made a mistake, or someone or the lawyers had made a
mistake, they could not get that removed for six months because
the credit bureau said that was their cycle.
If you think that was the law, would you be supportive of a
law that would require them to move it as expeditiously as they
are required to put it on?
Mr. Beales. I think what you are describing was a violation
of the law.
Mr. Ackerman. If it is not the law, would you be in favor
of a law making it the law?
Mr. Beales. Yes, sir.
Mr. Ackerman. Ms. Smith?
Ms. Dolores Smith. I really do not have that familiarity
with how credit bureaus act.
Mr. Ackerman. I am not that familiar with computers, but I
know if you can put it on within 30 days, you can get it off
within 30 days. The question is, what is sauce for the goose is
sauce for the gander?
Ms. Dolores Smith. The answer is that it certainly would be
reasonable to require them.
Mr. Ackerman. Thank you.
Mr. Serio?
Mr. Serio. Yes, I think we would be supportive of that.
Mr. Ackerman. Ms. Brill?
Ms. Brill. Yes.
Mr. Ackerman. And the new Mr. Smith?
Mr. Joseph Smith. Yes, sir.
Mr. Ackerman. Thank you.
I yield back the gentleman his time.
Chairman Bachus. I thank you, Mr. Ackerman.
Let me ask this question, and I guess I will ask Mr. Beales
because you would be in the best position to answer the
question. I notice the Assistant Attorney General from Vermont
said that almost no one uses this 1-800 line. I think that was
your testimony.
Ms. Brill. Yes. It is difficult to find. Correct.
Chairman Bachus. I had heard that over five million people
had used it. Obviously, there is a big difference in almost no
one and almost five million. What is the true story?
Mr. Beales. As I understand it, there are several million
people who have opted out. I do not know what the precise
number is. I think that that is something that the credit
reporting agencies should be able to tell you as to how many
people are on the database. I think the notices that people get
in the pre-screened offer, there are certainly ways that they
could be clearer and more conspicuous to identify that number
and let people figure it out, but a great many people have
found it.
Chairman Bachus. I would agree that it is hard to find.
Most people are not aware of the number. But even with that a
given, it is my understanding we have had five million opt-
outs, so it would be interesting to find that figure.
We talked about credit scoring and disclosure of credit
scoring by credit reporting agencies. California is moving a
law right now to do just that. If you require a credit bureau
to do that, now, the credit score, if a lender or bank or
mortgage company or insurance company, any of them are doing a
credit score, that is their credit score, isn't it? Isn't that
the insurance company who would formulate their own score? The
bank, if they are going to lend money, it would be their score?
It is not the credit bureau's score, is it?
Mr. Serio. That is not necessarily true.
Chairman Bachus. Okay.
Mr. Serio. It might be. In fact, that is one of the things
in the case we had in New York with Metropolitan Life, they
actually came in and said that by taking the different factors
they get from the credit bureaus, and then creating their own
credit model, and basically limiting it to data from their
population of insured, they did create a MetLife credit score.
That is what gave us the confidence that it was a finite data
pool; that it was their own folks; that it was directly related
to their financial risk; and that is why we did allow it,
together with the safeguards of reporting adverse actions if
they were to deny the discount for the insurance if they did
not reach whatever the credit score standard was.
Chairman Bachus. Yes, because if First National Bank loans
money, they come up with their own internal credit score, which
is their property.
Ms. Smith, does the credit bureau even keep that score?
Ms. Dolores Smith. First of all, my understanding is that
each of the credit bureaus is basically developing their own
credit scores for credit bureau customers, so it may have some
utility for some creditors. For banks, what we expect is that
they will be doing their own underwriting based on the risk
factors that they consider. They would be looking at the credit
report and pulling data. If the bank, as you suggest, uses a
credit scoring model, it would be one that has been developed
for the bank, because the idea is to evaluate credit worthiness
in terms of the bank's clientele, not who may be in the
population of customers at the credit bureau.
Chairman Bachus. Ms. Brill, in Vermont, you have testified
they pretty much lead the nation. I am just going to assume
that. Is there a problem with telling a credit bureau to
release a credit score that may be a lender's credit score?
Have you tried to do that?
Ms. Brill. We do not now have a law requiring disclosure of
scores. There are about four States that do.
Chairman Bachus. Have you ever attempted to do that?
Ms. Brill. Yes, we did. We originally had a law that would
require disclosure of scores. It was back in 1992 when our law
was first enacted. At that time, I believe no other state had a
law requiring disclosures of scores. The industry came into our
legislature the next year, or it was right around the time that
the FTC developed its guidance which basically did not require
disclosure of scores. The industry came in and said it is way
too expensive to do for Vermont; we are going to pull out of
your State, et cetera, et cetera. So our legislature devolved
down to the federal standard and did not require disclosure of
scores.
Chairman Bachus. So you actually backed off requiring it,
or repealed a law that did that?
Ms. Brill. Correct, although our office would like to see
disclosure of scores now, and we do support legislation that is
pending in our State legislature to require disclosure of
scores.
Chairman Bachus. Okay.
Mr. Beales, what was the problem with requiring those
scores?
Mr. Beales. The difficulty with requiring disclosures is
which score, because there are many different credit scoring
models in use. There are some fairly standard ones that are
very widely used, but there are also customized ones for
individual companies or individual creditors. It is not so much
a conceptual problem as a which score problem, because whatever
score was disclosed may or may not be the score that was
actually used in making a particular decision.
Chairman Bachus. Okay, thank you.
Mr. Davis?
Mr. Davis. Thank you, Mr. Chairman. Good afternoon to the
panel.
From listening to the discussion, it seems that there are
two questions. One of them Mr. Ackerman I think very skillfully
pursued with you, and it is the question of what would the
content of a national standard be if we have one; and the
second one Mr. Sanders I think pursued with you, and it is the
question of what is the utility of having a national standard.
Ms. Brill, I want to take advantage of your expertise as
someone who is actually out there practicing in this area and
litigating in it to educate me a little bit. Let's say
hypothetically a credit card company is headquartered in
Florida. And let's say they send out a solicitation to someone
in my State of Alabama, and someone in Alabama obtains credit
from them. Whose laws control in that situation? Is it the
Florida law that is the law of the headquarters state, or is it
the Alabama law as the law of the consumer?
Ms. Brill. We would say the Alabama law.
Mr. Davis. So essentially it is a rule that the law of the
state where the consumer seeks credit would govern?
Ms. Brill. If there were a fight over the jurisdictional
issue, one would need to show that the company purposefully
entered the economy of Alabama. Assuming there was sufficient
advertising, sufficient telemarketing and other forms of
outreach to that state, then I believe the law of Alabama would
probably apply.
Mr. Davis. And in the modern day and age with solicitations
and sending these things in the mail, you would almost always
have that voluntary entry into the stream of commerce, wouldn't
you?
Ms. Brill. Almost always, yes, as long as it was not solely
over the Internet.
Mr. Davis. So if someone for example in my State of Alabama
wanted to raise some kind of a legal claim against a credit
card company in Florida, obviously Alabama law would govern
that claim. Is that right?
Ms. Brill. Yes. I should say that it really depends on the
nature of the law, and if the law is focusing on a consumer
right with respect to that offer, then yes, I believe the
consumer would be able to assert that Alabama law applies.
Mr. Davis. So if a credit card company, say, had
headquarters in Florida and was primed to be a national company
and sent solicitations to all 50 states, that would mean in
effect that consumers in 50 different states would be able to
invoke 50 different sets of laws if they filed suit. Correct?
Ms. Brill. To the extent that the different states have
different laws, that is currently the case. That is right.
Mr. Davis. All right. Now, have you done or can you shed
any empirical light for me on whether or not any research has
been done on the degree to which the 50 states do have
different sets of laws and the degree to which there is an
amount of uniformity? Obviously, I do not expect you to give me
a 50-state answer, but as a general rule are the laws more
uniform than not, or is there significant variation between the
laws?
Ms. Brill. My written testimony sets out the various state
laws that exist in the credit reporting area. You were asking a
question with respect to a credit card solicitation, and I was
understanding that the law that may apply might not necessarily
be credit reporting, but might have to do with fair credit
billing or something else, another area where the states are
not preempted and have various laws. But with respect to credit
reporting, my written testimony does set out the different
types of state laws that exist.
I believe that there are a wide variety of state laws now
in the credit reporting area, and that is why I say we have
what I would call a dynamic dual regulatory system dealing with
credit reporting.
Mr. Davis. All right. Given the dynamic duality, if you
will, of that system, one of the concerns that people on the
other side of this debate raise is that absent a national
standard, a credit card company has to make do with the
patchwork of laws from different states. I think you
acknowledge that is kind of the reality. So what kind of
guidance would you give a company, let's say for whatever
reason we do not reauthorize the preemptive standard and say
the states are given a broad leeway to formulate their laws,
what kind of practical guidance would you give to a credit card
company in Florida that is running a national business, to help
them get through this maze of laws?
Ms. Brill. Contact a lawyer who can research all the laws,
or contact the National Association of Attorneys General which
can provide a compendium of the different state laws. I am
sorry, but that is currently the situation. That is what they
have to do right now.
Mr. Davis. I guess what I am getting it is the more
nationalized the system obviously creates one set of
incentives, and the more the system is driven by state law, it
creates another set. I am trying to focus on the very narrow
policy issue, because people on the other side of this debate
raise the argument that credit may be less freely extended, for
example, if there is a wide patchwork of state laws, and that
if there was one national uniform standard, that if it is
robust enough and fair enough, that that would give some
practical guidance and better practical guidance to the credit
companies. Do you agree with that as a general matter?
Ms. Brill. It is a hypothetical question because we do not
have a uniform set of standards right now. We have a wide
variety of state laws. So hypothetically, I would like to see
the data, the regression analysis that would show that credit
would be more freely available. I have never seen an economic
analysis to show that. As I tried to point out in my opening
statement, the economy of Vermont has not been harmed in any
way by our more protective laws. We have quite a number of more
protective laws, not only in fair credit reporting, but also in
the privacy area. So I would like to see the regression
analysis showing that.
Mr. Davis. Okay. I think my time has expired, Mr. Chairman.
Chairman Bachus. Our last member, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Obviously our discussion today has a lot to do with
consumer protection. It appears to me that there is no greater
consumer protection than a competitive marketplace. Given that
each week back in my home in Dallas, Texas I receive a dizzying
array of credit offers, it gives the appearance that we do
indeed have a healthy, robust, competitive marketplace in the
extension of credit.
When we look at consumer protection, it seems like it
divides up into four areas: access to credit, affordability of
credit, privacy, and accuracy. I am convinced from my study of
economics, my observation of what is going on in the real
world, and the preponderance of testimony that this committee
has received, that indeed we do enjoy the greatest access and
affordability as to credit to be found in the world.
I guess the relevant question might be: Do we pay too high
a price in the category of privacy and accuracy? I have heard
occasional anecdotes here and anecdotes there, serious ones,
concerning consumers that have been wronged by this process.
But my question to the panel is, can you quantify this problem
for me? Can you give me a metric? Can you put it in some kind
of context? Out of the millions or tens of millions or hundreds
of millions of credit transactions each year, how often do we
have consumers who legitimately complain about privacy concerns
or accuracy concerns? What is the scope of the problem? Perhaps
each one of you could very briefly address that.
Mr. Beales. We do not have a reliable quantitative measure
of the problem. We do not know of any measures of accuracy that
we think are reliable as to the extent of inaccuracies. There
is no question that it happens. Our focus on accuracy and
privacy is to focus on the process of notices to consumers and
their ability to correct and reinvestigations, and furnishers
providing accurate information.
Mr. Hensarling. Thank you, if I could interrupt. I do have
a limited amount of time.
Ms. Smith?
Ms. Dolores Smith. We do not have data that would quantify
that for you.
Mr. Hensarling. Okay, thank you.
Mr. Serio?
Mr. Serio. We have not seen any significant breakdown. In
fact, it has been more of a balance between the need to run in
a competitive marketplace and the protections that the
consumers have been looking for.
Mr. Hensarling. Thank you.
Ms. Brill?
Ms. Brill. I have not seen the data. It is an excellent
question. One of the problems is, of course, consumers do not
have broad access to their credit report, and as a result, they
might not know that there are inaccuracies in the reports.
Mr. Hensarling. Mr. Smith?
Mr. Joseph Smith. We do not have any quantified data. With
my colleague the attorney general, we work them one at a time.
Mr. Hensarling. Okay. Thank you.
Mr. Chairman, I would like to yield the balance of my time
to you for a follow-up question.
Chairman Bachus. I appreciate the gentleman from Texas.
I keep hearing things today, and we have a panel of magna
cum laude graduates, so I am a little bit intimidated by that.
But I did hear testimony that said that credit bureaus do not
update their files for six months after a consumer disputes
something on the report, and that is a real problem. What is
the basis for that? It is my understanding that current law
requires the credit bureau to update their file within 30 days,
and that is a uniform standard. So doesn't the present law take
care of that?
Mr. Beales. Mr. Chairman, that is my understanding. It
should be corrected within 30 days or deleted.
Chairman Bachus. So what can we do that we are not doing
now, when we say after 30 days you can sue them for not doing
it?
Mr. Beales. Right. Ultimately, it is an enforcement
question of making sure that the law is complied with.
Chairman Bachus. But what I am saying is that another law
is not going to do anything more. I mean, it is not a problem
with the law.
Ms. Brill. May I respond on that issue, Mr. Chairman? I
think one of the problems may be with respect to the duties of
the furnishers of that information. I am not sure, I think it
was Representative Ackerman who brought up that issue. The
issue may be that the information gets deleted once, but then
becomes reinserted into the credit report in a subsequent
cycle. So it might take a longer time to get the information
permanently deleted.
I think that that is a problem in the credit reporting
industry now, and I think that one way to address that is to
improve the duties upon furnishers and also to improve the
ability of consumers to bring a private right of action with
respect to a furnisher's failure to permanently delete
inaccurate information.
Chairman Bachus. Okay. Let me ask you this, Chairman
Greenspan testified before our committee, and I think Ms. Smith
in your testimony today you also mentioned this, that the
national credit reporting system has resulted in a
democratization of credit availability, allowing more Americans
in low-and moderate-income categories to enter the financial
mainstream and own their own homes. Does the Federal Reserve
have statistics, or do you compile statistics on consumer
credit patterns, and do they bear out that statement?
Ms. Dolores Smith. We do study consumer patterns through
surveys that are carried out by the Michigan Survey Research
Center. So we will generally have some idea of consumer
patterns. We do not have, so far as I know, data that would
spell out exactly in the economy how much can be attributed to
any particular cause.
Chairman Bachus. Okay. If you have uniform standards, one
thing that people have testified, and I think there is pretty
much agreement that they do allow banks to make quicker, less
expensive credit decisions. Does everybody agree on that?
Ms. Brill. I am sorry, what is the question?
Chairman Bachus. That a uniform standard would allow banks
to make less expensive or it reduces the cost of the banks of
making decisions and they can make them quicker.
Ms. Brill. I do not agree.
Chairman Bachus. You do not agree.
Ms. Brill. No. I do not believe we now have uniform
standards, and I think that in Vermont we have more protective
standards and our credit decisions are very quick and credit is
readily available at very low rates.
Chairman Bachus. So Chairman Greenspan's saying that they
allow banks to make prudent credit decisions quickly and
inexpensively, you dispute that?
Ms. Brill. I do.
Mr. Sanders. Mr. Chairman, in Vermont some of us on
occasion do disagree with Chairman Greenspan.
[LAUGHTER]
Chairman Bachus. How about Ms. Smith?
Ms. Dolores Smith. Ms. Smith believes that the Chairman is
correct.
[LAUGHTER]
That the availability of the data from the credit bureaus
on a uniform basis does enable banks to make credit decisions
more quickly, and that they are prudent credit decisions.
Chairman Bachus. So it does increase the cost of credit
underwriting when you do not have uniform standards.
Ms. Dolores Smith. It would make it more difficult and it
would cut down on the efficiency generally. I think it is hard
to say what it would be for a particular institution, but if
you are looking at the industry as a whole I think that it is a
given that having a uniform system does facilitate operational
efficiency.
Chairman Bachus. Mr. Serio, do you agree?
Mr. Serio. Yes, Mr. Chairman, thank you.
We agree with that entirely in terms of not just the speed
with which decisions are made, but actually making better
underwriting decisions in the insurance realm, which would
benefit all the policyholders of a typical company. The
safeguards come in from the other side of the process, from the
state side. That is why together, as our testimony indicates,
that really works well with the best of both worlds, from both
the federal and the state realms because you have, particularly
for banks and insurance, if I can add banks in for a moment,
they are both regulated industries and they both have a certain
amount of skin in the game, if you will, to make sure that the
information they are getting is good. They are using these
things to maximum efficiency and effectiveness. That is why, to
now look at it in the abstract of whether it works or does not
work, but rather how does it work as a whole, and we think it
does.
Chairman Bachus. Right. We are not saying that that makes
the case that you should have uniformity. I am simply saying
that all our testimony to date, and on the other panels, there
has been pretty wide agreement that uniformity allows quicker,
more cost-efficient decisions. Now, whether it is worth paying
more costs, which are passed onto consumers, or whether it is
worth it is another debate.
Ms. Brill. Mr. Chairman, very respectfully, I would urge
this committee to look at the data. In Vermont, our credit
decisions are obviously extremely prudent because our
bankruptcy rates are the lowest in the nation.
Chairman Bachus. But it would be lenders outside Vermont
lending to Vermonters that would have to comply with your law,
and so the cost would be incurred by them. I am not sure you
would have that data.
Ms. Brill. What the cost is? You are correct that I do not
know what the incremental cost is to the industry of complying
with Vermont's law. I do not have that data.
Chairman Bachus. Obviously the cost of that is going to be
to those 49 other states, institutions there or insurance
companies there trying to comply with your law. The cost of
complying with the Vermont law is going to be spread out over
50 states.
Ms. Brill. I am not certain that that is true. It may very
well be.
Chairman Bachus. But do Vermonters borrow money from out-
of-state institutions or get insurance from out-of-state
institutions?
Ms. Brill. Absolutely. All I am saying is that I am not
sure that the institutions would spread the costs across the
nation, or whether they would impose a premium on Vermonters. I
was merely responding to the point about the prudence of the
decisions and the accuracy of the information, and their
ability to evaluate the credit worthiness of Vermonters. It
would appear to be high, given that our consumer bankruptcy
rates are the lowest in the nation.
Chairman Bachus. In fact, Mr. Sanders actually said that in
Alabama they are one of the highest in the nation, and in
Vermont they are one of the lowest, and he says that the Fair
Credit Reporting Act has a lot to do with that. But I went back
and saw where ours were in the south, and they have always been
historically the highest, and New England has historically
always been at the lowest, and that was 50 years ago, and this
law is not that old. But that is a good argument if you can
make it and get away with it.
Mr. Sanders?
Mr. Sanders. Just a couple of points, and I did not suggest
that people's interest rates were directly 100 percent impacted
by the Fair Credit Reporting Act. Obviously, there are a
thousand factors that determine that. But just a general
statement in terms of the state of credit in America, we should
not forget that since the year 2000, bankruptcy rates are up by
23 percent, and they are currently the highest in the country.
Mr. Beales, I did want to address a question to you. You
are the Director of consumer affairs for the FTC, and in that
position presumably you are one of the key consumer
representatives in this country, the person that millions of
people presumably look to for help. I am sure that you will
agree with me that a consumer's credit score is of enormous
consequence to that individual in terms of purchasing a home or
a car or the overall interest rates that that person pays. I
don't think anyone disputes that.
Picking up on Mr. Ackerman's line of questioning, what we
have learned today, and you will correct me if I am wrong here,
is that you, whose job it is to represent millions of
consumers, do not know how a credit score is calculated. You do
not know it. I do not know it. Nobody up here knows it. We do
not know why one credit bureau may develop a higher or lower
score than another. We do not know that one's score may be
higher or lower because one is black or white or Hispanic;
because one may live in a bad part of town or a fancy part of
town; because one is a woman or a man; or because one may have
lost the job three years ago for no fault of one's own.
Given that reality, that you have told us that you do not
know the methodology by which these scores are determined, do
you believe that you, me, this committee and the American
people should receive a description of the key factors that may
adversely affect a consumer's credit score? Do we have a right
to know how these scores are determined?
Mr. Beales. Congressman, I believe, with all due respect,
that we do understand the methodology by which these scores are
developed. We understand it in some detail. We do not know the
particular mathematical formula for any particular score, but
we do understand how they are developed. They are developed in
a way to predict as well as it is possible to statistically
predict the different characteristics that are correlated with
the risk that somebody will not repay.
Mr. Sanders. One second, I am not quite sure, but we do not
know. Mr. Bachus is from Alabama, I am from Vermont, what
criteria? Is he a better risk because he is from Alabama? We
have members here who are black or white, women or men, you do
not know. You do not know how much weight. If somebody was laid
off from a job three years ago, how much weight does that have
in terms of their ability to get decent credit? You do not know
the answer to that. I am asking you a simple question, as
presumably a representative of consumers in this country, do
you think the people have a right to know?
Mr. Beales. What people do have a right to know, and what
they get now under the Equal Credit Opportunity Act, is the
four most important factors that influence their score; if it
was based on a credit scoring decision, then the four most
important factors that influenced that are identified. Now,
everything matters in a credit score. It is the nature of the
beast. The cut that was made in the ECOA is to identify the
four most important ones; these are the things you, the
consumer, ought to focus on.
Mr. Sanders. I would simply say that my understanding is
that the Equal Credit Opportunity Act requires that credit
scoring models be statistically sound and empirically derived.
That is fine. But serious concerns have been raised that the
use of credit scoring models may have a disproportionate impact
on minorities and women, among other factors. Do you want to
comment on that?
Mr. Beales. The origin of these models was to comply with
the ECOA, to replace subjective judgments that may well have
been correlated with race or gender, with objective
characteristics where the creditor could say, and you could
about any particular model, here are the things that go into
it; here is the business basis for this decision, which the law
allows. It is not discriminatory. Now, whether the current
models are in fact or not, I have not heard that allegation
previously, but that is the history of these models. They were
developed to avoid charges of law violations.
Mr. Sanders. But you do not know.
Mr. Beales. We have not investigated the particular models.
Chairman Bachus. Would the gentleman yield for just a
second?
Mr. Sanders. Yes.
Chairman Bachus. I think the Federal Reserve maintains some
of those models. You could maybe ask Ms. Smith.
Mr. Sanders. Mr. Beales can comment on that, but I cannot
imagine for the life of me, Mr. Chairman or Mr. Beales or any
member of this committee, why this is not public information.
If women are not getting the same type of credit ratings
because they are a woman, why don't we know about that? And why
don't you demand that we know about it and why isn't that made
public?
Ms. Dolores Smith. I will address that with respect to
women. I think that we don't know about what kind of factors
may have an impact on the basis of race and ethnicity, but
initially, 25 years ago, there was a problem with credit
scoring systems and the impact that they had on the
availability of credit to women, largely because the credit
bureau reports were based strictly on information about the
husband, in the case of a couple, or just basically information
about men, rather than men and women. So over time, that
remedied itself as women received credit and as information
about them entered into the database at the credit bureaus, and
into the development of these credit scoring models.
With respect to race and ethnicity, there are, I suspect,
factors that do affect the availability of credit to them. They
are likely, though, to be based on related factors and
correlations having to do with minorities having lower incomes
and having less in the way of assets.
Mr. Sanders. But Ms. Smith, you are presuming these things,
because we don't really know.
Ms. Dolores Smith. We can only presume.
Mr. Sanders. But don't you think that on an issue of this
magnitude we should not have to presume? That this information
should be made public? Why shouldn't we know exactly how they
come up with their scoring methodology?
Ms. Dolores Smith. First of all, I will say that on the
credit scoring methodology and on credit scoring systems in
general, this was a decision that basically the Congress made
back in 1974 or 1975, when it amended the ECOA.
Mr. Sanders. Right, I know that. But shouldn't we change it
right now? Tell me why you think it is wrong to make this
information public to the people.
Ms. Dolores Smith. But what information is it that you are
talking about? How the systems are developed?
Mr. Sanders. Precisely.
Ms. Dolores Smith. The problem with telling people how the
systems are developed is, and you have testimony from Fair
Isaac that I think will lay that out more clearly than I can,
but it has to do with this being information that the creditors
are using to make their underwriting decisions. So the concern
is that under the ECOA, as Mr. Beales noted, the consumer does
have the right when they are turned down for credit to know the
principal reasons, but not necessarily the score, with the
expectation that the score is not going to be very helpful to
them.
Mr. Sanders. We are going around the bush here a little
bit. I cannot imagine any reason why people not know how the
score is derived.
Ms. Brill, did you want to comment on that?
Ms. Brill. We agree.
Mr. Sanders. That is a Vermont response; very brief and to
the point.
Any other comments on that?
Mr. Beales. Congressman, I think we do understand how the
reports are developed. I think the reason that the algorithm
itself is not and should not be made public is that it is
expensive to develop these models. It is a piece of
intellectual property, and if you make it public, anybody can
use it.
Mr. Sanders. Expensive? Let's see. I would just comment
that if one looks at the compensation packages that the heads
of these companies make and the profits these banks make,
whenever we ask them to do something that is going to drive up
consumers's costs, but somehow or another it never affects the
compensation packages or the profits or the dividends that are
paid out. I think the public does have a right to have this
information.
Thank you very much, Mr. Chairman.
Chairman Bachus. Any other members who wish to ask
questions?
Ms. Maloney?
Mrs. Maloney. Thank you, Mr. Chairman, for holding this
committee meeting. I am very appreciative to all the panelists.
In particular, I would like to welcome Superintendent Serio
from the great State of New York, and thank him for once again
joining the committee to offer the views of state insurance
regulators. This is his second appearance before our committee.
He testified earlier on the need for antiterrorism insurance in
the aftermath of 9-11 and how the availability of insurance was
affecting the recovery of our city.
Superintendent Serio, in your testimony you extensively
describe the approaches different states have taken on the use
of credit reports in rating and underwriting insurance. I
certainly agree with you that this is a critically important
issue that magnifies the importance of the accuracy of the
credit reports and the need for consumers to be educated as to
how they are used.
Insurers argue that credit information is a good predictor
of potential losses when used for insurance underwriting.
Mistakes or inaccuracies on credit reports have the potential
of significantly raising the cost of insurance for consumers.
Given your experience in New York and with the state laws
across the country, do you see any role for federal
intervention in this area beyond extension of the FCRA
provisions allowing consumers the ability to correct mistakes
in their credit reports?
Mr. Serio. Mrs. Maloney, we have as a body at the NAIC
taken the approach first that disclosure is paramount, maximum,
practical, transparent, if you will, at least to the regulatory
bodies. Some of the points made by my fellow panelists about
the need for confidentiality on some of those models, we would
at least think that it needs to be disclosed to the regulators
so that we can make decisions about whether they are being
unfairly discriminatory or not under existing state insurance
laws.
I think that has worked. In the matter that I mentioned a
little while ago with respect to one filing that we do have in
New York that we have allowed where there has been a discrete
data set from Metropolitan Life put together so that they can
use a credit scoring mechanism, but where it is readily
identifiable, where that data came from, that the information
is then related to the consumer. There is not necessarily a
need to tinker with the FCRA because we do have these other
laws that are already providing a lot of that detail work, if
you will, specifically in those regulatory environments, to
achieve that maximum protection.
Mrs. Maloney. Thank you.
One of my colleagues has a piece of legislation before our
body that says that credit reports cannot be used by insurers.
Would you comment on that piece of legislation or that idea,
whether you agree with it or disagree with it, and why?
Mr. Serio. I think on behalf of the NAIC, we have found
actuarial support for credit reporting data and credit scoring
mechanisms to some degree. I think you will find in the
compendium of the laws and the regulations that we have
provided to you that the focus has been that it is a worthwhile
and useful tool, but not to be taken alone. I think a lot of
the action in the states is moving towards that it is some
determinant of risk, but it should not be the sole determinant.
I think that is where a lot of the legal enactments have been
going.
For it to be a sole determinant would be problematic for
the Commissioners, and that is why this is one of several or a
series of factors or indicators to go into underwriting. But as
a set of indicators, it is a legitimate risk factor.
Mrs. Maloney. I would like to follow up on my colleague's
questioning on how systems are available. As I understood it,
you believe that how they are developed should be available to
regulators, but not the public. Are they available to
regulators now or not?
Mr. Serio. In a lot of ways, from the insurance side, a lot
of the regulators do have the right to ask for that material.
But like many other pieces of information that regulatory
bodies get, these are what you might call proprietary data. I
think Mr. Beales was alluding to that, that in the hands of the
regulators to evaluate, it does provide requisite consumer
protection without losing that counterbalance, which is the
competitive marketplace, proprietary data; things that have
been constructed at great cost. I do not think we are
approaching this from the perspective of not to evaluate it,
but I think there has got to be a question of in whose hands do
you get the best and highest use of that information.
Mrs. Maloney. Thank you very much. My time is up, and I
thank you very much for traveling down from New York. We
appreciate it.
Mr. Hensarling. [Presiding.] On behalf of the Chairman and
all the members of the subcommittee, we thank you for your
enlightening and patient testimony. Panel one is now dismissed,
and we would at this time call panel two.
I would like to welcome our second panel. We appreciate
your agreeing to testify before this subcommittee today. At
this time, to introduce our panelists, I would first like to
yield to Mr. Castle.
Mr. Castle. Thank you, Mr. Chairman.
I would like to introduce my friend Clint Walker, who is on
this end of the panel, who hails from my home state of
Delaware. There are not a whole lot of us, so we appreciate him
being here. He is the general counsel and Chief Administrative
Officer of Juniper Bank in Wilmington. He is also very active
in the community in Delaware and serves on the Board of the
Wilmington Renaissance Development Corporation and the Delaware
Community Investment Corporation. As a matter of fact, Juniper
is an enterprise zone on the Christiana River which you go by
on your Amtrak train. If you are going from here to New York,
you will see it on the right-hand side there where the ballpark
is. The state has been very appreciative of all the
contributions by Juniper in terms of jobs and community
involvement.
For today's purposes, he has plenty of experience in
consumer credit issues and FCRA. Not only has he been general
counsel of the First USA Bank and Citibank, but he was recently
appointed to the Consumer Advisory Council of the Board of
Governors of the Federal Reserve. In addition, Clint is former
Chairman of the American Bar Association's Subcommittee on
Privacy, so there is a heck of a lot we can learn from his
background and his experience, and we appreciate Clint being
here today.
I may not be here all the time because I have to do some
voting in the Education Committee, but we appreciate your being
here, as well as the other panelists.
I yield back, Mr. Chairman.
Mr. Hensarling. Thank you.
At this time, I would like to yield to Ms. Biggert for our
second introduction.
Mrs. Biggert. Thank you very much, Mr. Chairman.
It is my pleasure to introduce Kevin Sullivan from the
great State of Illinois, a little bit larger state, but which
also has many of the model insurance laws. Mr. Sullivan is Vice
President and Deputy General Counsel for Government Relations
at the Allstate Insurance Company. He is responsible for
development and advocacy of State and Federal public policy
positions. This is actually a new position as of January 2003.
He has been very active in the company since 1984. Prior to
going to Allstate, he served as the Commissioner of insurance
for the State of Nevada, as well as Regional Counsel for the
National Association of Independent Insurers. He then had
several legal positions in the insurance departments in the
states of Nevada and Nebraska. So he is well informed on these
issues as well.
He is a graduate of the University of Nebraska. He and his
wife and children now reside in Libertyville, Illinois. I would
like to welcome him to this panel.
Thank you, Mr. Chairman.
Mr. Hensarling. Thank you.
I have the pleasure of introducing our other panelists, Mr.
Ramon Rodriguez, the Chief Operating Officer of the United
States Hispanic Chamber of Commerce; Mr. Leonard Bennett,
member of the National Association of Consumer Advocates; Ms.
Julie Smith, President of Buzzuto Management Company, on behalf
of the National Multi Housing Counsel and the National
Apartment Association joint legislative program.
Mr. Rodriguez, we would like to call upon you at this time
to receive your testimony. Please, if you can, press the button
on the microphone so that we can hear you. If you are
unacquainted, we have a light system here. We would ask our
panelists to try to stick to the five minutes, and you will get
a yellow light when there is one minute to go in your
testimony.
Mr. Rodriguez?
STATEMENT OF RAMON RODRIGUEZ, CHIEF OPERATING OFFICER, UNITED
STATES HISPANIC CHAMBER OF COMMERCE
Mr. Ramon Rodriguez. Thank you, Mr. Chairman.
Good afternoon, Mr. Chairman and members of the committee.
Thank you for the opportunity to testify before this committee
relevant to an issue that is of vital interest to the consumer
in particular, to financial institutions in general, to small
business owners, and in particular to Hispanic-owned
businesses.
My name is Ramon Rodriguez and I am the Chief Operating
Officer of the United States Hispanic Chamber of Commerce,
commonly referred to as the USHCC. Since its founding in 1979
in the state of New Mexico, the USHCC has been at the forefront
of advocating for and on behalf of Hispanic business owners,
both on a national and international level. As the leading
Hispanic business organization in the United States, we
represent the interests of more than 1.5 million Hispanic-owned
businesses in the United States and Puerto Rico.
Our primary mission is to promote and enhance business
opportunities with corporate America and the public sector for
the constituency we represent. One of the challenges that
confronts our constituency continuously is access to capital.
The entrepreneurial spirit of the Hispanic community is
unequaled within the minority business community. It has twice
as many businesses as the next largest minority business
sector, and growing at an exponential rate, generating over
$200 billion in annual gross receipts.
With an increase in the number and profits of Hispanic
businesses in this country, the community has become a central
figure with the country's financial markets. For Hispanic
businesses, access to capital means the ability to grow and
expand their enterprises to become more competitive in the
business world. Part of that access to capital is shaving
access to credit and having a mechanism in place that will not
impede the free flow of that credit, that in some instances can
mean the difference between taking advantage of an opportunity
or not.
Mr. Chairman, now that you know who we are, allow me to
focus on the Fair Credit Reporting Act and the importance of
uniform national standards to our members. Because others have
and will testify about the intricate inner workings of the Act
and what will happen if any aspect is materially disrupted, I
will not do so today. Suffice it to say that all of the
economic benefits being described apply equally to our
businesses and our members, and more importantly, all of the
consequences of disrupting or balkanizing the current system
falls on us as well.
Having said that, let me make some important points
uniquely from our perspective. Let me begin with some
statistics I have seen. Seven out of ten businesses are started
with less than $20,000 of capitalization. Small businesses
represent 99 percent of all U.S. employers and they account for
80 percent of all new jobs. Over 45 percent of small businesses
rely upon personal credit cards as a major source of financing,
and since the 1996 amendments, those in the lower half of the
income spectrum have enjoyed by far the largest increase in
access to competitively priced credit. Minority homeownership
and minority ownership of businesses have increased steadily
since 1996, due largely to competitively available credit.
Unlike any time in our history, those in the lowest one-fifth
income bracket have, by far, seen the greatest increase in
homeownership as a result.
These phenomena have occurred because Congress enacted laws
that allowed a truly national market for credit to develop, and
gave businesses both large and small the ability to accurately
assess credit risks like never before. Not surprising then that
recent studies also show that those who achieved the most gains
since 1996 will, should the current system become balkanized,
suffer disproportionately. One study indicated 1.8 million
fewer jobs and 19,000 fewer home purchases a year if FCRA is
not renewed. Because our members are among those who have
benefited the most from what the 1996 amendments made possible,
we will suffer disproportionately should the current law be
permitted to lapse. We urge you not to let that happen.
Let me share with you a letter our President, George
Herrera, recently sent to the White House on this topic. I
share this because I know this administration shares our
concern. The letter reads as follows: ``This administration has
always been attentive to issues of importance to the Hispanic
business community, particularly issues that impact upon our
ability to enjoy the same economic opportunities as others. On
behalf of the United States Hispanic Chamber of Commerce, allow
me to focus on two economic issues important to both our
members and to our community.
``There is increasing discussion within the chamber of the
potentially severe economic consequences should the expiring
provisions of the Fair Credit Reporting Act be permitted to
lapse. Equally of concern is having states like California
continue efforts to restrict our companies from knowing their
customers and acting upon information now available to them to
better their business potential. I urge the White House to
actively work to obtain the legislation necessary to prevent
these things from happening.
Throughout the years, but more so recently, the Hispanic
business community has contributed greatly to the growth of our
nation's economy. The economic success of our members and of
individuals within the community is due, in substantial part,
to credit becoming widely and fairly available at competitive
rates. These laws have extended the reach of credit markets in
ways that have largely abolished artificial restrictions
prevalent only a few short years ago. We must not retreat and
we must not allow a patchwork of laws that ultimately will
unfairly hurt our members and our communities.''
George concluded by saying, ``One recent study I saw
predicated a severe economic impact should Congress not act. It
came as no surprise that the findings also indicated that we
would suffer disproportionately. That is why this is important
to our members and that is why I am asking for your help.''
George makes the point well. With the current law, a credit
system that is the envy of the world has developed. Our members
can both extend and receive credit at a speed and cost never
before dreamed possible. The days when most small businesses
only sold their wares to customers in their neighborhood are
long gone. Our members need and rely upon a credit reporting
system that reflects national consistency. Only then can our
members accurately judge the credit worthiness of their
customers regardless of where they are, and only then can our
members benefit from intense competition to fulfill their
credit needs, regardless of what street or neighborhood where
they live or do business.
Allow me please to make three final points. First, many of
our Hispanic business members succeed because they are able to
market aggressively and successfully. Those of us who have
succeeded in business know that customers do not come to us.
Mr. Hensarling. Mr. Rodriguez, unfortunately I do need you
to sum up so that we can go to our other panelists.
Mr. Ramon Rodriguez. Yes, I am just about there, sir. Thank
you very much, Mr. Chairman.
Let me then address the one point that I think is very,
very important as well, and something that was mentioned in the
first meeting.
Secondly, the letter explained that we are very concerned
about the efforts in some states to restrict our companies from
knowing their customers and acting upon the information now
available to better their business potential.
In summing up, Mr. Chairman, I would simply like to say
that one of the things that our organization also supports as
it would benefit our consumers and our constituency is the opt-
out options that would be available to those consumers as it
relates to their respective credit. It is a critical element of
the FCRA and I certainly urge that.
I urge the Congress and the Administration to resolve these
issues quickly. Otherwise, we believe this country risks a
significant economic retreat, and if the economists are
correct, it will fall hardest on those whose gains are only
recent, that is minority business communities.
Thank you, Mr. Chairman.
[The prepared statement of Ramon Rodriguez can be found on
page 332 in the appendix.]
Mr. Hensarling. Thank you, Mr. Rodriguez.
Mr. Sullivan, we would like to receive your testimony now.
STATEMENT OF KEVIN T. SULLIVAN, VICE PRESIDENT AND DEPUTY
GENERAL COUNSEL, GOVERNMENT RELATIONS, ALLSTATE INSURANCE
COMPANY
Mr. Sullivan. Mr. Chairman, members of the committee, thank
you for allowing me to be here today to testify on the
importance of the access to credit reports for insurance
company purposes. I would like to especially thank Mrs. Biggert
for the generous introduction.
I am in fact, Deputy General Counsel for Government
Relations to the Allstate Insurance Company. Allstate Insurance
Company is the second largest writer of personal lines
insurance in the United States, primarily automobile and
homeowners insurance. I will direct my comments to those
particular lines of insurance.
You have heard a lot about the Fair Credit Reporting Act
and its importance for the lending industry. It is also of
growing significance in helping the insurance industry make
automobile and homeowners insurance more affordable and
available to millions of Americans. I would like to take this
opportunity to provide you with some indication of why the
continued use and access to credit management information is
important to insurance companies if they are going to be able
to charge consumer prices which match the risk of loss that
those consumers present.
Finally, I would like to take a moment or two to highlight
some of the concerns we have with the recent activities at the
state level, which have threatened the continued viability of
the full use of the information contained in consumer credit
reports.
Insurance underwriting has in fact been recognized since
1970 as a permissible purpose under the FCRA and it is used in
a very rudimentary fashion to underwrite homeowners insurance,
where companies look at credit records to determine precarious
financial positions and concerns for potential arson and fraud.
But in the last 10 years or so, the insurance industry and
Allstate in particular began to recognize a strong correlation
between major public record items on credit reports and future
loss potential.
We began to look at things like bankruptcies, collections,
repossessions, and realized that people who had those things on
their record were 40 percent more likely to incur losses than
people with out them, a very, very significant indicator of
future loss potential. We could not ignore that significant
difference if we were to price in a manner matching risk. We
called that financial stability, and we used it as an
additional factor in helping us to underwrite insurance, not in
lieu of all the other underwriting factors. Throughout the
1990s, we developed better information and more sophisticated
models for both automobile and homeowners insurance by taking a
look at our own book of business, literally hundreds of
thousands, millions of customers. We built pricing models which
allowed us to develop better, and what we consider more
accurate prices. To this day, we now have the ability to give
people with the best credit records lower premiums than those
with the worst credit records, a very significant differential.
We think that that is a reasonable way to provide our customers
with the best value.
What is credit scoring and how is it used? Very quickly and
simply, insurance scores are derived from a review of credit
reports. The Allstate model is a proprietary model, but like
others it evaluates how people handle the acquisition of credit
and how they handle and meet the obligations that they incur.
We look at the presence of public records, things like
bankruptcies, collections, delinquencies, the number and types
of accounts an individual has and their account payment
history. We look at credit inquiries and credit utilization,
which is the relativity between the balance they carry and the
limits they have available to them. The resulting score, again,
is used in addition to other rating and underwriting factors to
arrive at a price that we offer to an applicant.
It is important to point out that our goal is to help
improve our ability to predict and to properly distribute the
premiums to those individuals who are most likely to incur
loss. It is in fact the best predictor of future loss we have
yet discovered. Again, the differential between homeowners
insurance is even greater than that for automobile insurance,
where there is a 60 percent difference. In homeowners a person
with a bad credit record is twice as likely to incur losses as
an individual without that.
So we are concerned that the states, almost 40 of them as
Commissioner Serio acknowledged, are developing their own
particular regulations to limit the ability of us to use credit
records. We are concerned about that, that it will basically
regulate the use of credit information right out of the
acceptable factors, and that will result in worse prices for
some and less availability of insurance coverage for others.
So we are very supportive of the FCRA. As Congress
continues to examine the preemptions, we are looking forward to
working with the subcommittee in an effort not only to extend
the preemptions, but also to find solutions to the problems
caused by inconsistent and anticompetitive restrictions on the
use of insurance scoring at the state level.
Thank you, Mr. Chairman.
[The prepared statement of Kevin T. Sullivan can be found
on page 473 in the appendix.]
Mr. Hensarling. Thank you, Mr. Sullivan.
Mr. Bennett, we would like to receive your testimony now.
STATEMENT OF LEONARD BENNETT, MEMBER, NATIONAL ASSOCIATION OF
CONSUMER ADVOCATES
Mr. Bennett. Good morning, distinguished members of the
committee and subcommittee. My name is Leonard Bennett. I am
here on behalf of and as a member of the National Association
of Consumer Advocates, the organization that includes among
other things 850 members, many of whom, as myself, are consumer
protection attorneys. I litigate these cases. This is the first
time I have appeared before Congress. I am not sure if I will
appear again.
I come from a conservative background. I went to the George
Mason University School of Law and Economics, and had as one of
my teachers Justice Ginsburg. I have a finance degree and have
what I believe to be the only frontline experience other than
the Vermont Assistant Attorney General that you heard from
today, and I might be one of the few speakers that you hear
from that has that experience.
You pass laws. We can talk about the policy, and you can
talk and debate about the statistics analyzed by government
analysts, government relations, and spokespersons for trade
groups. But I am the individual who goes into court, in my case
the Richmond federal court, not known for its liberal views,
and attempt to enforce these laws. As a conservative by
ideology, I do not want the Federal Trade Commission to have an
army of regulators patrolling the streets in my community to
enforce these laws. So I am supportive of the efforts of NACA,
the efforts of Congress in providing us tools to enforce the
law by private cause of action.
I have heard a lot today about the importance of credit and
information. There is an important concept I learned, one of
the few things I may recall from my finance undergraduate
degree, called the efficient market hypothesis. That concept is
that business actors can only make within a stock market
context rational decisions when they have accurate information.
It is true that Hispanic businesses need accurate information
to make decisions and that Allstate, if it knows whether or not
an individual has positive credit and is a good credit risk,
may want to consider that in its decisions. It is true that
Juniper Bank may want to know and may want access to
information about whose credit is acceptable. But without
accurate information, all of those systems, all of those
decisions fail.
Our economy has a problem. The problem is, our credit
system is failing. I am a proud American and I would put our
system up against anyone's system in the world, but we can do
better. The Fair Credit Reporting Act has failed. Bankruptcies
are skyrocketing. That means Juniper Bank and State Farm and
other businesses that use credit reports are not able to make
rational decisions and predict who is going to file bankruptcy.
Identity theft is up. Identity theft is a symptom. It is not a
cause; it is not an isolated problem. It is a symptom of a
broken system.
I have in my written remarks provided details of the
mechanics of the system. For those that were here for the last
panel, and a number of questions that the distinguished
representative from New York asked, or the ranking member
asked, these questions are answered.
I have about a minute and 28 seconds. I want to point to
just one of those, and that is the failure of the
reinvestigation system, and let you know how it works. Whenever
you have a credit problem, you contact me or you write a letter
to the credit bureaus. Eighty percent of the disputes come in
by writing; 20 percent by phone call. They have minimum wage
employees that have to process one consumer every four minutes
or less. In the case of Equifax, and as a proud America this
particularly offends me, Equifax contracts out their dispute
work to a foreign company in Jamaica, that uses Jamaican
employees. I assume it is not a jobs program for lesser-
developed nations, but rather to save money.
Your dispute, in my case the letter, may attach documents,
paid-in-full notes, a letter from the creditor, whatever, if
you are an identity theft victim, or otherwise it is reduced to
a two-digit code for identity theft or a mixed identity. For
the representative from New York's problem, that code will come
out to the furnisher, not his/her. That is all they get.
I am glad that Representative Castle is not here, because I
litigated the only case, the only one since 1997, since the
1996 amendments took effect in 1997, against a furnisher that
has ever been able to go to trial. We won in Richmond. The
defendant was MBNA. MBNA said, and this is the last thing I
will read, that there are no national standards. I quote that,
and I will not read it again. It is in my written testimony.
MBNA's position on appeal in their appellate brief is, dear
judge, dear court of appeals, there are no national standards
that regulate furnishers. Read the position of the largest
credit card company in America.
Please review my written testimony, and I will certainly
answer any questions that the committee has.
[The prepared statement of Leonard Bennett can be found on
page 150 in the appendix.]
Mr. Hensarling. Thank you, Mr. Bennett.
At this time, we would like to receive your testimony, Ms.
Smith.
STATEMENT OF JULIE A. SMITH, PRESIDENT, BUZZUTO MANAGEMENT
COMPANY, ON BEHALF OF THE NATIONAL MULTI HOUSING COUNCIL AND
THE NATIONAL APARTMENT ASSOCIATION JOINT LEGISLATIVE PROGRAM
Ms. Julie Smith. Thank you.
Good afternoon, Mr. Chairman and distinguished members of
the subcommittee. I am Julia Smith, President of Buzzuto
Management Company, an owner, developer and manager of
apartments in the mid-Atlantic region. It is my pleasure to
appear today on behalf of the National Multi Housing Council
and the National Apartment Association joint legislative
program to discuss the experience of apartment providers and
the rental housing industry with the Fair Credit Reporting Act.
The National Multi Housing Council and the National
Apartment Association represent the nation's leading firms
participating in the multi-family rental housing industry. The
NMHC and the NAA believe that eliminating the current uniform
federal treatment of adverse action notices, consumer report
contacts, and furnisher obligations can be expected to impose
new operational costs on rental housing firms and increase
uncertainty about the credit and legal history of our
residents. These increased operating costs and risks will have
a material impact on the cost and availability of rental
housing.
Recent state legislative proposals addressing consumer data
demonstrate the benefits of FCRA's system of functional
regulation. These state proposals suggest that states may opt
to regulate in a patchwork fashion, varying coverage of their
consumer data laws by industry, rather than by function as the
FCRA does. While we support the continuation of the national
preemptions now found in FCRA, we support efforts by Congress
and the Administration to develop new measures to address
identity theft problems that have gained wider national
attention since the enactment of major changes to the FCRA in
1996. The uniform national standards that FCRA now provides
have increased the usefulness of consumer report information,
enabling rental housing providers to make more informed
decisions about resident and employee applicants.
The January 1, 2004 expiration of current state law
preemptions under Section 624 of the FCRA, however, raises
concerns for rental housing providers in three specific areas:
one, adverse action notices; two, permissible consumer report
information and the obsolescence of that information; and
three, consumer data furnisher statutory obligations.
The expiration of Section 624 preemptions could raise
operating costs and risks for rental housing in three areas.
Adverse action notices, without additional congressional
action, the expiration of Section 624's preemption of state
laws addressing Section 615 A and B beginning next year could
mean that rental housing firms operating in multiple states
would be required to provide many more versions of the adverse
action notices under circumstances that would vary with each
jurisdiction.
Today, rental housing providers are typically providing
standard form adverse action notices in the vast majority of
states under uniform conditions. Adverse action notices
provided by rental housing owners are promoting wider awareness
of consumer history that, in turn, can be used to improve the
accuracy of file data where the consumers access and review
their report and dispute inaccurate data.
The NMHC and NAA are concerned about the higher operating
costs that could result from a legal regime where the content
of the adverse action notice and the circumstances under which
it is provided varies with each jurisdiction. Permitting states
to vary the content of what information may be included in
consumer reports as the expiration of Section 624 preemption of
the obsolescent limitations and other provisions in Section 605
would do, could substantially expand crime and credit risk for
rental housing owners and residents.
The NMHC and NAA believe that creating new opportunities
for States to delete information for consumer reports based on
varying policy rationales compromises the national consumer
data system.
On a national basis, rental housing residents and providers
could bear hardships of states that decided to use this new
authority to restrict the availability of negative criminal and
credit history. For example, a resident or employee applicant
from a state that had decided to restrict disclosure of prior
sexual offender history, as some states already do following
Megan's Law, could very well be obligated to document that he
or she was not a sex offender, where the applicant's
application to rent or work included a reference to time spent
in a non-disclosing state.
The NMHC and the NAA are concerned that a rental housing
provider's ability to reduce crime risks in the community it
owns by screening out applicants with criminal history profiles
could be significantly compromised by the ability of states to
restrict the sharing of criminal history data through consumer
reports. Naturally, a state law or municipal ordinance enacted
under a state enabling law that restricted the disclosure in
consumer reports of prior criminal history would make it easier
for criminals to opt not to disclose prior crimes and more
difficult for rental housing providers to detect a failure to
disclose.
Section 624's existing preemption of state laws outside of
Massachusetts and California governing a furnisher's duties
provides benefits that should also be preserved. Expiration of
the preemption on furnishers' duties would likely create varied
new state-imposed furnishers' duties that might not track the
realities of reasonable business practices, particularly in
industries such as rental housing where small businesses
predominate. For example, a state may choose to specify a short
amount of time for a furnisher to conduct an investigation upon
notice of a dispute under FCRA section 623 B. This mandate may
appear to provide additional consumer benefit, but in practice
the state standard may promote hurried and inaccurate
investigations as the state deadline does not provide adequate
time for small companies, as well as large companies, to
undertake a full and fair investigation.
FCRA currently provides businesses with standards of care
and deadlines that are capable of being implemented. These
provisions and the experience of NMHA and NAA members have
worked well to balance customer and user desire for file
accuracy with a furnisher's business practices. Where the
duties of furnishers are left to the states to define, the
operation and practices of rental housing providers furnishing
consumer data would have to be adapted and updated with the
advent of each new statutory change.
In closing, we share the concerns voiced by members of this
committee and witnesses before it about the crime of identity
theft, which has received increased public attention since the
passage of the last major changes to the FCRA in 1996. The Act
imposes duties on rental housing providers furnishing consumer
information to verify disputes. Thus, where identity theft has
compromised, a person's rental, credit, or criminal history,
the FCRA provides a resolution mechanism for victims to work
with rental housing providers and other furnishers to correct
records that have been compromised.
We look forward to working with this Congress and the
Administration to address identity theft concerns in the
context of the extension of the state law preemptions now found
in the FCRA. The expiration of the existing preemptions
presents an opportunity to maintain uniform national standards,
while providing new tools to address crimes such as identity
theft that have gained greater prominence since 1996.
Thank you very much.
[The prepared statement of Julie A. Smith can be found on
page 443 in the appendix.]
Mr. Hensarling. Thank you, Ms. Smith.
Mr. Walker, your turn.
STATEMENT OF CLINT WALKER, CHIEF ADMINISTRATIVE OFFICER AND
GENERAL COUNSEL, JUNIPER BANK
Mr. Walker. Good afternoon, Mr. Chairman, members of the
committee. First, I would like to thank Congressman Castle for
his generous introduction. As he stated, my name is Clint
Walker. I am the Chief Administrative Officer and General
Counsel of Juniper Bank. Juniper is a young and growing bank
focused on issuing credit cards to U.S. consumers. I appreciate
the invitation to appear before you today to discuss how the
FCRA affects our bank, consumers and the economy as a whole.
The FCRA has provided the legal framework that has been
instrumental in the shaping of an extremely efficient credit
reporting system that supports millions of credit decisions
each year. Consumers receive direct benefits from the system in
the form of lower credit costs, more choices for credit, and
greater convenience. For example, FCRA governs the important
underwriting marketing tool known as pre-screening. Pre-
screening is used to provide firm offers of credit to consumers
who meet certain established criteria. If a consumer responds
by requesting credit, the bank must honor the offer, so long as
the consumer continues to meet the credit criteria initially
established. Under FCRA, these pre-screened offers must notify
consumers they can opt out of pre-screening in the future by
simply calling a toll-free number.
Because the pre-screening rules established under FCRA are
the same across the country, lenders are able to develop and
market products on a nationwide basis. It is these uniform
rules that enable a new bank like Juniper to enter the market
and compete nationwide with the giants of our industry. The
competition enabled by pre-screening provides tremendous
benefits to consumers in the form of lower rates, no annual
fees, and wider credit availability.
In addition, there are other significant benefits related
to pre-screening that have attracted less attention, but are
just as important. For example, Juniper has found that accounts
obtained through pre-screening have a loss rate of
approximately one-fourth to one-half of those associated with
accounts obtained through other means. Moreover, the fraud rate
on accounts acquired through pre-screening is about one-seventh
the fraud rate associated with accounts obtained through other
means. This is in part because pre-screening allows banks to
more carefully and efficiently target offers through the use of
their underwriting criteria.
The contents of the consumer report are also largely
standardized under FCRA, because FCRA establishes time frames
for determining when the information becomes obsolete and it
preempts state laws. This is critically important because if we
know that the contents of a credit report are uniform across
the country, we can accurately evaluate the credit risk posed
by each consumer regardless of where that consumer resides.
This enables us to offer lower rates and make credit more
widely available.
On the other hand, if states were allowed to restrict the
contents of credit reports, those reports would be less
reliable and we would have to increase our prices or reduce
availability to compensate for the increased risk. Consumers
with less than perfect credit histories would suffer the most.
For example, today a bank may decide to extend credit to an
individual with one or two delinquencies in an otherwise
positive credit report. However, if the bank is aware of those
delinquencies, but doesn't know if additional information is
being shielded under state law, the bank might not be able to
extend credit to that consumer or may only do so at increased
costs to offset the additional risk.
In addition to being a user of credit reports, Juniper is
also a furnisher of information to credit bureaus. In fact, it
is card issuers like Juniper that supply much of the
information in credit reports, and when we at Juniper look at a
credit report, we typically find that the most useful and up to
date information has come from other credit card issuers. Under
FCRA, furnishers have certain obligations and these obligations
are uniform across the country. They include certain
obligations to reinvestigate. We take these obligations very
seriously, and we assign a person to every inquiry we get from
a credit bureau about our information.
These obligations were carefully crafted in 1996 to balance
the need for accuracy and concerns about impeding the supply of
information. In particular, Congress recognized that imposing
unreasonable burdens on furnishers could have a chilling effect
on the flow of information that is the lifeblood of the credit
reporting system. As part of the delicate balance struck on
this issue, FCRA precludes states from imposing different
standards. It is important that this delicate balance be
preserved. If a state were free to impose stricter standards,
furnishers would be forced to reevaluate the practice of
furnishing information to credit bureaus or respective
consumers in that state. Indeed, some furnishers may feel they
have no choice but to stop or restrict furnishing information
about consumers in that state.
In conclusion, the benefits to consumers associated with
uniform standards under FCRA are clear. These national
standards enable consumers to access a multitude of credit
choices at lower costs than ever before, and have produced
significant benefits to the economy as a whole.
Thank you again for the opportunity to appear before the
subcommittee. I would be happy to answer any questions you may
have.
[The prepared statement of Clint Walker can be found on
page 484 in the appendix.]
Chairman Bachus. [Presiding.] Thank you.
I will convene the questioning. Mr. Rodriguez, how can an
efficient credit reporting system allow entrepreneurs who must
rely on their personal credit histories to obtain financing to
start new businesses?
Mr. Ramon Rodriguez. Mr. Chairman, it is our belief that
the more proactive that accurate and liberal reporting can be
shared with that consumer, the more proactive in turn that
consumer can be in terms of addressing issues of concern that
might appear on his or her respective credit report.
As a result, we firmly believe that with that opportunity
made available to that consumer, he or she can turn a business
opportunity into an opportunity to be gained as opposed to an
opportunity that was lost because of other tactics, dilatory or
otherwise, that may be exercised by the respective reporting
agency or the respective creditor.
Chairman Bachus. Can you discuss how credit reports have
given those who maybe historically have been unable to get
access to credit, the ability to do so now?
Mr. Ramon Rodriguez. I do not have any tangible, specific
knowledge of that, Mr. Chairman, but again just referring to my
previous response, I believe that the greater sharing of
information that occurs, the more liberality of that sharing of
information, it would assist those who in the past may have
experienced some negative credit history of some kind, to be
able to provide the necessary explanations, as Mr. Ackerman
indicated that he had to his respective agency, and be able to
preclude some negative event from occurring that would prevent
that individual from taking advantage of other credit
opportunities or business opportunities.
Chairman Bachus. Thank you.
Ms. Smith, your written statement discusses the need for
uniformity with respect to adverse action notices that must be
provided under the Act. Can you explain how these notices are
helpful to consumers?
Ms. Julie Smith. They are very helpful. If an applicant
applies for an apartment and the application is not accepted or
rejected, all apartment operators are required to send that
applicant written notification letting them know what the
circumstances were in rejecting that application, and then
giving them the resources that they need to contact, to find
out what they need to do in order to take care of whatever
issue it was that caused the rejection of the application.
So that is in these standard notices that are being used in
the industry, and have made it much easier for so many of the
apartment companies, many who are so small, to comply with that
requirement.
Chairman Bachus. There has been speculation that if we had
several different state laws and these adverse notices had to
comply with all those laws, that it could make the adverse
notices several pages long. Would consumers be less likely to
read that adverse notice if you were talking about a several
page long document?
Ms. Julie Smith. It could be very intimidating to them. The
notices that are being issued now are very clear and I think
are very consumer-friendly in that they do give very clear
direction on what they need to do and what their next step is.
I would be a little concerned about something that was lengthy
and potentially intimidating to the consumer.
Chairman Bachus. Okay, all right.
Mr. Walker, your written statement indicates that fraud
losses on accounts acquired through pre-screening are
significantly lower than fraud losses on accounts acquired
through other means.
Mr. Walker. That is correct.
Chairman Bachus. Does this suggest that pre-screening is
less likely to result in identity theft than other types of
credit card applications?
Mr. Walker. I would not say, Congressman, that it is less
likely to result in identity theft, because people cannot
really use pre-screen solicitation for identity theft. All the
information that is in that, frankly, is name and address,
which a crook could get from a telephone book. I don't think it
is any different from a regular solicitation that is sent in
the mail.
Chairman Bachus. Okay. How are pre-screened offers
different from general solicitations?
Mr. Walker. They enable us to do several things. First of
all, we find that an individual who makes that extra effort to
come to you to seek a loan is a riskier applicant. It is
basically adverse selection; why are they going to that effort,
and some people, not by any means all, but some people are
doing that because they know something about themselves and
they want the credit.
Second of all, pre-screening enables you to get information
about the consumer at two different points in time: one, at the
time when you basically make the pre-screened offer; and two,
when the individual responds, and you can see what has happened
to the individual during that period of time. The migration of
credit information is very, very important in determining risk
incident, and it is a great opportunity for us to mitigate
risk.
Chairman Bachus. All right, thank you.
Ms. Maloney?
Mrs. Maloney. Thank you, Mr. Chairman.
I would like to thank all of the panelists. Mr. Bennett,
you seem very fed up. In your testimony you really leveled some
rather scathing charges against the investigative provisions in
the FCRA. I would like to ask you, have you contacted the FTC
or other governmental agencies to talk about the system's
shortcomings? If you have, what has been their response?
Mr. Bennett. Congresswoman, understand that speaking here
is a strange experience for me because I am asking you to help
put me out of business by solving these problems. I am the
litigator, but I can say that NACA itself, as well as our
allies, particularly the U.S. PIRG have been in touch with the
Federal Trade Commission. But as you would expect and as I
would hope as an advocate of small government, the Federal
Trade Commission is not funded in the capacity that would be
necessary in order to monitor a number of the provisions of the
FCRA. The most important one, the one that has not been
discussed but a bit here, is Section 1681 S(2)(a). That is the
requirement that says that a furnisher must maintain complete
and accurate records. It would be a wonderful national standard
if it were enforceable, but because of the (c) and (d)
subsections of that statute, it is only enforceable through the
Federal Trade Commission.
I would gather, and I would believe, and I would bet some
of my limited reputation on it, that the Federal Trade
Commission has not prosecuted a furnisher for violating Section
1681S(2)(a). The Federal Trade Commission has done some
admirable work on monitoring the violations of the statute by
the credit reporting agencies, but it is impossible to monitor
that. It is impossible. Think of all the collection agencies in
the world out there that can just fold up shop and move on to
the next town. It is impossible because think of the volume for
these large institutional investors who report and monitor, for
the Federal Trade Commission to be expected to keep up with
that.
You provided us an incentive, congresswoman, as has this
committee, and as I hope it will do with any amendments that
are made, for private individuals, conservative, liberal,
southerners like myself, or you have an excellent attorney in
New York that prosecute these claims; a number of states, and
Alabama, Mr. Chairman, you have some of the best Fair Credit
Reporting Act brains in the country. If you give us the tools,
we can help make it right; eliminating preemption, not putting
any more pressure on the furnishers is not the way to make it
right.
Mrs. Maloney. I know from my own experiences, and
Congressman Ackerman pointed out, that identity theft is really
on the rise. It is a huge problem in New York and probably
across the country. But I would like to specifically ask you,
what should we do to change the system? Do you have any
specific recommendations? I would like to invite you to submit
it to the panel in writing if you would like more time to think
about it. But do you have specific ways that it would work
better for consumers and for people who are trying to help the
consumers?
Mr. Bennett. Let me formally say, as you might expect, that
we fully endorse the legislative recommendations in U.S. PIRG's
written testimony. Representative Sanders, the ranking member,
has some, and Chairman Bachus, with your skills in the privacy
area, I am sure can come up with many. We certainly would like
the opportunity to submit that in writing.
I will answer this as Leonard A. Bennett. The biggest
problem out there right now is that the statute has too many
loopholes with respect to the investigation process. Credit
reporting agencies believe that they do not need to do anything
independent in the investigation process under Section 1681 I.
The agencies do not believe they need to evaluate information
independent of the furnishers. I have deposition excerpts I
provided in my written testimony, for example, where Trans
Union's designated spokesperson says, we just mimic what the
furnisher says. In that particular case, they even say, we
ignore third party documents.
I have a case that is in litigation now in which a Bank of
America customer refinanced his second mortgage in early 2002,
and Bank of America, apparently by mistake, reported it as a
foreclosure and charge-off in late 2002. He sent a copy of the
paid-in-full note, the released deed of trust, the letter from
the closing attorney and the letter from Bank of America. The
credit reporting agency ignores it because only communication
directly from the furnisher can result in a change or removal
of the credit report.
On the flip side, the furnisher's liability, and you will
see an excerpt from Capital One, the furnishers are not
entirely innocent either. The furnisher represented in the
Capital One deposition taken last month in my home state
explains an episode in which the reporting agencies, all three,
independently came in to the furnisher and said, this is the
response that we want you to make to our investigation demands.
We want you just to parrot or mirror what we say. The employee
in the deposition said, well, I asked the reporting agency,
should we look at original documents; should we review our
account statements; should we actually do something more than
just look at the computer screen? They were told no.
Identity theft, for example is a symptom. The problem from
identity theft is not so much that it happens. In a world of
automation, mixed identities and inaccuracies may happen. We
would like to see less emphasis on Social Security numbers. In
the case of the Capital One case, the one that I talked about,
the consumer had a pre-screen, pre-offer sent to the thief, who
knew that her Social Security number was one digit off from our
client's because of some other mistake that had been made by
furnishers. So she crossed out that digit and wrote in
handwriting the new Social Security number of our client, and
submitted it with the same name.
Because of the automated system, when Capital One got that,
they changed their records to add the thief's name as our
client's alias, and then that got sent to the bureaus, who now
after multiple disputes keep re-reporting it. Carol Fleischer
is her name. She is unable now to convince the world, ``I am
not Ms. King,'' I believe her name is, ``but I am not the
thief; I am Carol Fleischer and I have good credit.'' So the
reliance on Social Security numbers, and not even full matches,
is a problem.
MBNA, the case in which I was able to prosecute a case in
Richmond's federal court against MBNA, and it is now on appeal,
in MBNA's case, their employees reported that when they get an
investigation request in, all they have to do is match up two
of the following: name, Social Security number, date of birth
and address, two of the following, and if they match them up,
bingo. I cannot do much about that because Section 1681S(2)(a)
which requires accurate information, and would be a wonderful
national standard, I would take that over what California,
Vermont and Massachusetts have. That standard is not
enforceable unless you, this committee, wants to fund an army
of regulators out there knocking on every door, going to
Juniper and the like, instead of allowing the free market
system that you have set up through private causes of action to
work.
S(2)(b) does not have a standard itself. The quote I used
from MBNA is fantastic. It says, thus Congress did not intend
to impose upon any furnisher the duty to defend its
investigation or records qualitatively under Section
1681S(2)(b). Indeed, the requirements of accuracy as they
relate to mere furnishers of information are contained in
Section 1681S(2)(a), a section which is expressly made not
actionable by consumers like Johnson under Section 1681S(2)(c)
and (d). If Congress had wanted to subject furnishers to a
qualitative standard, it easily could have done so.
So the debate about a national standard, even though I am
normally for States' rights, if you want to give me a national
standard by allowing us to sue under Section 1681S(2)(a) or an
even better legislative idea, make it a safe harbor. In the
rules of civil procedure in federal court, if someone files a
bad faith notion, we cannot sue them until we have first given
them a notice. So we first have to say, hey, your pleading is
in bad faith. The Congress could say, you still cannot sue
under S(2)(a) until you have written the furnisher and given
them an opportunity to correct the problem. That is a fair,
reasonable and free market solution.
Mrs. Maloney. Thank you. My time is up.
Chairman Bachus. Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
One of the advantages of coming to these hearings is
occasionally you actually learn something. Mr. Rodriguez, I was
very interested in aspects of your testimony that seven out of
ten businesses are started with less than $20,000 of capital. I
was aware that small businesses, the job engine of America,
create the preponderance of new jobs, but I did not realize how
many of them started with as little capital. I think you went
on in your written testimony to say over 45 percent of small
businesses rely on personal credit cards as a major source of
financing.
I really previously had not thought about the extension of
FCRA as a jobs issue, but given that we just passed a Jobs and
Growth Act in Congress and we are all very concerned about the
state of our economy, I guess I am curious whether or not the
Hispanic Chamber has developed any kind of model if Congress
fails to reauthorize and get us closer to a national standard,
as opposed to a 50-state atomistic standard? What would the
impact be on jobs, and if you have not developed a model, what
are your personal thoughts?
Mr. Ramon Rodriguez. We have not developed a model per se,
but to the extent of our recognition of how important the
credit-worthiness and the availability of credit is to the
Hispanic business owners throughout this country, to that
extent we had entered into an agreement with a financial
institution that would make available to those business owners
credit cards, both from a MasterCard and Visa perspective, that
would provide for them up to a $35,000 line of credit with a
very nominal rate of interest as they went into that plan.
That amount of money, that $35,000 limit, would, as I
indicated in my previous comments, allow in many instances a
small business owner, and most of the 1.5 million Hispanic-
owned businesses are small to the extent that they are mom-and-
pop operations, to take advantage of a business opportunity by
using that credit card line of credit to embrace that business
opportunity, that but for that line, they would not have been
able to, and perhaps may have caused them to shut their
operations or, indeed, not be able to grow as they had intended
to.
So that we will certainly look at and are looking at
aggressively at developing a model that we can present to this
body or some other body at an appropriate time, that would
reflect the kind of job loss impact that not extending the FCRA
as it currently exists would impose on small businesses.
Mr. Hensarling. But it is a fair assessment to say, then,
that in the opinion of the U.S. Hispanic Chamber that but for
the extension of FCRA there could be a significant job loss due
to the unavailability or unaffordability of credit to small
businessmen and entrepreneurs.
Mr. Ramon Rodriguez. We firmly believe that.
Mr. Hensarling. Thank you.
Mr. Sullivan, you said in your testimony that the use of
credit-based insurance scoring is the most significant
advancement in cost-based pricing in at least the past 30
years, so that is a rather significant and bold statement. I
understood in your testimony you alluded to a couple of
different studies, but I am curious if you could explain to me
why there is a correlation?
Mr. Sullivan. There have been a number of studies that very
directly highlight the correlation. The explanation of why is
one that is open to speculation. There are various theories and
hypotheses. Early on in the process, we began to wrestle with
how you would even conduct a study, put together a study that
would be able to explain why something happens. Generally in
the insurance business, we feel we have a responsibility under
the laws of unfair discrimination to statistically justify the
differences, and we do not generally get into the whys those
statistics seem to bear out.
But because we got that question a lot, we began to explore
it. We ran across about 30 different studies which speculate
that there are issues of risk-taking behavior related, and
other issues like stress that result in distracted driving and
other sorts of things. We can only speculate as to the reasons
why. The critical factor as far as we are concerned in our
responsibility to provide coverage at premiums that match the
risk of future loss that somebody presents, is that somebody
who is 60 percent more likely to have an automobile accident or
two-times as likely to have a loss on a homeowners insurance
policy should pay more for their insurance than somebody who is
less likely to have losses should pay.
Mr. Hensarling. Thank you. I am out of time.
Chairman Bachus. Thank you.
The gentleman from North Carolina?
Mr. Watt. Thank you, Mr. Chairman.
Mr. Bennett, I have to say at the outset that I have
instinctive identification and admiration for you for being
here, and thank you for being here. I guess it is based on the
fact that you practice like I did in the Fourth Circuit. That
is burden enough, given the persuasion of most of the judges in
the Fourth Circuit.
[LAUGHTER]
But to come here and suggest to my colleagues, many of whom
give lip service to states's rights, but seldom really vote
that way, that the right of the private cause of action is the
bedrock of conservatism, which all of them have forgotten
about. It requires me to just express my admiration for you and
I hope they were listening. There has been a concerted assault
on private causes of action, not so much necessarily in this
committee as much as in the Judiciary Committee, on which I
also serve.
I, like you, believe that without those individual causes
of action and the prospect of class actions that are effective,
you will have a bureaucracy at the FCC and the FTC and all of
the other agencies that is so big, trying to enforce these
things, that they will be absolutely unmanageable. So I have a
lot of identification and agreement with you on that issue in
particular.
The question I have is to you and the other panelists about
one concern that you raised, which is the over-reliance on
Social Security numbers. What would replace that, but for the
use of Social Security numbers? I mean, names seem to change
regularly; addresses seem to change regularly; and about the
only consistent identifier that most people have is the Social
Security number. So the question I am raising with you first,
and I will let you address it and get the ideas of the other
members of the panel also, is, without that consistent
identifier, wouldn't matters actually be worse, rather than
better?
Mr. Bennett. I have read the U.S. PIRG testimony and it
goes into great detail about this question. Let me say that I
would not advocate personally, and I have not spoken to our
Director of NACA who is here, but I would not necessarily
advocate eliminating the use of Social Security numbers. The
problem is total reliance on it. For example in the Carol
Fleischer case I talked about, the mere existence of the same
Social Security number was all you needed to get a credit card.
Now, I assume that Juniper Bank and Allstate do much better in
that regard, but a lot of the credit reporting agencies, all
three of them, and many of the furnishers, rely almost entirely
on either the Social Security number or, even worse, a partial
Social Security number.
Mr. Watt. Okay. Let me hear from the other panelists about
their experiences in this area, and whether they have any
positions on undue reliance on Social Security numbers. I guess
we are not advocating no reliance on Social Security numbers,
but maybe less reliance on it, or reliance on it in conjunction
with other things.
Mr. Walker, you look like you might have an opinion on this
issue.
Mr. Walker. I do, Congressman. I think the use of the
Social Security number obviously is incredibly important, just
for the reasons you said. It is the one unique identifier. I am
Clint Walker; there is a Clint Walker, Jr.
I also agree with Mr. Bennett that it should not be used as
the sole piece of information identifying a customer or
employee. You should look at a variety of things. That frankly
depends on the situation that arises, and how many other pieces
of information you look at, but we never look at solely just
the Social Security number, but it is very, very important.
Frankly, we would love to see if we could have the use of the
full Social Security number when we get pre-screened lists.
That would make our ability to predict fraud even greater.
Mr. Watt. It looks like my time is up, unless there is
somebody else who has a burning desire to get into this debate.
If not, I will yield back. We have a long day here with two
more panels and I do not want to abuse the privilege. Anybody
else have any burning desire to address this issue?
Mr. Ramon Rodriguez. Mr. Congressman, I guess my wanting to
respond would indicate a burning desire, although that is not
necessarily so. I will say that any system that relies on human
input, if you will, mechanical, automated or otherwise, I would
think would not at all ever become full proof, unless of course
creditors wanted to consider optic identification or establish
DNA banks of some sort or something. But it is a challenging
situation.
Mr. Watt. I do not think the FCRA is ready to go there
quite yet.
Mr. Ramon Rodriguez. Nor do I.
Mr. Watt. We will keep going. I yield back, Mr. Chairman,
in the interests of time.
Chairman Bachus. You are not speaking for Mr. Sanders are
you?
[LAUGHTER]
Mr. Watt. Yes, I think I am even speaking for Mr. Sanders
on that issue.
[LAUGHTER]
Chairman Bachus. All right, thank you.
Mr. Tiberi?
Mr. Tiberi. Thank you, Mr. Chairman.
Mr. Rodriguez, I did not get to hear your testimony today,
but I looked at your written testimony that you have submitted,
and I want to follow up on Congressman Hensarling's questioning
a bit. You write in your written testimony that the Fair Credit
Reporting Act and the importance of uniform national standards
to your members. Would you believe that in addition to
extending FCRA as a benefit to your members, that having some
sort of uniform privacy standard for consumers would be to the
benefit for consumers to understand? Some simplified way for
consumers across the country, would that be a benefit to your
members as well?
Mr. Ramon Rodriguez. Without a doubt, Mr. Congressman.
Quite frankly, generally speaking, it would be to consumers
across the Board, not only to the constituency specifically
that we represent. One of the panelists indicated before in
terms of the simplicity of the language that could be used, and
that is certainly something that we advocate also very
aggressively in terms of being able to present to those
consumers plain English as opposed to any language that is
couched in legal jargon that would tend to either dissuade them
or otherwise confuse them as to what it is that they might be
reading. So in direct answer to your question, yes.
Mr. Tiberi. Expanding on what you said in your testimony
and expanding on what Congressman Hensarling said, clearly you
testify that the Fair Credit Reporting Act that was passed
before I got here, the amendments in 1996, have clearly helped
small business owners, consumers, minority homeownership. If we
do not extend FCRA at the end of this year, those amendments,
do you think that it will have a reverse effect on what has
been a positive outcome thus far?
Mr. Ramon Rodriguez. Again in direct answer to your
question, Mr. Congressman, yes we do. And just to elaborate on
that for a moment, one of the reasons is because of the
patchwork legal effect that would result by individual states
then being able to control and mandate certain credit reporting
requirements et cetera, et cetera, it might preclude a business
owner from being able to cross those borders and do business in
another state where that credit may not exist or may not be
readily available. That would certainly have a domino effect
across the nation for our constituency, and that is something
that we certainly are very concerned about.
Mr. Tiberi. Mr. Sullivan, being in the financial services
arena as well in more than one state, what effect would it have
to you as a company, and then on to consumers, what sort of
cost do you believe would be entailed in having at minimum
maybe 50 different standards, if not more, if localities went
into that business as well?
Mr. Sullivan. Yes, the cost to comply with the various
different notice requirements and other things would be
staggering. I suspect with each additional state, we would be
talking about just reprogramming expenses in excess of $100,000
per state. But we also see an expense to the consumer in the
limitation of the ability to use the information in consumer
reports to make offers of lower prices to individuals with good
credit performance.
As a result of not having the information as readily
available to us, we would be likely to write less insurance
coverage because we are taking on greater risk of loss. We
found in states where we have implemented credit-based
insurance scoring, we have written approximately 20 percent
more business than we otherwise would have. That is just one of
the benefits that have inured to consumers through good access
to credit information.
Mr. Tiberi. Thank you.
Mr. Bennett, I came in partly at the end of your testimony
so I heard a little bit about it. I want to follow up on the
issue of the credit bureaus, the issue of liability. I think
you and I would both agree that information provided to credit
bureaus today is voluntary. Do you believe that if we tightened
up the issue of liability for information going in, that that
would possibly be a disincentive for those who are reporting
information to credit bureaus, and thus they would have less
information?
Mr. Bennett. I do not believe so.
Mr. Tiberi. Why not?
Mr. Bennett. I disagree, representative, with your premise,
which is that it is voluntary. Under Section 1681S(2)(a) of the
statute, furnishers are required to, at least aspirationally if
the Federal Trade Commission does anything, provide accurate
and complete information. Right now, and if you recall the New
York Times article on this very issue, a number of large
institutional creditors do not submit information under the
current regime for the very reason that it is unenforceable
under Section 1681S(2)(a) its aspirational standard is
unenforceable by private cause of action, and they have an
incentive to keep their customers locked in. The way credit
scores work, among other things, the more positive your payment
history, then the higher your credit score, to simplify it. By
not reporting positive credit information, which is what a
large number of institutional creditors may do, then they
maintain control of those customers, who do not maintain the
score, to leave that sub-prime lender and then now have that
zero percent interest or the 2.9 percent credit card.
Mr. Tiberi. Unfortunately, Mr. Chairman, I ran out of time.
I was going to ask a follow up, but I appreciate the
opportunity.
Chairman Bachus. Thank you.
We will conclude this panel. I would say this, Mr. Bennett,
the Federal Reserve and some of the bank regulators do put out
guidance to the banks that they are under an affirmative duty
to report positive credit information. I do not know how that
fits in, but I would make that statement.
This concludes our second panel. We very much appreciate
your testimony. It has been very helpful. You are dismissed.
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 those
witnesses and the responses will be put in the record.
This panel is discharged.
At this time, we are going to take a recess to either 2
o'clock or to 10 minutes after the close of a vote on the House
floor, if such a vote intervenes between now and two o'clock.
We are going to recess until 2 o'clock. If there is a vote on
the House floor between now and two o'clock, then we will
reconvene 10 minutes after the conclusion of that vote.
[RECESS]
Mr. Tiberi. [Presiding.] Back in order. I will ask the
panelists for the third panel to be seated. I will call on my
colleague, Mr. Royce, to introduce one of our panelists.
Mr. Royce?
Mr. Royce. Thank you, Mr. Chairman. I thank you for
chairing this hearing and I greatly appreciate this opportunity
to introduce one of our witnesses today, and that is David
Lizarraga. He is Chairman and CEO of the East Los Angeles
Community Union, which is also known as TELACU. David and his
organization is not only a great friend of my district and to
Los Angeles, but to all of Southern California. TELACU is a
nonprofit community development corporation that is based in
Los Angeles. Since 1968, TELACU has worked to bring economic
opportunity to East Los Angeles and other areas of California
that are in need of creative entrepreneurial economic growth.
Almost 30 years ago, TELACU chartered Community Commerce
Bank, which is an industrial loan company based in Los Angeles.
Through Community Commerce, TELACU has provided access to
credit to thousands and thousands of customers. A significant
number of these customers had difficulty obtaining mortgages
and obtaining other loans before Community Commerce's creation.
David, I look forward to your testimony today. I am
interested in your views as to the potential impact on your
mission and the customers you serve if Congress were to fail to
reauthorize provisions of FCRA that are set to expire at the
end of the year. Again, I thank you for being here.
Mr. Chairman, I am supposed to chair a markup of
legislation in my subcommittee at two o'clock, so I am a little
late for that markup, and I appreciate very much the
opportunity to introduce David here.
Mr. Tiberi. Thank you, Mr. Royce.
I will go ahead and quickly introduce the remainder of our
panelists. First, I would like to introduce Mrs. Flora
``Grandma'' Green, who is the lead spokeswoman for the Seniors
Coalition; also Mr. Ed Mierzwinski, Consumer Program Director
for the U.S. Public Interest Research Group; Ms. Shanna Smith,
Executive Director for the National Fair Housing Alliance; and
finally, last but not least, Dr. Wayne Brough, Chief Economist,
Citizens for a Sound Economy.
I would like to remind our panelists that each of you will
have five minutes to give us a statement, and would remind you
that we have a fourth panel after you, and we will have
questions from hopefully not just me after all of you are
finished with your Statements.
With that, I would like to welcome Ms. Grandma Green to
begin the proceeding.
STATEMENT OF FLORA GREEN, LEAD SPOKESWOMAN, THE SENIORS
COALITION
Mrs. Green. Thank you.
I am certainly happy to be here. My name is Flora Green,
but most everyone knows me, affectionately I hope, as Grandma
Green. I am the national spokesperson for The Seniors
Coalition. I enjoyed working in the private sector for over 40
years in credit granting and debt collection, so this gives me
an added insight on the issue at hand.
I commend you for your leadership in convening this
hearing. On behalf of The Seniors Coalition, I appreciate the
opportunity to present seniors' views on the national credit
reporting system that has evolved under the Fair Credit
Reporting Act and how it serves consumers and strengthens our
economy. The Seniors Coalition is the nation's leading free-
market senior education and advocacy organization. We are four
million strong and are growing stronger every day. Our mission
is to empower seniors to speak with a united voice and
significantly impact policies and decisions at the federal and
state level that affect their healthcare, financial, and
retirement security. By leveraging the combined strengths of
grassroots organization, education, action and communication,
our members are driving positive policy changes at every level
of government that improves their lives and benefit the nation
as well. Our national credit reporting system serves consumers
and strengthens the economy.
It is no coincidence that we have the strongest economy in
the world, even though it is not performing as well as we would
all like. There are two reasons for this. One is our
entrepreneurial spirit. We Americans are a bunch of practical
dreamers and optimists who are willing to invest, take risks,
and work hard to create something of value. My father was a
farmer and a businessman, so I understand how important this
spirit is.
The other reason for our strong economy is access to
affordable credit. This includes the ability to obtain credit
quickly at affordable rates to invest in and grow a business.
But it also means ensuring that consumers can get the credit
they need instantly and at a reasonable cost to buy the goods
and services they want. Together, business creation and credit
access have helped build an economy that is still the envy of
the world. We all want to keep it that way, and renewing the
expiring national standards under FCRA will help ensure that we
do.
There is no question that the strong, efficient national
credit reporting system we have today is the direct result of
the Fair Credit Reporting Act which Congress enacted in 1970
and strengthened in 1996. This law strikes a balance between
the interests of consumers and business. Since it helps ensure
the orderly and efficient functioning of our national credit
reporting system, it is essential to the health and growth of
our economy and provides other benefits as well.
The experts tell us that all the available evidence points
to the fact that our system is working as intended. As a
result, seniors and other consumers have convenient access to
affordable credit to buy appliances, clothes, cars, homes, and
countless other items they need and want. When you consider
that consumer spending last year accounted for two-thirds of
our gross domestic product and most purchases were made on
credit, it is clear just how important our national credit
reporting system truly is. The Fair Credit Reporting Act
protects seniors and other consumers.
The Fair Credit Reporting Act is not just vital because it
has helped create a national credit reporting system that
underpins our economy and ensures that it functions with
maximum efficiency. It is also vital because it ensures that
all Americans, regardless of their age, income, ethnicity and
gender, can obtain access to the same opportunities that credit
makes possible. What is more, it provides consumers with some
of the most important protections. I want to focus on a very
few of these protections and why it is so critical that
Congress preserve them as part of the FCRA reauthorization.
Furnisher Responsibility. The current credit reporting
system protects consumers because it requires credit furnishers
to adhere to uniform standards. Only when credit providers
voluntarily report information that allows credit reporting
agencies to create an accurate financial picture of consumers
do consumers benefit. When this happens, consumers can obtain
the best deal on credit at the most favorable rates.
That is why it is crucial that credit providers continue to
report information, but some have suggested removing the
current limits on credit providers' liability and creating new
private rights of action that they believe will help protect
consumers. The truth is, this would have the opposite effect.
It would cause many credit furnishers to stop voluntarily
reporting the information they have collected because they fear
legal action based on negative information reported.
Without adequate or complete information to assess the
risks of extending credit to a consumer, many credit providers
would simply not approve credit in borderline cases or charge
more to cover the higher risk. In either case, many seniors and
other consumers would simply lose out by not obtaining the
credit they need or at the rates they could afford. The Seniors
Coalition favors renewal of the furnisher responsibility
provision without changes.
Reinvestigation time frames. Errors in consumer credit
reports can result in diminished or lost access to credit or
higher costs to borrowers. While the reported error rate is
well under 0.5 percent, errors do creep into credit reports.
The FCRA requires that errors in reports be corrected at the
consumer's request within 30 days. This ensures that errors are
erased in a timely manner.
Some have suggested that states reduce this mandatory error
correction time to 20, 15, or even 10 days. But this could
result in consumers being treated differently by credit
providers in different states.
Mr. Tiberi. Grandma, could you kind of try to sum up?
Mrs. Green. I will. I will.
Mr. Tiberi. Sorry to interrupt.
Mrs. Green. Much of this you have already heard, so I am
just going to skip a few pages and I am going to tell you one
of the things that seems so important to me.
The Seniors Coalition favors renewing this provision to
ensure the availability of credit for consumers with less than
perfect credit and to protect seniors, consumers, and companies
from losses due to identity theft. The Congress' failure to
renew the FCRA's expiring national standards would hurt seniors
and other consumers.
Let me sum up. There is an old saying, and it is not
grammatically correct, let's don't fix what ain't broke.
Thank you.
[The prepared statement of Flora Green can be found on page
264 in the appendix.]
Mr. Tiberi. Thank you, Grandma Green.
I would like to introduce Mr. Ed Mierzwinski. Thank you for
being here today.
STATEMENT OF ED MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, US PIRG
Mr. Mierzwinski. Thank you, Representative Tiberi, Chairman
Bachus. It is a privilege to testify before the subcommittee
once again on the important issue of Fair Credit Reporting Act
reforms.
U.S. PIRG and the state PIRGs have been active on this
issue around the country and here in Washington, in fact since
1989 when Congress first began its efforts to review and renew
the original 1970 Act.
I want to say at the outset that consumer groups think that
the Fair Credit Reporting Act is an important privacy law and
an important consumer protection law. The Fair Credit Reporting
Act is based on the fair information practices. It gives
consumers a number of substantive rights to dispute, to review,
to look at and audit their information, and to seek redress
when their information is inaccurate. As Mr. Bennett and
Assistant Attorney General Brill have testified, however, it is
sometimes difficult to enforce those rights. That is why we
believe that Congress should strengthen the Fair Credit
Reporting Act.
We believe that one aspect of the strengthening of the Fair
Credit Reporting Act is to fully restore states' rights to
protect their consumers better. We fundamentally believe that
our credit system in this country is not based on the
preemption that was temporarily inserted by the Congress in
1996, but is based on a number of other factors. We
fundamentally believe that the credit system that has served us
well, but could serve us better, will not be jeopardized by
expiration of preemption.
As Justice Brandeis said in his dissent in New State Ice
vs. Liebmann, ``It is a happy incident in our federal system
that a single courageous state may engage in novel social and
economic experiments.'' We believe, as Assistant Attorney
General Brill testified and as I outlined in great detail in my
testimony, that we do not have a uniform standard around the
country, that the Fair Credit Reporting Act did not create a
uniform standard. In fact, the states, where they are allowed
to, have experimented and have gone far ahead of the Congress
in matters of credit report protection.
In fact, the states have moved more quickly. Vermont passed
its law in 1992; California, 1994; Massachusetts, 1995; while
Congress fumbled until 1996. Since then, Congress has only
enacted one law to deal with the tremendous epidemic of
identity theft. All Congress has done about identity theft is
in 1998 enacted legislation to criminalize identity theft.
Meanwhile, the crime has gotten worse. As the FTC has stated in
its annual reports, the identity theft complaints lead all
others for the year 2000, 2001 and 2002, and doubled in 2002.
Congress, though, has not done anything to rein in the sloppy
credit granting practices that consumer groups believe are the
root cause of identity theft.
It does not matter if a thief goes to jail for 5 years or
10 years if no one goes to jail and no one is caught, and it
does not matter if you only catch one or two of the people that
are doing it, if hundreds of thousands of people are doing it,
because the credit card companies are aiding and abetting the
identity thieves.
Meanwhile, to fill the gap, as again Assistant Attorney
General Brill testified, the states have stepped in and enacted
a number of laws. California has a list bullet by bullet of
five pages of identity theft-related reform laws that have
already been enacted. Six states have free credit report laws.
One example I want to leave you with is that California and
Ohio have both enacted legislation that is being implemented
over this year and the next couple of years to require the
truncation of credit card numbers on receipts. Earlier this
year, Visa trumpeted in a press conference that it would
voluntarily truncate credit card numbers on receipts. I suspect
that had two states not done this, and had not a dozen states
been considering this, Visa would not have enacted that so-
called voluntary provision.
I am concerned that the debate in this committee is over
the question of whether we should preserve the status quo. I do
not think the status quo is good enough. I think that in our
testimony we outline a number of problems with the Fair Credit
Reporting Act, as other witnesses have discussed today; the
abusive use of account reviews to deny or raise the price that
consumers pay. The uniformity issue, many people have argued
that we have a free flow of credit; that the voluntary system
has served us well. Yet no witness has talked about the serious
problem that has been identified in several agency guidances
and in a recent Federal Reserve Bulletin article.
Because of the lack of enforcement by the agencies, a
number of the largest banks in the country are not fully
reporting complete information about their customers. I think
that is a serious problem that prevents consumers from shopping
around. The accuracy of information should include the
completeness of information, yet the Federal Reserve, in a
study of 248,000 credit reports, found that 70 percent of
credit reports contained at least one trade line where
information was not being completely reported.
My testimony also outlines the problems posed by the
preemption provisions in the Act, how the confusion over the
affiliate sharing provision has chilled efforts in states to
enact stronger financial privacy laws under the Gramm-Leach-
Bliley Act's positive provision. I have outlined how difficult
it is to deal with opting out under the pre-screening rules.
Mr. Bennett has outlined the difficulties in reinvestigation
procedures.
Finally, my testimony goes into tremendous detail
summarizing the Consumer Federation of America report that
finds that 29 percent of consumers have a disparity of at least
50 points on their credit scores from each of the three credit
reporting agencies, which would suggest in our view that there
are significant problems in this system and that the status quo
just is not good enough.
I know I have run out of time, but I would be happy to take
your questions. Thank you.
[The prepared statement of Ed Mierzwinski can be found on
page 302 in the appendix.]
Mr. Tiberi. Ms. Smith?
STATEMENT OF SHANNA SMITH, EXECUTIVE DIRECTOR, NATIONAL FAIR
HOUSING ALLIANCE
Ms. Shanna Smith. Thank you.
My name is Shanna Smith and I am the President and CEO of
the National Fair Housing Alliance. I want to thank the
committee for the invitation to testify about the access to
fair credit and the use of credit scoring in mortgage loans and
homeowners insurance.
The National Fair Housing Alliance represents virtually all
of the private fair housing centers in the United States. One
of our charges is to examine and challenge discriminatory
barriers to homeownership. Many of you know that the
Administration this month has announced that it is
homeownership month.
I want to deal first with fair access to credit. As many
people know, studies and lawsuits continue to demonstrate that
African Americans, Hispanics and women and elderly women in
particular are not treated the same when they are applying for
credit as similarly situated white males. As a result, these
groups of people end up paying higher interest rates or paying
more for a product.
When you pay higher interest rates, you pay more for a
product. The money you have in your pocket at the end of the
month is less. Some scholars refer to this as the Black tax.
White people who are similarly situated as people of color have
the opportunity to have more disposable income, more money for
savings. Some people have said, African Americans, Latinos and
women ought to be better negotiators when they are purchasing
products or trying to get a home loan, or to get homeowners
insurance. Yet we have conducted testing, and in our testing we
send in people who are equally qualified, African Americans,
Latinos, and whites, and none of them are negotiating. They are
all asking for the same terms and conditions for a loan. They
are asking for homeowners insurance. They are asking to
purchase a product. No one is instructed to negotiate harder
than someone else. Yet invariably, we find that the African
American and Latino applicants are charged higher rates for
mortgage loans, higher fees, and when it comes to homeowners
insurance, they are paying a higher premium and oftentimes
getting inferior coverage.
That has been demonstrated with settlements that we have
had through the HUD administrative procedure with State Farm
and Allstate insurance companies in 1996 and 1997. Since that
time, those two insurers drastically changed their underwriting
policies and procedures to make sure that people living in
integrated and predominantly African American and Latino
neighborhoods have access to the good products that white
consumers in white neighborhoods have always had access to.
If you listen to the earlier testimony, there are a lot of
problems with the accuracy of the information that the credit
bureaus maintain. I am telling you that access to credit is
fraught with racial and ethnic and gender discrimination. The
reporting of that information to those credit bureaus reflects
that. If these credit reporting repositories do not keep
accurate information and if sub-prime lenders and predatory
lenders and conventional lenders fail to report good credit-
paying habits of their customers, then those people who are
creating credit scoring models are building their models on a
foundation that is fraught with discrimination. How can you
build something that is supposed to determine equity, when what
you are building it upon is full of discrimination? So any of
these credit scoring models that are being purported to be able
to predict people's behaviors are not accurate.
When I first looked at the mortgage lending credit scoring
model years ago when it was coming out, our concern was, what
is it predicting? Is it predicting a default or foreclosure?
Default means I did not make a payment this month. Does that
also predict, then, who will cure that default? I think that if
somebody is late in payments, it is reasonable to say that they
have to pay a higher interest rate or a different fee. But to
charge them an extraordinary rate when they are not actually
going to go into foreclosure is unconscionable and
unreasonable.
With homeowners insurance issues, one of my biggest
concerns is, right when this whole credit scoring issue started
with homeowners insurance, we asked them what does this
predict. They initially said to us, it predicts who will commit
a fraud. I said, well, my goodness; if it can do that, then why
don't we have all the police chiefs in the country run our
credit reports and arrest us now? If you can predict that, then
let's get rid of that. They said, oh, no, no. It can predict
who is going to file a claim. Talking with the insurance
companies, I meet with them regularly, they say to me that
weather is a major reason for claims, and the other predictor
they say is that people who filed claims before will file them
again.
So what would my credit score have to do with that? And
then you have to ask yourself as a committee, and I will wrap
up, if you use a credit score for getting a mortgage loan and
that same credit history file is used by the insurance company
to deny me homeowners insurance, what is going on? If I am good
enough to get a mortgage loan and my credit is good enough for
that, why isn't my credit good enough to get homeowners
insurance, because without that I cannot close on my mortgage
loan. My testimony has many recommendations.
Finally, I would say that if credit scoring is going to
continue to be used by the homeowners insurance companies, then
they should be held to the same standards that the lenders are,
and there should be some type of reporting by these insurance
companies so that we in the civil rights movement can monitor
the types of policies, the cost of policies that are made
available at the census tract level.
Thank you.
[The prepared statement of Shanna L. Smith can be found on
page 450 in the appendix.]
Mr. Tiberi. Thank you.
I would like to reintroduce Mr. Lizarraga.
STATEMENT OF DAVID LIZARRAGA, PRESIDENT AND CEO, TELACU
Mr. Lizarraga. Good afternoon, Mr. Chairman,
representatives and members of the subcommittee, Representative
Waters and Representative Royce.
I am David Lizarraga, Chairman and CEO of The East Los
Angeles Community Union, TELACU, a Los Angeles-based nonprofit
community economic development corporation that has become one
of the nation's largest CDCs, with more than $350 million in
assets. We are the fourth largest Hispanic company in
California and 22nd in the nation.
In the 1960s, East Los Angeles was abandoned by the major
companies that had for generations been the lifeblood of the
community. We fell into a devastating economic decline. When
our country went into a deep economic recession, our
communities went into an economic depression. TELACU came
together to provide self-sufficiency and with the opportunities
to use tools that would create dynamic opportunities to rebuild
and enhance the communities it serves. TELACU's mission of
providing greater opportunities continues to be realized in the
creation of new jobs, responsive financial institutions,
expanding businesses, quality affordable housing, and
educational opportunities for young people and veterans alike.
The refusal of credit to those in traditionally underserved
communities locked the neighborhoods in our communities into
financial stagnation. In 1976 to begin reversing this trend,
and before the Community Reinvestment Act was enacted, TELACU
combated redlining by creating a bank of its own. It was called
Community Commerce Bank, a community development financial
institution designed for the express purpose of serving the
credit needs of people in our neighborhoods and communities. I
am honored to be Chairman of the Board of Directors of this
bank.
We make loans to families and small business owners, and
our bank has now extended its services to under-banked
communities throughout California. The success of our bank is a
testament to the viability of inter-city lending. Since 1976,
our small bank has loaned $1.5 billion to previously un-banked
customers. For example, in 1996 we took a chance on a local
Hispanic realtor with limited credit and assets, and made him a
loan to purchase a single home from HUD and rehabilitate it. It
was boarded up, full of weeds, a hangout for gangs and drug
dealers.
This businessman restored the property which was located in
a low-income neighborhood in the barrio. We sold it to a first-
time homebuyer, brought stability to a neighborhood, and
preserved positive quality of life for that block. We now fund
20 small business developers that month after month and year
after year make a good living reclaiming neighborhoods just
like this one.
The communities we serve often require that our loan
underwriting be nontraditional, but we are highly profitable.
We have an enviable delinquency rate. We are highly rated by
our State and Federal bank regulators. We have been recognized
year after year by the U.S. Small Business Administration as
one of the best small business lenders in the region. The
services of our bank are available to all our customers, but
our focus is on the low-income and minority neighborhoods in
our community. The great majority of our current minority
customer-base is Hispanic.
All financial institutions will soon have to recognize that
credit programs reaching the fast-growing Hispanic population
in this country will be necessary to sustain profitability. The
U.S. Hispanic population is expected to reach 53 million by
2020. The annual purchasing power of Hispanics in the United
States, including Puerto Rico, is already estimated to be $630
billion. In the not so distant future, it is projected to reach
$1 trillion.
The service that the consumer credit reporting industry
provides is essential to our bank, to the entire financial
services industry, and to most businesses and nearly all
consumers. Accurate data and information are essential for
robust competition in the marketplace. That is one reason that
community development financial institutions like ours argue on
behalf of accurate information in credit reporting. It is also
the reason why we work so hard to educate consumers, so that
they can take advantage of their right to ensure accuracy in
what is collected and reported about them, and to limit with
whom this information is shared.
This is particularly important to low-income and minority
consumers. Accurate credit data collection and reporting can
help nontraditional borrowers overcome barriers that have
artificially constrained economic growth in minority
neighborhoods. If a nontraditional borrower retains a
satisfactory credit record that is properly reported, it will
be much more difficult for a lender or business to defend a
decision not to provide credit.
One of the major goals of the Fair Credit Reporting Act,
including the 1996 amendments, has been to promote accuracy in
credit reporting by credit reporting agencies. However, the
Federal Trade Commission reported in 2002 that complaints about
credit reports are still one of the most common consumer
complaints the agency receives, with the largest number of
complaints still relating to accuracy.
I believe the Congress should take appropriate measures to
ensure greater accuracy in credit reports, including vigorous
oversight and regulatory enforcement. Additionally, public and
private support for consumer education can help ensure
increased accuracy. But problems are not always related to
accuracy. It is sometimes how reports are used, not the credit
reports themselves, which is the problem.
Finally, Mr. Chairman, let me say a word about common
national standards for credit reporting. The provisions of FCRA
that makes the federal standard preeminent expires on January 1
of next year. I support a common national standard, Mr.
Chairman, but by that I do not mean a standard pegged to the
lowest common denominator. I know from our own experience in
California that a hodge-podge of local standards could
interfere with the good lending that we do at TELACU and
Community Commerce Bank.
Under Gramm-Leach-Bliley, we have had a number of attempts
at local privacy standards in jurisdictions we serve across
California. A proliferation of such local fair credit reporting
standards could create difficulties for our highly regarded
lending to low-income and minority borrowers.
So I would argue for a vigorously enforced federal standard
with appropriate oversight for this committee and the Congress.
I believe that such a federal credit standard serves our bank
well, but more importantly serves our consumers well. I believe
that the FCRA has helped advance the kind of lending and credit
opportunities that we have worked so hard to make available in
our communities, and I strongly urge its reauthorization.
[The prepared statement of David Lizarraga can be found on
page 297 in the appendix.]
Mr. Tiberi. Thank you.
Mr. Brough?
STATEMENT OF WAYNE T. BROUGH, CHIEF ECONOMIST, CITIZENS FOR A
SOUND ECONOMY
Mr. Brough. Thank you, Mr. Chairman and members of the
committee.
My name is Wayne Brough and I am the chief economist at
Citizens for a Sound Economy, which is a 280,000-member
grassroots organization that promotes market-based solutions to
public policy questions.
The Fair Credit Reporting Act has allowed the United States
to develop an integrated and highly efficient system of
information sharing, and allows businesses to provide consumers
a wider array of financial services and products at competitive
prices. On behalf of the members of Citizens for a Sound
Economy, I urge you not to ignore the importance of
establishing uniform standards and the need to extend the 1996
amendments to the Fair Credit Reporting Act.
The Fair Credit Reporting Act has generated tremendous
benefits for businesses and consumers by establishing these
standards. At the same time, this information sharing has
raised serious concerns about privacy. The advances in
technology and the commercialization of data have magnified
both the benefits and concerns about information sharing. It is
the role of the Fair Credit Reporting Act to balance these
concerns.
It is important to remember that the Fair Credit Reporting
Act was created to facilitate the exchange of this information.
This information does provide benefits to consumers and the
economy as a whole, and FCRA sets up the guidelines to do this.
Prior to 1970, the market for credit was localized, ad hoc, and
limited. The Fair Credit Reporting Act made this a nationwide
market with new standards that allow consumers access to a
wider array of financial services and products, while
increasing competition among providers. Today, with new
technologies, the market has become very efficient. The 1996
amendments to the Fair Credit Reporting Act acknowledged these
benefits of sharing information, while establishing some new
safeguards.
If you look at the private sector, information sharing has
become integral to many. To be successful, businesses must
compete and provide better services for consumers, and better
information is one source of competition. It allows more
customized marketing in products, reduces fraud, and lowers
costs. At the same time, consumers in the private sector can
exercise choice. Consumers value privacy and businesses are
realizing this, and they are beginning to compete based on
privacy policies. Privacy policies in the future must consider
the benefits of these information-sharing practices.
Laws that restrict the flow of information can have
detrimental impacts on consumers. The Fair Credit Reporting Act
establishes guidelines for the use of credit information. This
has allowed the United States to develop one of the most
efficient and sophisticated financial services markets in the
world. Seventy-five percent of all households are participants
in the market for consumer credit or mortgages, and consumer
access to credit has increased and so has competition among
providers.
With respect to insurance, I just wanted to go into some
things. The insurance companies have used the information in
credit scores as a risk characteristic to help predict future
losses. This allows companies to price products more
efficiently, while covering their costs. Risk classification
allows insurers to divide individuals into groups with similar
claims and set prices based on the probability of future loss.
Driving history, age and gender are common variables to
classify risk, but increasingly insurance scores with credit
have been found to be more reliable predictors of future risk.
Why there is the strong correlation between credit history
and the risk of future loss is unclear. One theory says that a
good credit score predicts risk-averse behavior, which means
safer driving habits and better consumer practices. But there
are many other theories and none of them are very conclusive.
But that does not betray the fact that there is a very strong
statistically significant correlation between risk and credit
scores. That is enough to make this a useful rating variable.
When insurers ignore or are prohibited from using effective
rating variables, consumers are harmed because the cost of
insurance will be higher than it should be. More accurate
information allows insurers to offer a wider array of products
to customers they would otherwise not be able to cover.
There has been some criticism of the use of these credit
scores. The first is that the correlation has not been
established. But there are a number of studies that demonstrate
this. If there was not an established link, I do not think the
insurance industry would be very interested in pursuing this as
a risk factor.
Another criticism is that the information comprising the
credit report is inaccurate. There are problems with the
accuracy, and I think FCRA was set up to address some of those.
But if this was true on a broad scale, then the correlation
would not hold true over time. The third criticism is that the
use of credit reports has a disparate impact on protected
classes. Again, if you look at the studies on this, there are
none that have conclusively demonstrated this effect.
Restricting the use of classifications such as credit
history reduces the efficiency of the market. It limits the
ability to accurately predict future loss. Making transactions
less efficient does not help consumers or producers. The result
is higher prices, subsidies, and fewer choices in the market.
To be competitive, loss ratios must be predicted as accurately
as possible. Otherwise, consumers bear the costs. Concerns over
insurance pricing are solved by injecting more competition, not
reducing the flow of information.
The Fair Credit Reporting Act has established important
uniform standards and safeguards for credit markets and
information-sharing. The consumer benefits through lower costs,
increased availability and expanded choices for financial
services and products. This information is useful in the
insurance market as well. Information about credit provides
more accurate risk classification. Restrictions on the use of
such tools create inefficiencies that generate higher costs for
consumers and higher premiums. To increase availability and
affordability of insurance, increase competition. This means
using more accurate models of risk and credit histories provide
such a role.
The Fair Credit Reporting Act has acknowledged such uses
and should continue to facilitate this use, especially at a
time when state-level privacy and credit scoring legislation
may be impeding market activity.
Thank you.
[The prepared statement of Wayne T. Brough can be found on
page 229 in the appendix.]
Mr. Tiberi. Thank you, Mr. Brough.
Thank you all for your testimony. I have a couple of
questions here.
Mr. Mierzwinski, right?
Mr. Mierzwinski. You get it right every single time.
Mr. Tiberi. Okay. I just look at it and it is tough. So is
my name.
You said the status quo is not good enough. You and I would
agree on that. I would like to make the national uniform
standards stronger and I think you would like to eliminate
them. You touched upon the fact that a single state or a single
courageous state could do something I would assume you met
stronger than what the national standard is.
Let me take that example and have you answer this question.
Let's assume that California, which is probably a good example,
passed a credit standard that was far more restrictive than the
current national standard. Wouldn't that mean that the
California standard would become the national standard?
Mr. Mierzwinski. I think that that is entirely possible,
that a standard adopted by one state could eventually become
adopted federally. I think your inference is that because
California happens to be bigger than Vermont, for example, that
the federal government might, or industry might just decide to
adopt California's rule voluntarily on a national basis.
We would look at that as a good outcome, because we believe
in adequate uniform standards. Our view is that one or two
states might pass such a law, but that 50 states would not pass
50 different laws. The theory being that you would have
balkanization I believe is the term that the industry uses in
its advertising. So I think that if a state comes up with a
good idea, other states would copy it.
I presume that you might have a follow up which is: Is it
right for California to make national law?
Mr. Tiberi. Correct.
Mr. Mierzwinski. I think that if the Congress has failed to
come up with an adequate standard, that is the circumstance
under which California would act. Secondly, if the Congress
comes up with a national standard, the states have demonstrated
an ability to move more quickly if there are local
circumstances such as Norwich, Vermont or other problems.
One additional issue that has already occurred and will
possibly be a subject of the next panel, I am guessing that the
Fair Isaac witness may trumpet the fact that they have made
credit scores available nationally. In fact, they opposed
vehemently California legislation that actually is the real
reason credit scores are now available nationally is because of
California.
Mr. Tiberi. Let me get your thoughts on this issue. Mr.
Lizarraga's testimony pretty much applauded what has happened
in his community with respect to opportunities that his
constituents have benefited from because of FCRA. What would
your thoughts be on that issue and the issue of what Mr.
Rodriguez talked about, if you were here for the previous
panel, with respect to homeownership increase and all the other
litany of items that he mentioned that his members have had an
opportunity to grow under the FCRA?
Mr. Mierzwinski. Again, the second paragraph of my
testimony says this is a very important law that provides
tremendous credit opportunity for consumers. But when it does
not work, it does not work well enough. Our view would be that
the preemption in 1996 is not the reason that all those
opportunities are taking effect. We would say that since the
industry is the one trying to extend the preemption, that they
have a burden of proof to provide, as Assistant Attorney
General Brill suggested, regression analysis and detailed
studies. All I have seen are white papers mentioning the word
``uniformity'' over and over again like a mantra.
Mr. Tiberi. Thank you.
Mr. Lizarraga, you testified that a strong national system
would be preferable to a state system, or maybe even worse in
my mind, maybe your mind, allowing even local governments to
set standards. Talk about that issue and what it would mean to
you in California.
Mr. Lizarraga. I also said that I do not mean a standard
pegged to the lowest common denominator.
Mr. Tiberi. Right, a strong standard.
Mr. Lizarraga. A very, very strong standard. It is very,
very difficult to extend credit to individuals when you have
this patchwork of rules and regulations that, yes, we would all
adopt a uniform state standard that would be a level playing
field for everybody and a rule we can probably all follow. On
the other hand, when that does not preempt even local municipal
standards and you have counties and cities coming up with their
own rules and regulations, it makes it almost impossible to
extend credit or for credit to be applied for in any meaningful
way.
The people that are really affected in our community are
folks that really have the least access to credit facilities.
The only other facilities that are available to them if they do
not participate would be bank cashing, check-cashing types or
hard-money lenders in the community. That makes it very
difficult. We do have individuals that come to our bank to
establish credit almost for the first time. This uniformity
would be very, very helpful if it would preempt local
municipalities, in addition to providing a standard that states
would adopt.
Mr. Tiberi. Thank you.
I am going to defer to the ranking member of the committee,
Mr. Sanders.
Mr. Sanders. Thank you, Mr. Chairman.
My own view is in fact that we should have very strong
federal standards, but that should be the floor. On top of that
we should give in our democratic society where a lot of people
give lip service to states' rights, we should give those states
that want to go further the right to do so. Because my
experience in government has been is that lo and behold in
Colorado or in Utah, somebody comes up with an idea. And you
know what? It works. And then in Massachusetts, they say look
what they did in Colorado; that is a good idea; we can do that.
And you will find that many advances that have been made in our
society do take place not because the federal government has
deemed them, but because somebody in some place has an idea,
other states adopt the idea, and eventually it filters on up to
the federal government.
So I think we want strong national standards, among other
things making sure that every citizens in our country can get a
free credit report. But in addition to that, we certainly do
want to give states the options to go further.
I would like to ask Mr. Mierzwinski his view on the impact
if some are successful here of limiting those states who want
to go beyond federal standards in protecting consumers' rights.
Mr. Mierzwinski. I think that the limitations on states's
rights means that we are stuck with whatever standard Congress
comes up with. I am convinced, after working here for 12 years,
that it is very difficult to move the inertia of Congress and
that it is easier for the states to respond. They respond more
quickly when local problems occur. So the issue would be that
Congress would pass a law and then think that that was the be
all and end all law. Then when a problem came up, we would not
be able to convince Congress to fix it.
Mr. Sanders. And large states like California or small
states like Vermont will come up with different problems that
have different needs. If we are letting the federal government
make all of the decisions, then states are not going to be able
to respond to the particular needs of their own consumers.
Mr. Mierzwinski. That is exactly right.
Mr. Sanders. I would like you, again, Mr. Mierzwinski, and
others can jump in; let's not be naive about the nature of this
debate. On one side, we have virtually all of the consumer
organizations who do not believe that the federal government
should preempt. On the other side, we have very powerful multi-
billion dollar interests. What are the dynamics of what is
going on here?
Mr. Mierzwinski. I think there is a lot of money on the
table, and there is a lot of interest in preserving the status
quo by the vested interests. I think they believe that the
system is accurate enough for their purposes. That is an
important point, accurate enough. It tends to lean towards
false-negative information and there are enough people out
there with risk-based pricing paying at risk-based prices.
People are not just being denied anymore, the way they used to
be. People are simply paying more. The industry is happy with
that system. It is just not good enough.
Mr. Sanders. Let me just jump in and ask anybody. I did not
mean just to focus on Mr. Mierzwinski. One of the scandals that
has upset me very much, and we will see if it happens or not
that this Congress will move. We are going to introduce
legislation. You may have seen on the front page of the New
York Times last week this outrage by which credit card
companies tell an individual you are going to be paying 5
percent, and then lo and behold three years before you were
late making an auto loan or late on your rent, and suddenly
your interest rates go from 6 percent to 30 percent.
I think the federal government, the Congress, should deal
with it. My guess is that because of moneyed interests, we will
not deal with it. My guess is there are some states that may
want to deal with that issue. What do you think? How should the
people get protection from the rip-offs of the credit card
companies who are tripling, quadrupling their interest rates?
Mr. Brough, do you have a thought on that?
Mr. Brough. In my opinion, I think the best protection is a
very competitive market. Having access to a wider array of
credit and a wider number of providers in a larger market is
the best way.
Mr. Sanders. But all of the credit card companies are doing
that. MasterCard is. Citibank is doing it. They send out five
billion credit card applications a year, five billion. Do you
think that unless government acts to protect consumers,
consumers will get protection?
Mr. Brough. I think under the existing framework and in a
competitive market, there will be entrepreneurs in the credit
markets, as well as in other markets, and they will respond to
this void.
Mr. Sanders. Okay.
Mr. Brough. If there is an opportunity to make money, they
will do it.
Mr. Sanders. Yes, Ms. Smith?
Ms. Shanna Smith. He mentions a competitive market, but if
you open and close accounts in order to get better deals, your
credit score can be lowered because of that activity. So you
are caught one way or the other. You are either paying a higher
interest rate, stuck in that situation so that you do not open
and close accounts, or you open and close accounts for a better
interest rate and you do not get it when you go someplace else
to buy a car because your credit score is lowered.
Mr. Sanders. Mr. Mierzwinski?
Mr. Mierzwinski. I think that, Congressman Sanders, this
New York Times story on account review abuse is a very
important story that the committee should look into further.
Very quickly, first of all, what if you were a victim of
identity theft or mistakes on your credit report and your
credit score declines because of that? Second, what if you are
a victim of your bank intentionally gaming the credit scoring
system by failing to completely report on you, to deflate your
credit score so that you cannot shop around? Should you pay
higher rates because of that?
Mr. Sanders. Or what happens if you have an emergency in
your family and you need to borrow money? Your credit goes up
because somebody was sick in your family.
I want to thank you. I have gone on beyond my five minutes.
Thank you, Mr. Chairman.
Mr. Gillmor. [Presiding.] Thank you very much, Mr. Sanders.
The gentlelady from California, Ms. Waters?
Ms. Waters. Mr. Chairman, I want to thank you for holding
this hearing. I am sorry that I could not be here the entire
day. There are just so many other activities going on in this
building that we all have to spread ourselves pretty thin. But
I think this is a very, very important hearing.
I am very pleased at this particular consumer panel and
wanted to be here for this panel more than any other because it
is from this panel that we can really learn what is wrong with
the credit reporting system. I am very pleased that Mr. David
Lizarraga is here from TELACU because I have worked with him
for many, many years. His description of what he and his
organization have been able to do is not as generous as it
should be. They have done a phenomenal job starting out in East
L.A., but spreading out across the state in many communities.
So I know that he understands what it takes to be able to
empower citizens who have been redlined; who have been dropped
out of the system; who have not had credit opportunities, and
what it means to be able to not only counsel, but devise
systems that will include, rather than exclude.
To that end, Mr. Chairman, with all of the information that
you are hearing today, one area that is of particular interest
to me is, of course, credit scoring. I dislike credit scoring,
period. I don't like it. I wish we could eliminate it, get rid
of it once and for all. It is absolutely ridiculous for those
who are in the position to extend credit to simply look at
numbers and make a decision about whether or not someone is
credit-worthy.
I believe that the numbers oftentimes are not accurate, and
we do not have any way of knowing what has gone into that
information. I believe that through credit scoring, we are
denying our credit-worthy people the opportunity to own a home,
to make purchases that are needed by their family for a decent
quality of life. I believe that this is the one area that this
Congress should put some time and attention into. Again, my
preference would be to get rid of it.
You know, credit scoring to me is like mandatory minimum
sentencing, which I have been fighting for many, many years.
Mandatory minimum sentencing in the criminal justice system
takes away the ability of the judge to use his good sense and
discretion to determine what a person is all about, and to be
able to review their history and their record, and come up with
some decision about their intent, et cetera, et cetera. The
same thing with credit scoring.
You have heard Mr. David Lizarraga refer to the kind of
individual that he is attempting to serve. I know so many
people who have worked hard all of their lives. Some of them
made a mistake, got laid off from a job, could not take care of
their responsibilities. But the minute they got a job, not only
did they pay their bills, but they paid them faster and they
speeded up the amount of time to pay those bills. I know some
folks who do not know how to give all of the information that
is needed to make the assessment, and so they have been good
bill-payers, for instance, with electric bills and utility
bills, and that should be taken into consideration and this
credit scoring does not usually take that into consideration.
But the person who is there using that credit score to
extend credit does not see a person. They don't see a human
being, an individual. They don't get to understand something
about this individual and what makes them a good credit risk,
despite the fact this, that or some other may be missing or has
not happened.
So if there is anything that I could say today, it is that
African Americans, Latinos, people of color, immigrants who
work very hard are hurt by this system, and that should not be.
I will close by saying, and you are very generous with your
time, that consumers are at the mercy of public policymakers. I
am astounded by the amount of power that we have to determine
the quality of life for our consumers, and we have failed in
too many instances because we have not cared enough or we have
gotten too many campaign contributions. We like to party with
the very people who are the enemies of the consumers that we
are sent here to protect.
I would just hope that we would see this whole area of
credit reporting as one area that we could use our power to
work on behalf of the consumers of this country. I am pleased
and proud that our panelists are here today, and I would just
ask this committee to take this information seriously and not
only have national standards remain that we can judge the
credit reporting by, but get rid of some of the problems in the
system, credit scoring being the first one.
Thank you very much.
Mr. Gillmor. The gentlelady's time has expired.
The chair will recognize himself for a couple of questions.
One question, and this responds to what you brought up, Mr.
Mierzwinski. You made the statement that banks intentionally
falsely report on people's credit to prevent them from going
somewhere else. What evidence do you have of that? It would
appear to me that that would expose any financial institution
to a significant amount of liability if they did that. So I am
asking you, where is your proof?
Mr. Mierzwinski. My proof, Representative Gillmor, is
actually a speech by OCC Comptroller Hawke, an advisory from
the FFIEC, and a recent bulletin article in the Federal Reserve
Bulletin. The regulators recognize this important problem, but
I do not think it is a problem as you have surmised it is. The
reason is that under the Fair Credit Reporting Act, there is an
accuracy standard, but there is no completeness standard. Also,
there is no requirement that you report.
So I believe the regulators, if you read the FFIEC guidance
which I cite in my testimony, the regulators have said, some of
you are not reporting completely; apparently, this is because
of competition; you don't want others to catch your customers.
So what we recommend to all of you is that when you are
calculating your own risk analysis, you take into account that
other banks are not reporting completely.
It is bizarre and it is twisted, but it actually gets at
one point that was discussed earlier this morning, which is
that very few of us know what goes on inside the black box at
Fair Isaac, but the banks know, and that is the reason the
banks are not reporting. They are not reporting because they
know it deflates credit scores.
Mr. Gillmor. Let me ask Mrs. Green, the FCRA has
established the framework under which consumers can obtain
credit from lenders remotely, such as over the phone, through
the Internet or by use of mail. Would you comment on how that
might benefit senior citizens, especially those that might have
difficulty leaving their homes?
Mrs. Green. I think there is some benefit to that. I know
the seniors that I have talked to in the past few weeks
concerning the issue of the Fair Credit Reporting Act are
concerned. They feel that Congress needs to act to reestablish
the standards that have been in effect, ones that they are
comfortable with. There is great concern over a crazy-quilt
type of action that might result.
I agree also that this is where ideas come from. I
understand that, as well as many of my counterparts. But the
senior population as a whole has grown up, let's say that, with
the kind of issues that the Fair Credit Reporting Act has been
of help to them. They are concerned that they are going to lose
that. Getting back to the original question, you know, people
of my age are usually pretty conservative and we are a lot more
astute than sometimes our children think we are, and are able
to make decisions for ourselves. I am seeing this and I am
hearing it. But their greatest concern with this issue is that
Congress will not act and that they will be left at sea.
Thank you.
Mr. Gillmor. Thank you, Mrs. Green.
Mr. Brough, what impact will limitations on the use of
insurance scoring have on consumers?
Mr. Brough. I think you are in a position where you are
going to see the size and scope of the providers in the market
start to dwindle a bit. Obviously, that puts upward pressure on
rates. Basically, I think it restricts choice, and you are
going to see some increases in prices as a result.
Mr. Gillmor. One final question, this is for Mr. Lizarraga.
I hope I have pronounced that correctly. What would be the
impact on low-to moderate-income consumers if the FCRA is not
reauthorized?
Mr. Lizarraga. I believe that it would have a negative
impact in that we really need a national oversight; a national
agenda, if you want to call it that way, that addresses the
needs of consumers. I really believe that what Ms. Waters
indicated a little bit earlier, that we can step up to the
plate. Our bank does not use credit scoring. We do not use Fair
Isaac. We believe that we can evaluate a person by the person's
character, their capability to pay, their credit and their
collateral. We use all kinds of different types of methods of
assuring ourselves that they can pay that loan. I have to tell
you, we have 0.01 percent delinquency, and out consumer is a
low-and moderate-income borrower.
We also are very pleased to tell you that this last month,
we did not have one single REO. So I just want to tell you that
it can be done, but we do need some help and assistance and a
strong national legislation in this regard that would be very,
very helpful. We are plagued by the ability of local
municipalities wanting to be of assistance, trying to step up
to the plate to assist communities, coming up with rules and
regulations that make it so difficult for us to really advance
credit to our communities.
Mr. Gillmor. Thank you.
Before I go to the next questioner, just a comment to Mrs.
Green, who mentioned about how seniors know more than what
their children think they do. I have six-year-old twins and
they already think they know more than their father does.
[LAUGHTER]
Mrs. McCarthy?
Mrs. McCarthy. Thank you, Mr. Chairman.
Ms. Smith, there was something that you had said earlier,
that if you take the credit cards and you close them out, that
when you got for another possible loan or anything, your
interest rate is going to be higher?
Ms. Shanna Smith. Your credit score can be lower. The more
you use credit, if you open and close accounts because you are
trying to get better rates, it can have a negative impact on
your credit score. Housing counselors will tell when they are
working with people, they will say, okay, you have too many
open lines of credit; close those lines. We have learned that
if you close your oldest lines of credit, which might have the
highest interest rates, and you open a new line of credit with
a lower interest rate, which is to my benefit if I do that, it
is going to have a negative impact on my credit score. It is
going to push my credit score down because the credit scoring
companies look at the length of time I have had the credit, not
the terms and conditions of the credit, but how long I have had
that account open. While I am doing something good for myself,
I am being punished through a credit scoring model.
Mrs. McCarthy. Following that through, though, because I
just found this out as I was going through the testimony in the
last two days, I probably have a drawer full of credit cards
that I do not use, nor have I used them for probably a long
time. They have been sitting there. There used to be a day when
people actually sent you a credit card.
Ms. Shanna Smith. Yes.
Mrs. McCarthy. I have found out that when I went for a
refinancing of my home, on my credit report came out all these
credit cards that I have.
Ms. Shanna Smith. Right.
Mrs. McCarthy. Now, the question is, obviously I have not
used them. I know I have not used them probably for five or six
years. So, what do you do? If I cancel them all, am I going to
go into that other racket? Or to be honest with you, I used to
just cut them up. Now, I found out that they are still active,
even though I cut them up.
I consider myself a fairly smart consumer. I guess if I was
getting charged every month, which the credit cards do not do
anymore because they are looking for your business, but
wouldn't it be reasonable for the credit agencies to think,
well, if you have not used them, and yes I know they can be an
open end of credit, but if you have not used them, because how
many of us go to Bob Stevens, it is an electronics place, hey,
open up a credit card, he will give you 20 percent off. Well of
course, I want an extra 20 percent off so I open it up. I have
not used that card since.
I can probably go down a whole bunch of things. Wouldn't it
be fair to say if you have not used your card for, say, three
to five years, that if it is going to be on the report, it
should say ``inactive''?
Ms. Shanna Smith. I agree. When I did my own credit score,
I found I forgot that I had this old credit card that I had not
used for 8 years. It still showed up. I had an R-1 credit
rating on it because I had never used it, but there they will
say, well, those are open lines of credit. Theoretically, you
could charge all the way up to the maximum on that open line of
credit, so I understand why they might be worried if once they
closed the loan, we are going to run out and use that credit
card.
But at some point, we ought to be able to cure that without
being penalized for curing that. Right now, I don't know for
sure because no one knows what is in the black box of all the
credit scoring agencies. I worked with a reporter in Cleveland,
and she was doing that with her credit versus her husband's
credit. She closed out his old accounts and his credit score
went down. She is white and lives in a white neighborhood, so
it was just about how the system works.
Mrs. McCarthy. Now, to follow through with that, I am also
curious about this, because when I go home this weekend, I am
going to have to go through all my credit cards. To tell you
the truth, I don't have the time to call up the credit company.
I will tell you why, because one credit card that I did have
when I was going to use it because I wanted to use it to fly, I
saw it was 21 percent interest. Now, obviously that is a credit
card that has been there for a long time. You know what? I am
going to call them up and I am going to renegotiate the rate.
Well, I tried calling at 5 o'clock in the morning. I tried
calling at 11 o'clock at night. I tried calling whenever I
could and never got through. To be honest with you, I gave up
and I opened up a new account, same card, but they were sending
you so many in the mail, so I just opened up a new account at
7.8 percent. I still have that card. That really ticked me off
that I just couldn't get rid of it, but now I dropped that
card, too, because if I cannot call them and talk to them, why
do I want to do business with them?
Ms. Shanna Smith. Imagine if you are a consumer who had a
real complaint and you were trying to correct that complaint
for your credit report.
Mrs. McCarthy. They tell you to write them.
Ms. Shanna Smith. Yes.
[LAUGHTER]
Mrs. McCarthy. Thank you.
Thank you, Mr. Chairman.
Mrs. Green. Could I add something to that?
Mrs. McCarthy. Absolutely.
Mrs. Green. I spent my years in debt collection. That was
the old bill collector in me that knew the answer to what you
are saying. When I ran into people with this situation, I
instructed them, if the account had a zero balance,
particularly one that they did not use, to request it be
cancelled and request that the credit grantor notify the credit
bureau it was being closed at the consumer's request. And that
helped.
Mrs. McCarthy. Thank you.
By the way, I will echo what the Chairman said. I have a
36-year-old son who questions everything I do financially.
Mrs. Green. I have four sons and I don't know how they can
know it all when I do.
[LAUGHTER]
Mrs. McCarthy. That is all right. We still have some good
time left in us.
I yield back the balance of my time.
Mr. Gillmor. The gentlelady yields back.
The gentleman from California, Mr. Royce.
Mr. Royce. The difference is, if you knew Paul's kids, they
really do know more than we do. They are geniuses.
[LAUGHTER]
I wanted to thank David Lizarraga for answering my question
earlier, and for his views on a strong national standard for
fair credit reporting.
I wanted to ask Mr. Brough a question. Mr. Brough's
testimony pointed out the importance of consumers' access to
credit to our overall economy. To hone in on that point, I
wondered if you would elaborate on how FCRA and in particular
the 1996 amendments have lowered the cost and access to credit
for consumers.
Mr. Brough. There, I think what you are looking at is again
the importance of a uniform standard. Having something that
actually sets a nationwide standard allows the providers of
credit to produce a wider array of products and serve a wider
array of customers because now they are not dealing with small
localized markets. At the same time, I think there is some
value in looking at how these credit scores work. If you look
at what we had previously, it was sort of these individual
decisions, and I think, if you have these statistically valid
models, what they find holds over time. So there are benefits
to these things.
But I think it is the notion that providers have to compete
among each other, and the wider the market of providers, the
more competition you are going to have on the provider side.
What gets that market large is the fact that you have consumers
out there demanding this. And the wider market of consumers you
are serving, it means all of these producers are going to have
to be competing for that business. In the end, I think that is
where we see the gains in the economy.
Mr. Royce. That goes to the issue of a wider market, but
how about safety and soundness and the economy? In your view,
has the FCRA and the 1996 amendments helped to improve that
safety and soundness of the financial system through better
information? In other words, you can manage risk better if you
have that information?
Mr. Brough. Exactly. I think, and there are sort of two
sides to that. One, you can manage risk better, so the
businesses are being more prudent. At the same time, you have
different tools to serve different customer bases. Given that,
you see some people getting credit that may not have been able
to get credit before.
Mr. Royce. So you have more access to credit, but can you
quantify at all the safety and soundness issue, the argument
that companies are better able to manage risk and therefore you
have a sounder system?
Mr. Brough. Personally, I have not done that, and I do not
have a good answer for you on that, because I have never really
tried to do that, but I think if you did look at the risk
management tools out there.
Mr. Royce. You are saying it is intuitive that that would
happen?
Mr. Brough. It is intuitive, and I do think that the risk
management tools that are available to people today are better
than the risk management tool that were previously available.
Logically, that would mean that we are in a better position.
Mr. Royce. Thank you, Mr. Brough.
Thank you, Mr. Chairman.
Mr. Gillmor. Thank you, Mr. Royce.
Next is Mr. Crowley.
Mr. Crowley. Thank you, Mr. Chairman, and thank you for all
of you here today. I am sorry, like my other colleagues, we
have been torn back and forth from different committees today,
back and forth and mostly within this building for me.
I want to congratulate the chair, as well as the ranking
member, for the number of panelists who have come before us
today, as well as the balance that has been brought to these
hearings. I especially want to welcome my friends from PIRG who
when I was in the state legislature I got to know them a great
deal, and I see a few in the audience here today.
Maybe you can, Mr. Mierzwinski, and maybe any of the
panelists please respond. In your Statement, I was not here for
it, but I have some notes on it from my staff, you mentioned
concern about the status quo that exists right now with the
seven provisions that are set to sunset later this year. If
that were to happen, and I am assuming that is what you would
prefer to see happen, and go back to the state legislature and
have each state then theoretically develop its own set of laws
concerning fair credit reporting.
California and New York, well, let's be more specific, New
York, New Jersey, Connecticut, Massachusetts, Vermont, New
Hampshire, Pennsylvania, all kind of bordering states around
New York, for instance, would all theoretically have different
standards. It could be anywhere from grace periods which could
be different depending on the state. Does that not create
somewhat of a bureaucratic nightmare for institutions that are
evaluating whether one should have or should be denied or be
given credit? If so, if it does create that bureaucracy, does
it not potentially raise the costs of interest in terms of what
is charged to the individuals receiving that loan?
Mr. Mierzwinski. Congressman, that is the industry's
position, and they have argued very forcefully that that would
occur. Earlier today, Assistant Attorney General Brill from one
of the states with a stronger existing law under the
grandfather provisions, Vermont, said that their citizens do
not pay higher rates. They studied zero percent and instant
loans, and found that bankruptcy rates are low, car loan rates
are low, mortgage rates are low, and consumers are well-off.
I just do not see the states balkanizing the system like
that. If we have a high enough, strong enough federal standard,
the states will only act if a new problem arises. The idea of
different grace periods is one of the examples you suggested. I
believe that those might be construed as inconsistent under the
federal law. And the federal law, we have never disagreed,
should prohibit inconsistent state laws. We have only supported
the notion that states should have stronger laws provided they
are not inconsistent.
So I do not think that the industry's nightmare will come
to pass. The States are rational actors.
Mr. Crowley. Unless, of course, you are from Vermont.
[LAUGHTER]
Mr. Mierzwinski. Yes, he is not here anymore, but 5 or 6
years ago, the realtors joined with the consumer groups in
California because the realtors were having trouble getting
consumers locked in mortgage loans. They were saying, ``Oh,
your credit score is too low.'' The consumer was saying, ``What
is my credit score?'' And the realtor would say, ``I can tell
you, but then I have to kill you.'' They were not allowed to
tell consumers their credit scores, and Fair Isaac vehemently
opposed disclosing credit scores. It was in their contract with
the credit bureaus that the ultimate consumer could not look at
credit scores. They did not know why they were being turned
down or paying too much for mortgages.
Fortunately, we got the realtors on our side. As a former
state legislator, you know they have a lot of juice. The
realtors and the consumer groups got California to pass that
law. Now it has been adopted virtually nationally by Fair
Isaac. We think it should become mandatory. That is the way the
state-federal system should work.
Mr. Crowley. Would anyone else like to comment on that
question? No one else wants to comment? How balanced is this?
Ms. Shanna Smith. I would like to say that we look at this
like the Fair Housing Act. When the Fair Housing Act was passed
in 1968, it was the federal standard. That federal law did not
preempt any state or local fair housing laws. So states like
Mississippi and Alabama, who still have not passed a Fair
Housing Act for their state, the people who live there are
protected under the federal law. But states like California and
Ohio looked at the 1968 law and said, well, we really need to
protect families with children and people with disabilities
because the federal law didn't. So they added those
protections.
If you think that the Apartment Association, who testified
here today, has to follow those various laws that are different
from the federal fair housing law, the mortgage lenders, the
homeowners insurance companies, the real estate industry, they
all have to follow these different fair housing laws that are
not only at the state level, but at local levels as well. It
has not wreaked havoc in those industries.
Mr. Crowley. I would just comment. I am having trouble with
this. I am sure many members are as well. The idea is we have
50 different states, and if they were to have 50 different
standards, it would be complicating to industry in some way. I
would hope that at least someone would admit to that. Would
that not be the case? It would not be complicating these
institutions? If so, does that complication, what does that do?
That is what I am asking.
Mr. Brough. I think it does a couple of things. One, it
changes the demand for some of these products within the state.
I think the other thing that you are going to see, it is going
to be very difficult for large-scale providers to go into a
number of markets. In that sense, you will have people
specializing in different states. When you start doing that,
you lose some of the fluidity in the markets.
So I think if you are a company and you were going up, say
for instance in the insurance market, you have 50 insurance
Commissioners. Obviously, if you have to re-tool to operate in
every single state, you are adding costs to the process. So
clearly there are costs involved. I would be very leery to
think about over-stepping the bounds and then having this
system.
On the other side of that is when you start to pull things
apart, it is not just the regulators or the legislators that
are innovating. The market is trying to innovate, too. As you
start throwing up these little barriers around the country, it
gets more difficult for the people in the marketplace to come
up with new products and serve consumers. So in that sense, I
do think you have to be careful about the balance between the
federal and the state regulations.
Mr. Crowley. My time has expired.
Mr. Tiberi. [Presiding.] The gentleman's time has expired.
Thank you.
Ms. Maloney?
Mrs. Maloney. Thank you very much, Mr. Chairman. Mr.
Mierzwinski, I agree with many of the comments that you raised
in your testimony about the need to address identity theft;
also your comments earlier with Ranking Member Sanders on
default pricing. That particular issue is particularly
important.
I would like to ask you, Mr. Mierzwinski, and Mr. Brough,
if you would comment on the statements that were made earlier
by Mr. Bennett when he said that the FCRA, and to quote from
his testimony, he says, ``Disputes are up, identity theft is
rampant, and consumer complaints to the FTC and FCRA in the
identity theft areas are overwhelming all other matters.'' I
would like to ask, do you agree with his interpretation? If you
do agree, what specific changes would you recommend to improve
the system to make it work better?
Secondly, following up on Mr. Brough's comments, I
represent a retail hub, New York City. People come from all
over the world and all over the U.S. to shop there. Every
single store has their own credit card. You walk into any store
and they will issue a credit card on the spot. They don't care
where you are from. I don't know how they do it, but they just
do it really fast. My question is, if you do not have a federal
system, what would the impact be on what is financially
important to New York City, which is that people shop there;
they spend money; and they can get access to credit? I would
like to begin with Mr. Mierzwinski on the first question, if
you would respond to that; and Mr. Brough, to the first
question on how it can be improved.
Secondly, the question of a financial hub like New York
City, or it could be any city where you can get access to
credit quickly, if you did not have a federal system, would
that be an undue financial burden on the ability for New York
stores to issue credit? This is an issue that retailers have
raised to me, that they believe it is important to their
ability to be in the marketplace.
Mr. Mierzwinski?
Mr. Mierzwinski. Thank you, Congresswoman. The second
question first, very briefly, and this responds also to Mr.
Crowley's question to me. If the federal standard is high
enough, the states are not going to enact 50 different laws.
But if the federal standard is not high enough, you should
leave the states with the opportunity to react to changing
local conditions. It is not in their interests as rational
actors to hurt their economies by passing laws that become
barriers.
The banks put up this straw man that there are going to be
barriers. They have said there would be walls around North
Dakota if they strengthened their affiliate sharing law. That
is not true. They said there would be walls around Vermont.
That is not true. So the federal law should be strong enough
that you do not have to worry about the states, but leave them
there just in case as a fail-safe.
Getting back to your first question, I totally agree with
Mr. Bennett when he said that the FCRA reinvestigation system
and consumer redress mechanism is broken. The consumers who
complain to the credit bureaus are put in voicemail jail. They
are given to people who are supposed to handle their complaint
within four minutes, and they have great difficulty getting
through. If you have your congressman or congresswoman call,
they have a concierge service for those people, but the average
citizen gets terrible service. Then if you do get a lawyer and
go to court, there is a circular problem with the law that Mr.
Bennett explains in great detail in his testimony, where no one
is responsible, no one is ultimately liable.
It is very difficult to prove actual damages. It is very
difficult to prove a violation. The companies rely on how
difficult it is to sue them, so that they have calculated that
their litigation costs are so modest that they do not have to
improve their reinvestigation quality. So they sue the few
consumers and they drive them nuts in court who sue them. They
leave the rest of us hanging out, complaining, stuck in
voicemail jail, not improving our credit reports. The answer,
the solution in my view is, make it easier to sue the
companies. That will force them to feel it in their pockets. If
they feel it in their pockets, they will improve the system.
Mr. Brough. With respect to that question, that is an area
that I have not looked a lot at, but I think these problems do
pop up. I have seen the numbers that do not suggest that it is
as rampant as some people say. Again, this is not my area of
expertise, but whether it is just an issue of enforcing what is
already on the books versus adding something new, I think that
is what I would look at. Like I say, that is not my area of
expertise.
On the other issue of New York stores, I think those kinds
of questions are real questions. One of the things to look at
and remember is that we have gone through this period of
financial services deregulation. That entire market is a lot
different than it was five or ten years ago. So when you look
at that market, I think the competition has occurred since then
is heating up, and the ability to move within the states is
something that has to be looked at. So I would definitely say
that you do have to be careful about throwing up state barriers
against stores.
Mrs. Maloney. Thank you.
Mr. Tiberi. Thank you.
The gentlelady's time has expired.
Mr. Meeks?
Mr. Meeks. Thank you. I want to say exactly what Mr.
Crowley said, in that I apologize, with committee hearings
bouncing back and forth. So I apologize for not being here, but
I will digest all of the testimony and information I heard in
the period of time that I was here. It was very important,
particularly on the dialogue with the gentlelady from Long
Island, Ms. McCarthy, on this whole scoring piece and making
sure that it is equitable.
What I am hearing is that a national standard would
probably be best if it was a high standard. The question is
whether or not the standard is high enough with what we do
nationally. So I would implore all of you to work with us so
that if we do a national standard, that it is a good one, and
high enough. Because it seems to me, I know for example I do
not want, going back to the interests of consumers, consumers
to be determined in different ways based upon the state that
they are in, to determine whether they will or will not get
credit. We have this debate among ourselves also. For me, the
whole issue of predatory lending, some states have good laws,
other states don't, so it means that some people are victimized
depending upon which state they live in.
From my viewpoint, I would rather make sure that there is a
high standard across the nation so that no one would be
victimized by predatory lending. Likewise, the same thing with
reference to credit and the credit history. I tailed in on Ms.
Waters's comments, and I know that in the African American
community and the minority community, they are victimized more
by bad credit and the credit ratings than anybody else I know,
and it stops them from doing a lot of opportunities that his
nation has, as a result of having a bad credit rating.
In fact, I know of individuals now where they cannot get
insurance, and are considered a high insurance risk because
they have bad credit. And then it gets all involved in their
insurance being denied, yet the reverse is not happening if you
have a good insurance rate, you cannot get credit. So it seems
as though you are having both ways.
But that being said, here is my question, and I guess for
anybody on the panel. With these pre-screening processes which
allow consumers to receive credit card offers for which they
have already been screened to be qualified for, as a result
many people receive numerous credit cards every week. Often we
do not want them, but sometimes we do use them.
Here is my question, the credit bureaus have said that they
are concerned about sending negative credit reporting notices
because they will be lost as junk mail. My question simply is:
Do you believe that sending negative credit reporting notices
would be beneficial or detrimental for consumers? I will ask
one on each side.
Mr. Brough. Beneficial.
Mr. Meeks. Beneficial.
Mr. Brough. Beneficial.
Mr. Mierzwinski. Congressman, that would be beneficial, if
I understand your question correctly. I could point out that
Colorado requires that any consumer who is credit-active, that
is he either has two inquiries or two negative items. I believe
the law may have been recently changed, but they wanted to make
sure that people didn't just have no credit. But everybody who
has inquiries on their credit report or a negative item put on
their credit report annually is required to receive a notice
from the credit bureaus of all of their credit reporting
rights. That notice then triggers them to consider asking for
their free credit report, which is also allowed in Colorado. So
then they find out more about their rights.
In terms of the use of credit scores, by the way, our
organization opposes their use and does not believe there is a
causation relationship between credit scores and insurance
risk.
Mr. Meeks. Thank you.
I am not sure, going back to again Mr. Crowley's piece, and
what you were talking about, I just want to have one question,
with reference to if there was a consumer or a person who was
in transit. Say, for example, if we did not have this high
national standard or it was still where it was in one state, in
Vermont, and you move from Vermont and you move into New York,
and there are two different standards. How would that affect
the individual consumer? Would they have to change their status
at all? Would the original contract be what governs? Would the
state that they moved to govern? How is that now? Because, you
know, we have some states with a higher standard than others.
Do you understand the question?
Mr. Mierzwinski. If I understand, are you saying that if
the consumer wants to sue, under which laws does he sue under?
Mr. Meeks. No. I got my credit card in Vermont, which had a
high standard for notifications, et cetera, et cetera.
Mr. Mierzwinski. Right. Okay.
Mr. Meeks. And I moved from Vermont to New York, and they
have a lower standard. What happens?
Mr. Mierzwinski. I do not see that anything would happen.
The difference in the credit cards in the two different states,
I do not know what would happen. Could you explain in more
detail?
Mr. Meeks. I yield to Mr. Crowley.
Mr. Crowley. If you issued the credit card in Vermont, you
have a 90-day grace period. And then you moved. You made a
purchase in Vermont and you moved to New York and they have a
60-day. Which would apply? Which grace period would apply?
Mr. Mierzwinski. I don't know the answer to that, but I
don't think that is a Fair Credit Reporting Act issue. I think
that is a truth-in-lending issue. The Truth in Lending Act is
completely different than what we are discussing here. What we
are discussing here is whether states can pass stronger laws to
sue furnishers; whether states can pass stronger laws on
notices and timetables under the Fair Credit Reporting Act and
some other issues. But I do not see how that one applies.
I would defer to Attorney General Brill and ask her in a
follow-up question.
Mr. Tiberi. Mr. Crowley, is that good?
Mr. Crowley. I was just making a point that there may be
other issues, that may not necessarily be a grace period, it
could be something else. I am just using it as an example, and
it may be the wrong example, but you get the idea.
Mr. Mierzwinski. Again, we see that there are dozens of
different credit reporting laws already, Congressman, and we do
not see these problems occurring. Again, the federal law we see
it as being a floor. Any law that is inconsistent with the
federal law, we support being preempted. We disagree that
``stronger'' means ``inconsistent.'' Under the current statute,
if an industry group believes that a state law is inconsistent,
it can appeal to the FTC and ask it to overturn it. I do not
know that that happens very often.
Mr. Tiberi. The gentleman's time has expired.
Thank you to the panelists from the third group for being
so patient with us. I would like to ask the fourth panel to be
seated. I would like to tell the members that we are informed
that there will be a series of votes around 4 o'clock, so I
will ask the group of the fourth panel to get seated as quickly
as possible. I will provide the introductions and we will get
started. I will begin introducing the fourth panel today,
starting from my left: John Ford, Chief Privacy Officer,
Equifax; Cheryl St. John, Vice President, Fair Isaac
Corporation; Mr. Richard Le Febvre, President, AAA American
Credit Bureau; Mr. Paul Wohkittel, III, President, Lenders'
Credit Services, Inc. and Director and Legislative Chair of the
National Credit Reporting Association; Tim Spainhour, legal
compliance leader, Acxiom Corporation; and last but not least,
Mr. Anthony Rodriguez, staff attorney with the National
Consumer Law Center.
Thank you all for coming. You each will have 5 minutes. The
light will turn red. If you could wrap up at that point in
time, and then we will hopefully be able to ask you some
questions if there are any of us left, including me.
Mr. Ford?
STATEMENT OF JOHN FORD, CHIEF PRIVACY OFFICER, EQUIFAX, INC.
Mr. Ford. Thank you, Mr. Chairman.
Mr. Chairman and members of the subcommittee, I am John
Ford, Chief Privacy Officer for Equifax. I commend the members
of this subcommittee and its excellent staff for the thoughtful
and thorough manner in which it is reviewing uniform national
standards under the Fair Credit Reporting Act. I appreciate
this opportunity to present the Equifax point of view on this
important public policy matter.
Before I go further, I would like to address for the record
the implications made by a member of the second panel that
somehow Equifax fails to provide quality reinvestigation
services because we outsource some of our credit file
maintenance operations to Jamaica. We are an international
company with operations in many countries. As a publicly traded
corporation, we have obligations to reduce unnecessary costs
and to provide quality services. Our small operation in Jamaica
does both. In fact, all of the service representatives happen
to be college graduates.
Founded in 1899, Equifax is a publicly traded corporation
that for 104 years has provided reliable information, products
and services to our customers so that they, in turn, can make
reliable and profitable risk decisions. Equifax treats
consumers as valued customers, too. In fact, one of our
fundamental operating principles is that by enlightening,
enabling and empowering consumers through a comprehensive suite
of credit solutions to better manage their credit health,
consumers win, business wins, and our economy wins.
Our bottom line is really very simple. As a steward of
sensitive financial information about virtually every adult
American, Equifax must adhere to high standards for protecting
privacy, for accuracy, and for customer service. Anything else
is not just unsatisfactory, it is a threat to our very mission
and success.
Today, there are three nationwide credit reporting
companies engaging in real competition, competition that works
to help promote a robust, healthy marketplace and to provide
consumers with appropriate protections, knowledge and
convenient and timely access to the goods and services they
want. Also contrary to statements of an earlier panelist,
banks, retailers and other information furnishers are not
required to participate in the system, but most do so
voluntarily because they understand the benefits of a full-file
system for their business and for their customers'
satisfaction.
In terms of data accuracy, I offer some statistics to help
put that issue in perspective. Credit reporting agencies
receive from data furnishers approximately two billion data
elements each month on about 1.5 billion accounts for more than
210 million consumer files. We issue close to three million
consumer credit reports every day. We at Equifax have a vested
interest in the accuracy and the integrity of these credit
reports and our credit database. So do our competitors, and so
do lenders whose ability to make informed decisions depends on
reliable data. If we provide inaccurate and unreliable data, we
risk losing our customer's business and consumer trust. It is a
testament to the extent of accuracy and reliability in the U.S.
credit reporting system that lenders are willing to risk their
capital with only a consumer application and a copy of a
consumer's credit report.
Some consumer group reports often mistakenly count cosmetic
errors as errors that impact a creditor's risk decision. If a
credit report has a transposed character in the address or a
missing middle initial, for example, these are cosmetic errors,
data that is not critical to the risk decision. A data item
that is true, but not yet updated, is also not an error. Error
rates of the size touted by anecdotal, non-scientific research
simply are not supported by the millions of highly efficient
and predictive risk assessment decisions made in the
marketplace every day. To generalize from sample sizes of 50 or
150 to a population of more than 210 million is simply faulty
logic.
Equifax and our industry care very much about the integrity
and the reliability of our databases, and we have invested
millions of dollars in advanced technology and in skilled
employees with an objective of putting the right information
into the right file 100 percent of the time. Are we perfect?
Absolutely not. Are we making great progress? Absolutely yes.
In the late 1980s, Congress began considering and
deliberating possible FCRA reforms. These efforts culminated in
the adoption of an extensive set of consumer protections in
1996. Having greatly strengthened the consumer protections
afforded by the FCRA, Congress also elected to establish
uniform national standards by preempting state authority with
respect to carefully selected FCRA provisions. Much of the
legislative language about the 1996 FCRA amendments reflect
bipartisan support of national standards for credit reporting
and a single set of federal rules.
Add to the lengthening list of reasons to retain national
standards the fact that consumers are highly mobile and often
have a presence in multiple states today. Forty-two million
Americans move every year; six million Americans have second or
vacation homes, many in a different state from their primary
residence. In addition, millions of Americans live in one
state, but work in another. If federal uniform standards were
to lapse, it is possible that the most stringent state law from
a large state would likely become the de facto national
standard. I think there is sufficient evidence as well that
despite statements to the contrary, that left in a vacuum, the
states are not hesitant at all to jump in and to act with
different and potentially conflicting law.
In closing, Mr. Chairman, I reiterate our position that
retention of the current national standards in the FCRA is
absolutely essential. Our banking system is national. Our
credit reporting system is national. Our economy is national.
Consumers' mobility is national in scope. Our enforcement and
interpretative framework via the regulatory agencies is
national. So should our governing law be national.
Thank you, Mr. Chairman.
[The prepared statement of John A. Ford can be found on
page 234 in the appendix.]
Chairman Bachus. Thank you.
Ms. St. John?
STATEMENT OF CHERYL ST. JOHN, VICE PRESIDENT, FAIR ISAAC
CORPORATION
Ms. St. John. Thank you.
Mr. Chairman, members of the subcommittee, my name is Cheri
St. John. I am the Vice President of global scoring solutions
for Fair Isaac Corporation. Thank you for the opportunity to
testify regarding the critical role played by uniform national
credit reporting standards and credit scores that help
consumers get the credit they deserve.
Fair Isaac invented statistically based credit risk
evaluation systems, now commonly called credit scoring systems.
Thousands of credit grantors use the scores known as FICO
scores generated by Fair Isaac's scoring systems implemented at
the three national credit reporting agencies. We also develop
custom credit scoring systems for hundreds of the nation's
leading lenders and insurance scoring systems for many leading
insurance companies.
Fair Isaac has also given consumers an active role in
credit reporting by pioneering consumer credit empowerment with
its myFICO.com score explanation Web site. Millions of
consumers have already taken control of their financial health
by using myFico.com to obtain actionable credit information,
including their FICO scores.
There are three main points I would like to highlight
today. Point one, with credit scoring, more people get credit;
they get it faster; and it is more affordable. By enabling
lenders to extend credit quickly, while safely managing their
risk, credit scores have made credit more accessible at lower
rates to more people. More people can get credit because credit
scores allow lenders to safely assess and account for the risk
of consumers who are new to that lender and who may have been
turned away by other lenders.
Scores make credit more affordable by reducing the cost of
acquiring new accounts and managing portfolios, reducing loan
losses, reducing marketing costs with pre-screening, and
cutting the cost of capital with securitization. FICO scores
are accepted, reliable and trusted to the point that even
regulators use them to help ensure the safety and soundness of
the financial system.
Point two, more data means smarter scores. Smarter scores
help everyone get the credit they deserve. Fair Isaac supports
the renewal of the national uniformity provisions of the FCRA.
The current reporting system helps both consumers and lenders.
If uniformity in credit information is lost, scores will be
less predictive, lenders will be less able to distinguish risk,
and consumers will be hurt. Consumers with better payment
history will lose the benefit of always paying on time every
time, and end up paying higher prices for credit. Varied rules
that limit the nature and quality of the credit data available
will only diminish the value of this powerful and beneficial
tool.
Point three, people who understand their scores and improve
their credit health have more credit power. Fair Isaac is the
leader in helping consumers understand their scores and take
control of their credit health. National uniformity in credit
data empowers consumers by promoting consumer awareness and
understanding of their credit standing, and helps prevent
identity theft. If credit data varied from state to state,
consumers would find it harder to understand and take charge of
their credit, and harder to tell whether changes to their
credit report are from state regulation or from suspicious
activity. Well-meaning state regulation should not be allowed
to diminish a consumer's role in managing his or her credit.
Removing information from credit reports, or even varying
reported information from state to state would make the process
of obtaining and understanding credit more difficult for
consumers. Credit cost and availability should be based on each
consumer's behavior, not on the state of residence.
In conclusion, credit scoring and the national credit
reporting system created by the FCRA benefits consumers,
lenders and our nation's economy.
I thank you for the opportunity to share Fair Isaac's
experience and knowledge in this important area, and I would be
happy to answer your questions.
[The prepared statement of Cheryl St. John can be found on
page 464 in the appendix.]
Chairman Bachus. Mr. Le Febvre?
STATEMENT OF RICHARD LE FEBVRE, PRESIDENT, AAA AMERICAN CREDIT
BUREAU
Mr. Le Febvre. Good afternoon, Chairman Bachus and
distinguished members of the subcommittee. My name is Richard
Le Febvre. I am President and CEO of AAA American Credit
Bureau. AAA was one of the first resellers that was allowed to
re-score consumers' credit files dating back now five years.
AAA has a national reputation and has calculated a tremendous
number of consumers' credit scores with great success, and is
considered one of America's foremost re-scoring companies.
I thank you for this opportunity to testify before you
today on an issue that is fundamentally important to the
American economy as a whole, and to individual Americans, the
American dream of buying a home, an automobile, obtaining
credit and insurance, and any other valuable asset.
Now, I want to explain what re-scoring is. Re-scoring is
updating of credit information, updating account balances,
deleting and updating inaccurate trade lines, deleting obsolete
trade lines, updating and deleting public records, deleting
inaccurate late payments, and updating incomplete or missing
data. Every day, these errors can and do cost consumers money
and result in credit denials. The errors cost consumers money
by causing increased interest rates and less favorable credit
terms. This is not meant to say the reports have a lot of
inaccuracies, but inaccurate information in credit reports is a
recurring and troubling problem that, under certain practices,
now directly impacts facets of American lives.
H.R. 1473 is an insurance bill that I helped Congressman
Gutierrez with with regard to the consumer disclosure section
of that bill. I wanted to discuss reinvestigation or Section
1681 I. It is my opinion that the repositories do an overall
good or fair job. But when the dispute is more sophisticated,
requiring more basic thought, then they fail in their
responsibilities.
Throwing technology at a problem with credit reporting
errors does more harm when sometimes only a human can protect
consumers against inaccurate reporting, no matter whose fault
it is. The average dispute time at the repositories is 10 to 15
disputes per hour. As a national reseller handling consumer
disputes, our average time per dispute ranges between 30 and 45
minutes; some lasting even longer. Dispute quality coming from
the repositories must be questioned at an average time of one
every five minutes.
Another problem I see all the time is reinsertion of
previously deleted data that is updated or removed after re-
scoring. I want to explain what a CRA-reseller is. The FTC
created what they call the Credco consent decree, which is the
bible of all re-sellers. But the industry is tying the hands of
their CRA-resellers. One bad bureau trade line in a tri-merge
credit report ruins consumers' credit worthiness and credit
reputation. Consumer choices being destroyed by industry is
focusing consumers to check their credit files in advance or
buyer beware, or be ready to pay extremely high fees for re-
scoring. It is a position that consumers should not have to
face.
In the past, for $50, a reseller has verified two years of
employment history, interviewed the consumer, sent them a copy
of their credit report, verified any outdated trade lines,
verified balances on accounts, verified any open collection of
charge-offs, verified any public records, and verified whatever
the consumer brought to our attention. This was all done within
24 to 48 hours.
Adverse action notice, which is one of the major issues
under the FCRA, gives consumers a heads-up that something is
wrong, causing them financial hardship. In today's information
superhighway evaluations, these systems deny consumers the
right to see their consumer reports, their credit reports, and
scores that were used for the evaluations. Consumers cannot
fight what they cannot see.
Risk-based pricing. Most consumer rate sheets show rates in
terms based on minimum score requirements. Consumers cannot
even apply for certain kinds of mortgages without meeting the
minimum score requirements.
Account review. In many cases, credit card companies check
the consumer's data almost on a monthly basis. I have seen
interest rates double and triple over my 12.5 years in
business, and lines decrease. I strongly question the logic for
re-studying consumers' rates during a consumer's financial
crisis, or they are a victim of errors, or victim of identity
theft. I truly believe it puts the consumer further into debt
and many times into bankruptcy. Infected scores lead to higher
rates and terms. It also leads to increased risk for new
lenders, lowering the consumer's credit worthiness and credit
reputation, harming consumers and lenders that want to do a
good loan.
Please review my examples. In my prepared statement, I gave
you some examples that we have had. I want you to review
numbers one, three and four, and if you have any questions, I
would be more than happy to answer them.
Thank you.
[The prepared statement of Richard Le Febvre can be found
on page 271 in the appendix.]
Chairman Bachus. Thank you, Mr. Le Febvre.
At this time, Mr. Paul Wohkittel.
STATEMENT OF PAUL J. WOHKITTEL, III, PRESIDENT, LENDERS' CREDIT
SERVICES, INC., DIRECTOR AND LEGISLATIVE CHAIR, NATIONAL CREDIT
REPORTING ASSOCIATION
Mr. Wohkittel. Good afternoon, Mr. Chairman and
distinguished committee members.
I am Paul Wohkittel. I am the President of Lenders' Credit
Services in Baltimore, Maryland, and I am the Legislative GSE
Chairman and a Director of the National Credit Reporting
Association. Thank you for inviting me to today's hearing.
Lenders' Credit Services is a credit reporting agency that
provides specialized mortgage credit reports, and it is
referred to as a reseller in the Fair Credit Reporting Act
because we do not gather and maintain a database of credit data
on consumers, like the three main repositories do. Instead, we
purchase their files and create specialized hybrid reports with
the data and resell these specialty reports to our end-user,
the mortgage lender.
In short, while the primary function of the repository is
to collect and maintain consumer credit data, the primary
function of resellers is to research and amend the data and
perform enhanced customer service for lenders and borrowers
alike. The services of my firm are utilized because we are
highly specialized agents in the credit reporting industry,
with the responsibility to act as a safeguard to assure the
accuracy of the credit reports for the benefit of the lenders,
and especially for the protection of consumers.
An excellent illustration of the valuable service we
perform is the recent introduction of credit re-scoring. With
the soaring popularity of automated underwriting systems that
are driven to a high degree by risk-based scoring, consumers
can be denied or offered higher than deserved interest rates if
inaccuracies exist in their credit file, costing tens of
thousands of dollars over the life of the loan. Our staff will
fully analyze the entire credit report, and if inaccuracies
exist, we will expediently correct them in conjunction with the
credit repositories to generate a new and accurate score.
The National Credit Reporting Association, who I also
represent today, is a nonprofit trade association that
represents the consumer reporting industry and specifically
reseller firms specializing in mortgage reporting, employment
screening and tenant verifications. There are approximately 300
credit reporting agencies in the U.S. that specialize in
mortgage reports. NCRA's more than 125 members provide in
excess of 25 million reports per year to the mortgage industry
to specifications required by HUD, Fannie Mae and Freddie Mac
for mortgage underwriting. NCRA commends this committee for
holding these hearings to seek a broad-based look at the credit
reporting industry. The effectiveness of this industry is
critical to the entire economy.
Further, we believe that the United States' credit
reporting system, in a macro sense, is the best such system in
the world. I say this from experience, as I have attended and
presented at conferences in Central Asia and Eastern Europe,
and I have knowledge of the systems in the different countries.
I personally am currently involved in constructing a credit
bureau in Kazakhstan, and I expect to begin one in Ukraine in
September of this year. In these projects, I am afforded the
opportunity to incorporate the best parts of our system and the
Fair Credit Reporting Act. I am also able to spot developmental
needs that, if addressed, could make our already superior
system even better.
NCRA believes that an improvement to the system would not
include allowing the preemption protection to expire. The need
for a uniform national standard is clear to maintain the levels
of efficiency that consumers currently enjoy when purchasing a
product or a service on credit. Instead, we believe the focus
should be placed on fine-tuning the Fair Credit Reporting Act
to allow it to address the needs of all parties concerned in
the credit lending process.
Four suggested enhancements are to strengthen the
responsibilities of furnishers of information section; to
provide better disclosure of the original qualifying report
when any adverse lending actions exist; to enhance the
definitions section of the Fair Credit Reporting Act pertaining
to consumer reporting agencies, to better define and delineate
responsibilities between repositories and intermediary agencies
known as resellers; and finally to increase the availability of
consumer assistance from these intermediary agencies.
In closing, on behalf of NCRA, Lenders' Credit Services,
and resellers nationwide, I would like to thank you for
inviting us to this hearing, and state that we stand ready to
assist in a unique way to address and meet the challenges posed
to the greatest credit reporting system in the world.
[The prepared statement of Paul J. Wohkittel can be found
on page 490 in the appendix.]
Chairman Bachus. Thank you.
Would the gentleman from Arkansas, Mr. Ross, like to
introduce your colleague from Arkansas?
Mr. Ross. Thank you. I do have a statement prior to his
being recognized, if that is okay.
Thank you, Chairman Bachus and Ranking Member Sanders, for
holding this second hearing to discuss such an important issue.
The Fair Credit Reporting Act is an essential part of our
economy and it is important to discuss its use and effects on
both businesses, as well as consumers. I am pleased that Tim
Spainhour from Crossit, Arkansas in our congressional district,
Arkansas' Fourth District, is here today in Washington, our
nation's capital, to represent Acxiom and is testifying during
this panel.
Acxiom is a leader in responsibly providing innovative data
management services to leading companies in America. It is an
Arkansas-based company. Their role in respect to the Fair
Credit Reporting Act is as a processor in the creation and use
of pre-screened consumer lists in credit, and also insurance
solicitations. They are the only high-tech company in the
state, and they have some 5,000 employees. Acxiom has been
listed by Fortune magazine as one of the best companies to work
for the last three years, and continues to bring highly skilled
workers to Arkansas.
So I look forward to hearing the testimony of Mr. Spainhour
as we continue to evaluate the Fair Credit Reporting Act and
its implications on consumers, respected business like Acxiom,
and the economy.
Again, thank you, Mr. Chairman, and I yield back the
remainder of my time, so that we can hear from this witness.
Chairman Bachus. Thank you. Mr. Ross, did you say they were
the only high-tech company in Arkansas or the largest?
Mr. Ross. It is our understanding that they are the only
high-tech company in Arkansas. It probably depends on your
definition, Mr. Chairman, of ``high-tech.''
[LAUGHTER]
We are pretty much a farm state, a lot of agriculture and a
little bit of manufacturing, but we would welcome a lot more
high-tech companies to make their home in Arkansas.
Chairman Bachus. Okay, thank you.
Mr. Spainhour?
STATEMENT OF TIM SPAINHOUR, LEGAL COMPLIANCE LEADER, ACXION
CORPORATION
Mr. Spainhour. Good afternoon, Chairman Bachus and Ranking
Member Sanders, and the distinguished members of the
subcommittee. My name is Tim Spainhour and I am the legal
compliance leader of Acxiom. I would like to thank you for
holding this hearing and inviting Acxiom to participate.
The reauthorization of the preemptive aspects of the Fair
Credit Reporting Act is important to Acxiom's clients, and
therefore to Acxiom, and is vital to the national credit
reporting system that consumers enjoy the benefits of today.
Although the scope of today's hearing is rather broad, I
will limit my testimony to a single, discrete aspect of the
activities in which Acxiom is involved. Specifically, I will
address the role of the processor in the creation and use of
pre-screened consumer lists.
For more than 30 years, Acxiom has been a leader in
responsibly providing innovative data management services to
leading companies in America. In a nutshell, we help
businesses, including those businesses that use pre-screened
lists for credit and insurance solicitations, to recognize and
engage customers who have the highest need for their products
or service.
Simply put, in the context of pre-screening, Acxiom's role
is one of a data processor, not a bureau. We provide
information products and services to our customers, and we
build and maintain the computer systems that are the foundation
of those client's customer management and marketing programs.
Our clients use these systems and the consumer data available
to them to identify potential customers.
In your May 8 hearing, testimony was presented which
suggested that pre-screening may increase competition among
issuers of credit, thereby providing consumers with greater
access to favorable credit rates. Although pre-screening may
offer such consumer benefit, not every consumer who meets or
exceeds a credit issuer's minimum credit criteria for a firm
offer of credit, will respond to that offer.
Acxiom assists credit issuers in matching consumers with
the offers they will find most interesting, and then assuring
that those offers are delivered to the right address.
Furthermore, many consumers have expressed an interest in not
receiving such offers. In this regard, the FCRA requires that
consumer reporting agencies, which prepare pre-screened lists,
also maintain an opt-out system whereby consumers can elect to
be omitted from those lists.
Because consumers have the ability to opt out from
inclusion in pre-screened lists, and in light of the
substantial costs associated with large-scale pre-screened
solicitations, our customers have a clear economic incentive to
market only to those consumers who are most likely to respond
to their offer. That is where Acxiom's expertise comes into
play.
The credit issuer will first determine the criteria they
will use to make a firm offer and communicates that criteria to
a consumer reporting agency. Once the list of consumers meeting
the issuer's credit criteria has been determined by the
consumer reporting agency, a processor such as Acxiom will
assist in further refining that field of potential customers to
those who are more likely to want or need the product.
The process of refining the list of potential customers may
entail the use of what we refer to as a partner file obtained
by the issuer. A file such as this could identify participants
in a frequent flyer program, who will be offered a product that
accumulates frequent flyer credits. Or the issuer may wish to
market to consumers who have demographic characteristics
similar to those who have responded to similar offers in the
past. A processor like Acxiom applies demographic data to the
records and then identifies those consumers whose demographic
characteristics are similar to past responders.
For example, golf has become a very popular sport. An
issuer may offer a credit card with a golfing theme as the
background on the actual card itself and utilize that same
theme on the envelope and the letterhead that communicates the
offer. That offer would be targeted to consumers who have an
interest in golf or who live in areas near golf facilities.
Acxiom also performs the services needed for postal
certification in order to assure that each letter gets
delivered to the most current, correct address and qualifies
for available postal discounts. This includes processing the
file for address standardization, carrier route pre-sorting,
and the application of the national change of address file to
make sure the most current and accurate addresses are used. In
other words, Acxiom utilizes all the tools at its disposal to
assure that the right consumer gets the offer intended for him
or her. This saves our clients money and lessens the amount of
unwanted mail in a consumer's mailbox.
Consumer choice is important to the credit issuers and to
Acxiom. Another service provided by the processor is to assist
the issuer in honoring consumer preference. There are some
consumers who do not want to receive pre-screened offers and
who have opted out with the consumer reporting agencies. The
issuer will also provide the processor with a list of consumers
who have elected to opt out with them. Acxiom, as well as other
processors who are members of the Direct Marketing Association,
also apply the opt-out list maintained by the DMA. The issuer
may also want to eliminate those consumers who are already
customers or who have received recent offers.
By narrowing the scope of pre-screened offers to only those
consumers most likely to welcome such offers, our activities
complement and are consistent with the intent and policies
underlying the FCRA. We add value to the pre-screen process by
helping credit issuers place welcomed offers in the correct
mailboxes. Without our expertise, consumers would receive more
unwelcomed mail through less accurate targeting. Without this
system, the issuers would incur higher costs, which would be
passed on to consumers.
Let me sum up this way. While waiting in line a year or so
ago at my polling place, I was asked by a poll worker who saw
my name badge from Acxiom, ``What does Acxiom do?'' I explained
that we assisted companies in marketing their services and
products to consumers. She said, ``So you are the reason I get
nine pieces of mail every day.'' I said, ``No ma'am. I am the
reason you don't get 19.'' That is the essence of what we do,
and I appreciate the opportunity to explain it here today.
Thank you.
[The prepared statement of Tim Spainhour can be found on
page 459 in the appendix.]
Chairman Bachus. Thank you.
Mr. Anthony Rodriguez, National Consumer Law Center?
STATEMENT OF ANTHONY RODRIGUEZ, STAFF ATTORNEY, NATIONAL
CONSUMER LAW CENTER
Mr. Anthony Rodriguez. Thank you, Mr. Chairman, Ranking
Member Sanders and members of the subcommittee.
My name is Anthony Rodriguez. I am a staff attorney at the
National Consumer Law Center. We are a nonprofit organization
that advocates on behalf of low-income consumers. We work with
thousands of attorneys across the nation on consumer law
issues, and we publish 12 legal treatises on consumer law,
including one entitled Fair Credit Reporting.
My comments today will address a number of issues, and I
will list those issues now. First, we think the system is
broken and needs to be fixed, and that Congress ought to enact
high standards for accuracy, high standards for accountability
when there are problems that arise as a result of those
inaccuracies contained in credit reports, and failures by
credit reporting companies and furnishers of information to
conduct adequate investigations or reinvestigations when a
consumer disputes the accuracy of information in their credit
report.
Second, the fact there is real harm caused by these
inaccuracies and caused by failures to reinvestigate. The harm
that is caused to consumers is real; it is emotional harm; it
is economic harm; it is the aggravation of having to deal with
inaccurate information that is not caused by them, but caused
by furnishers and the credit reporting agencies that deal with
this information and disseminate it.
Third is the lack of incentives that exist in the system to
ensure accuracy, in particular the lack of incentives for
furnishers to provide accurate information and the fact that
the current law preempts them from any state laws that would
provide them with an incentive to ensure accuracy. Whether it
is a lawsuit, whether it is defamation, negligence, those are
currently preempted unless they can show malice, and we think
that the preemption ought to end.
First, with respect to the broken system. I think it is not
just anecdotal information about inaccuracies. There are
various studies that have demonstrated that there are
inaccuracies in our credit reporting system. U.S. PIRG has
conducted several studies, at least six of them in the 1990s,
and their last report in 1998 that showed that 29 percent of
credit reports contain serious errors, not just minor errors
dealing with incorrect addresses or incorrect names, but
serious errors that included inaccurate delinquencies or
accounts that had never belonged to the consumers, contained in
their reports. These are serious errors that affect a
consumer's ability and cause real harm to consumers when they
seek to obtain a loan, seek to obtain educational
opportunities, and other opportunities as well.
Finally, with respect to the broken system, we look at the
complaints to the FTC, the fact that over the past several
years the primary complaint has been about credit reports. The
leading complaint now is about identity theft. The FTC itself
reported just last year that they received approximately 3,000
calls per week to their identity theft hotline, and that
approximately 43 percent of all their complaints are identity
theft-related. This is as reported by the FTC, and it is
available on their Web site.
Finally, the Consumer Federation of America conducted a
study in 2002 that showed that, and they reviewed over 500,000
consumer files, and in that report, it reflected that for
credit scores, there was a range of 50 points between the three
credit bureaus. That range affects a consumer's ability to get
credit. It affects whether or not they will be in the prime
market for a loan or a sub-prime market for a loan. Therefore,
it also affects whether the consumers affected by that
information are subject to predatory lending practices as well.
This, in essence, demonstrates the fact that the system is
broken and in need of repair, and the fact that the harm is
real, lost educational opportunities, payment of higher
finances when the information is inaccurate, difficulties and
the fact that they have to pay higher rates as well, higher
points, higher fees. All of this is a result of inaccurate
information.
In conclusion, what NCLC proposes is that there be high
standards established by Congress, and that those high
standards address accuracy; that they address accountability;
and they address access to information, that consumers must
have complete access to this information that is being
disseminated about them.
[The prepared statement of Anthony Rodriguez can be found
on page 323 in the appendix.]
Chairman Bachus. Thank you.
Mr. Anthony Rodriguez. Thank you.
Chairman Bachus. Mr. Rodriguez, let me ask you a question
that you really did not maybe deal with in your testimony. The
Law Center deals with public accommodation cases, I would
suppose. Is that correct?
Mr. Anthony Rodriguez. I am not sure what you mean by
``public accommodation.''
Chairman Bachus. Okay. ``Public accommodation'' is a whole
field of law, not housing discrimination in public
accommodation; like accommodation in a motel, hotel.
Mr. Anthony Rodriguez. Right, whether it is for disability-
related or any civil rights-related public accommodation.
Chairman Bachus. Okay. Do you practice that?
Mr. Anthony Rodriguez. We do not specifically practice
that, but I would be happy to see if I can answer a question if
you have one.
Chairman Bachus. How about housing discrimination?
Mr. Anthony Rodriguez. We address it in the context of
writing a legal treatise on the cost of credit and predatory
lending and discrimination that may occur as a result of
predatory lending or discrimination in the context of lending.
Chairman Bachus. Okay. Well, it probably would not apply.
What I am thinking of is there are national standards, or there
is a national law in public accommodation and housing
discrimination.
Mr. Anthony Rodriguez. For example, in the context of
disability, we have the Americans With Disabilities Act.
Chairman Bachus. Right.
Mr. Anthony Rodriguez. That is a federal law that
establishes standards with respect to access to public
accommodations for people with disabilities. That is a floor.
States have the right to enact stricter laws, and I practice in
Massachusetts where they in fact have stricter laws that
regulate all of the entities within the state in terms of their
public accommodations.
Chairman Bachus. Okay, well, I think that is what I was
asking. You practice public accommodation cases.
Mr. Anthony Rodriguez. That is right.
Chairman Bachus. I am not trying to trap you. You practice
public accommodation, and as you are saying, there are state
laws or federal laws.
Mr. Anthony Rodriguez. There are both.
Chairman Bachus. It is important to have a good national
law, though, is it not? Or good national standards?
Mr. Anthony Rodriguez. Yes, it is.
Chairman Bachus. Then if our present Act is broken, we
ought to attempt to fix it, should we not?
Mr. Anthony Rodriguez. That is our recommendation, yes.
Chairman Bachus. Right. Okay. That is what I was asking.
And that would be helpful, to try to have a good uniform
national standard. I am not talking about preemption.
Mr. Anthony Rodriguez. Yes, it is important to have a
uniform national standard that sets the floor as to what the
standard should be.
Chairman Bachus. Wouldn't it sometimes be an advantage,
particularly to people that may be less informed or less
sophisticated in dealing with financial matters? You hear that
the average American moves every six years. But I would think
that many of your clients, of the groups you represent,
actually move more often than that, do they not?
Mr. Anthony Rodriguez. I don't know the extent to which
individuals move, but generally yes, that is accurate.
I think it is also important to point out that national
standards are fine, but they have to be real standards that
have real teeth in them.
Chairman Bachus. Okay. I agree with you.
Mr. Anthony Rodriguez. And that is what we are concerned
about, that the current system does not have the adequate
protections for consumers to ensure accuracy, provide them with
the necessary access to the information, and to hold both
credit reporting agencies and furnishers accountable when
problems arise.
Chairman Bachus. Okay.
Mr. Sanders?
Mr. Sanders. Thank you, Mr. Chairman, and I thank all the
guests for being with us today. We appreciate your being here.
Let me pick up on a point that Mr. Rodriguez was making. I am
looking at a statement from the Consumer Federation of America,
which was the report that I think you were referring to.
Essentially, they analyzed over 500,000 credit files and they
found that in terms of the scores from the three major credit
reporting agencies, that nearly one out of three files, 29
percent, had a score discrepancy between the three reporting
agencies of 50 points or more. Did you understand what I was
saying? Okay. Credit scores, in fact, ranged from 400 to 800,
from rather poor to excellent.
Now, given that reality, do you believe, and I would like
to start off with Mr. Ford and Ms. St. John, do you believe
that all consumers should receive an annual free credit report
which includes their credit score? Given the significant amount
of discrepancies that exist right now, do the American
consumers have a right to get free credit reports which include
their credit scores?
Mr. Ford?
Mr. Ford. Thank you for the question, Mr. Sanders. Let me
make sure that I understood what you said, because I may want
to offer a correction. To my knowledge, the 500,000, that
number you used, did not represent credit files or credit
reports, but 500,000 credit scores.
Mr. Sanders. No, I am reading credit files, which is the
word in front of me.
Mr. Ford. Okay. My reading of the report indicates that it
was credit scores, not credit files; that actually 51 credit
files were used in drawing their conclusions.
Mr. Sanders. Well, again, I am reading from the Consumer
Federation of America, Mr. Chairman, which analyzed 502,000
credit files, and F-I-L-E-S is the word that they have here.
Mr. Ford. I understand what you are saying. We respectfully
disagree on that. But the real question is whether consumers
should be given a free disclosure of their credit score. Was
that your question?
Mr. Sanders. Should they receive annually a free credit
report which includes their credit scores, that is the
question.
Mr. Ford. Mr. Sanders, the Equifax position on that is that
the current FCRA provides the best balance between consumer
interests and business interests. We understand, and I am sure
you know, that in cases where the need is significant,
consumers already get a free report, when they are the subject
of an adverse action, when they are a victim of identity theft.
Mr. Sanders. Mr. Ford, I am hearing you say no to my
question.
Mr. Ford. You are hearing me say no.
Mr. Sanders. Okay. Ms. St. John?
Ms. St. John. With respect to the question of should a
credit score be included with the credit report, I think it is
important to address specifically which score, and point out
that there are different kinds of scores that are used in
different circumstances. Having said that, the most widely used
scores, as we indicated, we believe are the FICO scores, and it
would be important to disclose the scores that most lenders
use.
With respect to the question about should it be a free
credit report free score, it is a complicated issue. We feel
that score disclosure is best done in the context either of a
lending decision in the sense where a lender can have that
conversation and explain the various different factors, or a
complete service like Fair Isaac is offering that offers the
opportunity for consumers to be able to ask questions.
Mr. Sanders. I don't mean to be rude, and I apologize to
Mr. Ford. There is just not a lot of time.
Mr. Rodriguez, what do you think?
Mr. Anthony Rodriguez. Yes, and it ought to include
information that not only relates to the consumer, but also it
should be whatever information is given to the creditors as
well.
Mr. Sanders. It would seem to me, and I will open it up to
anybody else who wants to comment, that if one credit bureau
has me at 600 and one credit bureau has me at 400, and this is
the information that is going out to people that I am going to
do business with, I think I have a right to know how that
information was ascertained, so that I can defend myself and
perhaps pick apart some of the inaccuracies that might be out
there.
Mr. Spainhour?
Mr. Wohkittel. I would like to clarify something. The
National Credit Reporting Association was an active participant
in that study with the Consumer Federation of America. That was
in fact over 500,000 files, no scores. That represents over
500,000 people.
Mr. Sanders. Mr. Ford, do you accept that?
Mr. Ford. I will have to go back and look for myself, sir.
Mr. Sanders. Okay.
Mr. Ford. May I make another comment, though?
Mr. Sanders. You sure can. Let him finish and we will get
right back to you.
Was that your Statement, sir?
Mr. Wohkittel. That was my statement.
Mr. Sanders. So, Mr. Ford?
Mr. Ford. We have been talking about whether the states
should enact stronger laws, and I think in the case of
California, for example, the credit score disclosure, as far as
I know it is the only state that mandates disclosure of a
score, there also a reasonable charge is allowed. So the issue
of ``free'' is not on the table at least for California.
Mr. Sanders. Well, it is on the table for the United States
Congress. I will bring it on the table if others won't, but it
certainly is on the table here.
Other comments on that issue? Yes, sir.
Mr. Wohkittel. I agree under 609 as far as the repositories
disclosure, along with an understanding that the consumer
understands that that score fluctuates, because a lot of
consumers think when you have a 720 FICO score they have a 720
FICO score for the next two or three months. As long as there
is disclosure that that will fluctuate up and down, I think it
is great.
Mr. Sanders. Good, thank you. But in general, let me throw
it out to anybody who wants to respond to this, we heard the
consumer representative from the Federal Trade Commission
earlier today saying he, none of us, understands how that score
is determined; that this is kind of a trade secret. That
disturbs me, and you probably have different criteria for the
different companies.
Is there any reason that that information as to how a
company, the methodology, should not be made public, so that we
would know that somebody from rural America is judged the same
way from urban, black, white, woman, man? What is the objection
to making that information public?
Ms. St. John, did you want to comment?
Ms. St. John. Yes, please. We actually have published the
factors that go into the FICO scores for a number of years, and
made that information available both in terms of the factors
that are considered and even more importantly, what is not
considered by the FICO scores. So a question that I know was
brought up in the first panel this morning was a question of if
race is included in the scoring system. It is absolutely not.
Race, religion, ethnicity, national origin, gender are all
prohibited bases. They are not considered.
Mr. Sanders. They are not considered at all.
Ms. St. John. No. And that is information that we have
published for a number of years in various different consumer
booklets and made available since 2000 on the Web free of
charge.
Mr. Sanders. Mr. X lives in a low-income area; Mr. Y lives
in a fancy suburb. Are they treated exactly the same?
Ms. St. John. Income is not a factor used in the FICO
scores at all, so the FICO score would not see that. In
addition to that, Fair Isaac specifically did look at a study,
and this is part of our written testimony, to see if the scores
varied in a high-income area versus a low-to moderate-income
area, looking at application data. What we found was that the
same Fair Isaac score indicated the same level of risk,
regardless of whether someone was in a low-to moderate-income
or in a high-income area.
Mr. Sanders. Okay.
Mr. Ford. I had one comment, if I may.
Mr. Sanders. Yes, sure.
Mr. Ford. Equifax recognizes that there is a great deal of
interest on the part of consumers to find out more about what
is in their score, what it means. We do provide a product on
our Web site that allows consumers not only to see what their
FICO score is, but to understand the ingredients, you might
say, much as a colleague told me the other day that Coca-Cola
will tell you what the ingredients are, but they will not tell
you the formula because that is proprietary. But we tell
consumers, and FICO does as well, how their score relates on a
national index and the system allows him to play a ``what if''
scenario, what if I change this, what affect does it have on my
score. So it is not free, but it is part of our service.
Mr. Sanders. How much do you charge?
Mr. Ford. $12.95. It is part of our effort to help educate
consumers about what the credit score is and what impact
certain actions are going to have on that score.
Mr. Sanders. Okay. Thank you.
Chairman Bachus. Thank you.
That was like 10 minutes. What I am saying is, I think that
is fine, because there are a limited number of us and these are
serious issues. We might as well have some in-depth inquiries.
So I am not complaining. I am actually affirming that we need
to do this.
Mr. Hensarling?
Mr. Hensarling. Mr. Chairman, in the interest of actually
economizing on the time, I would simply like to yield my time
back to you.
Chairman Bachus. Yes, I will have 10 minutes, right?
[LAUGHTER]
Mr. Sanders. I don't know that that is going to economize.
[LAUGHTER]
Chairman Bachus. Thank you.
I will start with Mr. Ford, and work my way across. We have
heard a lot of people, a lot of testimony about how difficult
it is to correct an error on a credit report. I know that is
anecdotal evidence, you know, this person, that person. But we
have a great interest in that. In general, how long does it
take to resolve the average consumer dispute? Is there a time
frame within which the vast majority of disputes are resolved?
Mr. Ford. Mr. Chairman, the answer to that question is, by
statute the credit reporting agencies must within five days of
receiving the dispute from the consumer forward that to the
credit grantor-provider, and we must correct the file or,
depending upon the answer from the credit grantor as well,
within 30 days.
Chairman Bachus. All right. I did hear earlier someone said
that if they submit information to the credit bureaus, that the
credit bureaus will actually say, well, we actually have to
have that information corrected by the furnisher. I myself, I
will give you some anecdotal, I received a collection letter
and I called a credit bureau. It was actually from a credit
bureau that had a debt collection service associated with it,
and they tried to collect it. They actually in fact told me
that I needed to call the hospital which had supplied them the
information.
As a practical matter, I can see a reason for that. But at
the same time, I was calling them saying that I had a cancelled
check, that I had paid that. I would think that there ought to
be some provision where I could have sent them the cancelled
check and then they could have called the hospital.
Would you like to comment on that?
Mr. Ford. I will.
Chairman Bachus. You can see how that was frustrating.
Mr. Ford. Absolutely. I would be frustrated, too, and I am
frustrated often when I call places and things do not go the
way that I want them to as quickly as I want them to. We are
talking about an individual case versus an overall policy.
Chairman Bachus. I understand that.
Mr. Ford. Let me say first that we believe that the overall
system is designed to make the process straightforward and
clear for consumers to take a look at their credit report, see
if there is anything wrong, and go through a dispute or
reinvestigation process. If a consumer provides Equifax with
documentation, we will forward that documentation, with
discussion, to the credit grantor who is responsible for that
line or the collection agency, in this case, but to the credit
grantor. We will help facilitate the resolution of that issue.
Equifax is in the middle. We have a difficult time in the
middle being the arbiter of truth. When a consumer provides us
with adequate documentation, it makes our job a whole lot
easier. But the fact remains, if they provided that
documentation to the credit grantor, the credit grantor is
going to change it as well.
Chairman Bachus. So the situation I ran into, where the
agency told me ``we cannot actually accept something from
you''?
Mr. Ford. That is not the policy of Equifax. We would
accept the documentation.
Chairman Bachus. Ms. St. John, we have heard complaints
from some consumers that the current credit scoring system
penalizes comparison shopping for financial products and
services by lowering a consumer's credit score based on the
number of inquiries that are made by potential creditors. For
example, we have heard the scenario where a consumer seeking
the lowest interest rate when refinancing a mortgage generates
multiple inquiries by potential lenders, that that drives down
their credit score, and that would result in driving up the
cost of the mortgage.
Is that a legitimate criticism? And is it fair for
consumers to lower their credit scores based on multiple
inquiries?
Ms. St. John. Fair Isaac has made a number of innovations
and improvements in scoring over the years. One of the things
we looked at several years ago was this question of rate
shopping and inquiries, and ways to take that into account. The
FICO scores in fact do take into account rate shopping. Any
inquiries within the prior 30 days as of the time that the
score is being calculated are actually not counted. In fact, we
go back in time and look over a specific period of time,
looking for multiple auto and mortgage inquiries and counting
those as a single incidence.
So we have done research to find ways to accommodate rate
shopping and continue to look at number of inquiries as a
predictive variable, but one that is calculated fairly along
the lines of what you have indicated. That was a change that
was made in the FICO scoring systems at all three credit
reporting agencies a few years ago.
Chairman Bachus. If I comparison shop, and I would actually
think that is what you would do if you were trying to get the
lowest rate. I would call four or five mortgage lenders. There
is a lot of refinancing right now. In fact, I have done that
very thing. That would, in fact, or could under credit scoring
lower my credit score today?
Ms. St. John. Comparison shopping is actually taken into
account when we calculate the number of inquiries. So multiple
auto or mortgage inquiries within a very specific period of
time would be counted as a single inquiry. If that was spread
out over a longer period of time that someone was searching, it
is possible it could be counted as more than one. In general,
multiple inquiries indicate a higher degree of risk in some
cases, not in all cases.
Chairman Bachus. Okay. Have you performed any validations
of your proprietary credit score models? In other words, do you
have any data that would suggest that the credit scores you
assign to individuals are statistically valid and predictive of
their consumer behavior?
Ms. St. John. Absolutely. The scoring formulas are tested
extensively by Fair Isaac in terms of the data and holdout
samples from which they are developed. Even more importantly,
they are tested by those lenders on an ongoing basis, and by
regulators who oversee the financial institutions.
Chairman Bachus. Okay. Mr. Le Febvre, your testimony is
fairly critical of the role that credit scores play in the
consumer credit system. Yet Federal Reserve Board Chairman
Greenspan recently commented that the emergence, and I will
quote; the emergence of credit scoring technologies which rely
on the availability of information about the financial
experiences of individuals has proven useful in expanding
access to credit for us all, including for low-income
populations and others who have traditionally had difficulty
obtaining credit.
Do you agree with Chairman Greenspan's assessment that
credit scoring has in fact served to democratize credit
availability and helped to open up opportunities to those who
may have previously been shut out of the mainstream financial
system?
Mr. Le Febvre. In certain circumstances, I believe he is
correct. Back years ago before scoring, a lot of low-to
moderate-income minority groups would not. If you look at my
example one, my issue with scoring is I base it on what we call
ethnic tendencies. When you look at minority groups, they have
different tendencies than the rest of the population.
So what happens is, if you have a thin file and you have
one error, versus the average white male with one error, the
impact on a FICO score is tremendous. If you look at example
one, what they had is a three-year credit history, a three-year
mortgage payment history, but they made one $10 mispayment that
was an error, and the average FICO score drop was 72 points,
121 points, and 178 points.
Chairman Bachus. Okay. I will tell you what, because of
time, we will look at those and I appreciate it.
Mr. Le Febvre. Sure.
Chairman Bachus. We will re-read those things.
I want to move to Mr. Ackerman and then Mr. Crowley, and
then we will actually recess the hearing.
Mr. Ackerman?
Mr. Ackerman. Thank you, Mr. Chairman.
Thank you, Mr. Chairman, for this wonderful hearing. I ask
unanimous consent that an opening statement, I just want to put
it in the record, to save time, if that is okay.
Chairman Bachus. In fact, I will ask unanimous consent for
all members.
[The prepared statement of Hon. Gary L. Ackerman can be
found on page 111 in the appendix.]
Mr. Ackerman. Good. Thank you.
Several quick points. Mr. Ford, you said that you used the
Coca-Cola analogy of ``what is good for Coca-Cola is good for
the finance industry.'' But I did want to call your attention,
I just happen to have a bottle back here that is Diet Pepsi, if
you would accept that as an equivalent.
Mr. Ford. Being from Atlanta, I cannot do that.
[LAUGHTER]
Mr. Ackerman. You are right. They do not put the recipe or
the formula, but they do put the ingredients. But the law
requires, and they all follow the law if you are an ingredient
reader, when it says what it contains, which in this case is
carbonated water, caramel color, aspartame, phosphoric acid,
potassium benzoate, caffeine, citric acid, natural flavors.
The point is, they are listed in weighted order. It does
not tell you how to make it, so you do not know the exact
recipe, but you know that the prime weight in this thing that
you are about to consume is carbonated water. If you are trying
to cut back on salt, you know where it is relatively. If you
are trying to cut back on sugar, you know there is none in
here. It is aspartame, and whatever.
So that is very, very helpful to the consumer, and that is
why, as you say, Coca-Cola does it. So it would be helpful to
the consumer to know what is the most important factor. If you
listed it in order, that would certainly be of great benefit.
Voila, the worst thing that happens is you create a better
consumer. If you have better consumers, it is better for the
industry. And if the consumer knows what is important, that is
what the consumer hopefully will concentrate on. If you go to
school and you know the important thing is getting good grades
and staying out of trouble, that is what you concentrate on. If
you knew that was not important, then you could be a real cut-
up. That is why people are motivated, because you know what the
rules are. If you do not tell consumers what the rules are, you
should not penalize them for not being good at getting high
scores in the game.
I guess that is a comment.
Chairman Bachus. That was a Pepsi you were using to talk
about Coca-Cola.
Mr. Ackerman. Yes, but they all do the same. Every can you
read has ingredients listed in the order of which is the most
that makes up that product.
Mr. Ford. Congressman, may I respond briefly to your
comment?
Mr. Ackerman. Yes.
Mr. Ford. And I will likely defer to anybody else on the
panel. I certainly will defer to anybody else on the panel who
wants to add to it.
I recognize what you are saying about the ingredients and
listing them in order of importance. When I mentioned that
Equifax provides score power at our Web site, we also provide
the four most significant reasons accounting for the score. So
in some respects, the analogy still holds true because we tell
consumers what are the four primary reasons that caused the
score.
Mr. Ackerman. What is in the report that would make the
people responsible for aviation safety use that report in
determining the profile of flyers and whether or not they might
be arrested?
Mr. Ford. I am not aware that they are, sir. I am not aware
that they are using scores.
Mr. Ackerman. They are. They have announced they are using
the FICO scores to make determinations on flyers as to whether
or not they are going to search them. Is it their neighborhood?
You know, that is why I asked the ethnicity questions and those
other profiling questions. I am not saying they are wrong or
right, but the public has a right to know. We are getting very
suspicious of what information you have in there and what
weight it is given in the score, because they are just getting
the scores and making determinations. So maybe you could get
back to us on that.
The other question that I raised before had to do with how
long it takes to get something off of your credit report if it
is outright wrong, and everybody agrees it is wrong, and there
is no contention that it is wrong. The suggestion previously
was that the law said 30 days. That is not so. Section 611 of
the Fair Credit Reporting Act requires that the reporting
agencies have to ``promptly,'' is the word, remove inaccurate
information. What is ``promptly''? We know that you get it on
with 24 hours after it is reported, usually. How do you get
something off? In my case, and I will not mention any company
because I won't embarrass anybody here, but it was six months
to get it off, when the person who put it on sent me copies of
the letters he kept sending every day, every week, ``please
take this off; we made a mistake.''
Mr. Ford. Is your question directed to me, sir?
Mr. Ackerman. Yes.
Mr. Ford. It is my understanding that the statute requires
us to respond within 30 days.
Mr. Ackerman. That is not the question. You have to make a
determination within 30 days, according to the statute. The
person who put it on said it was wrong; shouldn't have put that
on; it is identity theft or the wrong person with that name, my
name; please take it off. The answer was: We take it off
according to the cycle, which is going to be six months.
This says ``promptly.'' ``Promptly'' is six months? That is
as early as you could do it. Do we need to say that it has to
be within a certain time frame? If you can put it on within 24
hours after it is reported to you, why does it take six months,
180-times 24 hours, to take something off? While I am trying to
take advantage of a mortgage rate, which now no longer exists,
or finance a house or a homebuyer for a first-time, or buy a
car.
Chairman Bachus. Let me interrupt just a second. We have
about 5 minutes on the floor.
Mr. Ackerman. Yes. I am sorry.
Chairman Bachus. We can come back.
Mr. Ackerman. Okay.
Chairman Bachus. But there are five votes on the floor.
Mr. Ackerman. Five votes.
Chairman Bachus. I know Mr. Crowley has been here forever.
I apologize to him.
Mr. Ackerman. Why don't we come back?
Chairman Bachus. Okay. I am fine with coming back. If you
could ask questions, then we will come back.
Mr. Ackerman. I will yield my time to Mr. Crowley.
Chairman Bachus. Mr. Crowley?
Mr. Crowley. Let me just ask quickly, and actually follow-
up on what Gary said previously in terms of the FICO scores. It
goes back to what I think Ms. Smith talked about on the
previous panel in terms of the Black tax or judging one on
their race, age, gender, and those issues going into
determining whether or not one receives credit or not.
Let me ask you a question, Ms. St. John, in terms of the
FICO scores. Do you share with regulators how or what goes into
making up how you determine one's FICO scores?
Ms. St. John. Yes. We have worked with both the lenders,
who obviously have a keen interest in understanding how those
scores are determined, and the regulators.
Mr. Crowley. So the regulators know exactly what you are
doing? There is some public entity that has an idea or concept
of what you are using to determine those scores?
Ms. St. John. In terms of the methodology.
Mr. Crowley. Who are there to protect the interest of the
public?
Ms. St. John. They have an understanding of that.
Mr. Crowley. No, no. What I am saying is, do they know what
formula you are using? Not this is proprietary information are
they aware of it; not necessarily the general public; but are
the people's representatives in government aware of what the
formula is?
Ms. St. John. They are aware of all of the factors that go
into the score. They have an understanding of the methodology
in terms of how we determine those scores and how they are
computed. With respect to the exact formulas that are in place,
in some cases with insurance scores, those are disclosed in
some cases with state insurance Commissioners. The concern that
we have with respect to the exact formula is making sure that
it is protected because if that information was generally
available, it would be subject to gaming if there were
potential illegal activity out there trying to unfairly
influence the algorithms.
Mr. Crowley. I don't really have enough time to go into
more of it, because there are other questions I have as well. I
mean, obviously Coca-Cola, someone in the federal government
knows what it is in Coca-Cola and how it is put together, and I
am sure there are people who work for Coca-Cola who retire, and
I am sure there are spies out there asking Coca-Cola, ``how do
you make it; how do you do it.''
My question is whether or not the interests of the people
are represented in terms of the formula and how it is developed
and how it is implemented. That is the question I had.
I had more things, but I think we all have to go over and
make our votes.
Chairman Bachus. Let me just say this, the chair notes that
some members may have additional questions for the panel and
they may wish to submit them in writing. Without objection, the
hearing record will remain open for 30 days for members to
submit written questions and for those witnesses to place their
responses in the record.
This hearing is adjourned.
[Whereupon, at 4:50 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 4, 2003
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