[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]





                    KEEPING SCORE ON CREDIT SCORES:
                     AN OVERVIEW OF CREDIT SCORES,
                       CREDIT REPORTS, AND THEIR
                          IMPACT ON CONSUMERS

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 24, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-117






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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             THADDEUS G. McCOTTER, Michigan
RON KLEIN, Florida                   KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio              BILL POSEY, Florida
ED PERLMUTTER, Colorado              LYNN JENKINS, Kansas
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

                 LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELVIN L. WATT, North Carolina       J. GRESHAM BARRETT, South Carolina
GARY L. ACKERMAN, New York           MICHAEL N. CASTLE, Delaware
BRAD SHERMAN, California             PETER T. KING, New York
DENNIS MOORE, Kansas                 EDWARD R. ROYCE, California
PAUL E. KANJORSKI, Pennsylvania      WALTER B. JONES, Jr., North 
MAXINE WATERS, California                Carolina
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
CAROLYN McCARTHY, New York               Virginia
JOE BACA, California                 SCOTT GARRETT, New Jersey
AL GREEN, Texas                      JIM GERLACH, Pennsylvania
WM. LACY CLAY, Missouri              RANDY NEUGEBAUER, Texas
BRAD MILLER, North Carolina          TOM PRICE, Georgia
DAVID SCOTT, Georgia                 PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri            JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois            KEVIN McCARTHY, California
PAUL W. HODES, New Hampshire         KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota             CHRISTOPHER LEE, New York
RON KLEIN, Florida                   ERIK PAULSEN, Minnesota
CHARLES A. WILSON, Ohio              LEONARD LANCE, New Jersey
GREGORY W. MEEKS, New York
BILL FOSTER, Illinois
ED PERLMUTTER, Colorado
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho









                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 24, 2010...............................................     1
Appendix:
    March 24, 2010...............................................    43

                               WITNESSES
                       Wednesday, March 24, 2010

Braunstein, Sandra F., Director, Division of Consumer and 
  Community Affairs, Board of Governors of the Federal Reserve 
  System.........................................................    39
Burns, Barrett, President and CEO, VantageScore Solutions, LLC...    13
Fortney, Anne P., Partner, Hudson Cook, LLP......................    15
Hendricks, Evan, Editor/Publisher, Privacy Times.................     7
Pratt, Stuart K., President and CEO, Consumer Data Industry 
  Association, accompanied by Myra K. Hart, Ph.D., Senior Vice 
  President, Analytical Services, Equifax Inc.; Chet D. 
  Wiermanski, Global Chief Scientist, Analytic Decision Services, 
  TransUnion LLC; and Stan Oliai, Senior Vice President, Experian 
  Decision Analytics.............................................     9
Quinn, Thomas J., Vice President, SCORES, FICO...................    11
Vladeck, David, Director, Bureau of Consumer Protection, Federal 
  Trade Commission...............................................    40

                                APPENDIX

Prepared statements:
    Gutierrez, Hon. Luis.........................................    44
    Klein, Hon. Ron..............................................    50
    Braunstein, Sandra F.........................................    51
    Burns, Barrett...............................................    71
    Fortney, Anne P..............................................   101
    Hart, Myra K.................................................   118
    Hendricks, Evan..............................................   124
    Oliai, Stan..................................................   139
    Pratt, Stuart K..............................................   150
    Quinn, Thomas J..............................................   169
    Vladeck, David...............................................   176
    Wiermanski, Chet D...........................................   193

              Additional Material Submitted for the Record

Braunstein, Sandra F.:
    Written responses to questions submitted by Chairman 
      Gutierrez..................................................   212
Burns, Barrett:
    Written responses to questions submitted by Chairman 
      Gutierrez..................................................   216
    Written responses to questions submitted by Representative 
      Kilroy.....................................................   221
Fortney, Anne P.:
    Written responses to questions submitted by Chairman 
      Gutierrez..................................................   224
Quinn, Thomas J. :
    Written responses to questions submitted by Chairman 
      Gutierrez..................................................   227
    Written responses to questions submitted by Representative 
      McCarthy...................................................   228
Vladeck, David:
    Written responses to questions submitted by Chairman 
      Gutierrez..................................................   229
    Written responses to questions submitted by Representative 
      McCarthy...................................................   231
    Written responses to questions submitted by Representative 
      Speier.....................................................   232
    Written responses to questions submitted by Representative 
      Kilroy.....................................................   232
Wiermanski, Chet D.:
    Written responses to questions submitted by Chairman 
      Gutierrez..................................................   233
    Written responses to questions submitted by Representative 
      McCarthy...................................................   234

 
                    KEEPING SCORE ON CREDIT SCORES:
                     AN OVERVIEW OF CREDIT SCORES,
                      CREDIT REPORTS, AND THEIR
                          IMPACT ON CONSUMERS

                              ----------                              


                       Wednesday, March 24, 2010

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:04 p.m., in 
room 2128, Rayburn House Office Building, Hon. Luis Gutierrez 
[chairman of the subcommittee] presiding.
    Members present: Representatives Gutierrez, Sherman, Moore 
of Kansas, McCarthy of New York, Green, Miller of North 
Carolina, Scott, Ellison, Perlmutter, Speier; Hensarling, 
Royce, Garrett, Price, Campbell, Marchant, Paulsen, and Lance.
    Also present: Representative Kilroy.
    Chairman Gutierrez. This hearing of the Subcommittee on 
Financial Institutions and Consumer Credit will come to order.
    Good afternoon, and thanks to all of the witnesses for 
agreeing to appear before the subcommittee today.
    Today's hearing will examine how consumer reports and 
scores are created, how they are used in today's financial 
services economy and the impact they have on consumers.
    This hearing will also focus on reports completed by the 
Federal Reserve and the Federal Trade Commission pursuant to 
the requirements of Section 215 of the FACT Act.
    We will be limiting opening statements to 10 minutes per 
side, but without objection, the record will be held open for 
all members' openings statements to be made a part of the 
record.
    We may have members who wish to attend who do not sit on 
this subcommittee. As they join us, I will offer a unanimous 
consent motion for each to sit with the subcommittee and ask 
questions when time allows.
    I yield myself as much time as I may consume.
    As we begin this hearing on credit scores and reports, we 
must recognize that the American consumer faces a very 
different landscape than 30 years ago.
    Credit cards are so widespread that they are routinely 
marketed to college students. Your local bank, that is if you 
are lucky enough to have one in your neighborhood, is more than 
likely owned by the same faceless Wall Street corporation from 
which you can shop for loans and car insurance online, 
something that was not even imagined 30 years ago.
    In large part, what has made all this possible are the now 
ubiquitous credit scores and reports created and provided 
largely by companies that sit before us today.
    Driven by an increasingly impersonal and homogenized 
lending environment, lenders, insurance companies, utilities, 
and even cell phone companies are relying more and more on 
credit scores and reports to determine whether a consumer is 
worthy of their attention and indeed their services.
    I know the increased use of credit scores has expanded 
credit to previously ineligible borrowers and the 
standardization of the system has minimized some of the bias 
present in our economy, but the system has created new concerns 
and dangers for consumers, especially if you are Black or 
Latino, that we should address.
    A good credit score and of course, favorable credit 
reports, have become the passport to a stable economic future 
for today's consumer.
    These passports are being issued by thousands of private, 
for-profit companies that few can identify using opaque 
formulas that are hidden from the American people and hidden 
from Congress.
    In a democracy, there is something unseemly in having one's 
life judged and possibly even guided, no matter how benignly or 
unintentionally, by private, for-profit companies to assist 
them where it is impossible for one to opt out.
    This fact alone causes me to doubt the fairness of our 
current system and structure. For instance, as Mr. Hendricks 
will mention in his testimony, consumers are not commonly 
allowed access to the scores that lenders and other financial 
consumers of data actually use to make lending decisions.
    Let me repeat that. For instance, as we will hear in 
testimony today, consumers, Americans, are not commonly allowed 
access to the scores that lenders and other institutional 
consumers of data actually use to make lending decisions.
    Instead, you are sold an ``educational score.'' That is not 
the score used by the lenders to determine necessarily your 
credit card rate and can be different than that used to 
determine the rate for qualifying.
    What is going on is they are selling you a product that is 
never really used to make any decision about your 
creditworthiness. How is that educational?
    On top of that, lenders use their own private data to 
further determine what rate or fee they want to charge a 
consumer. For an industry that is supposed to be focused solely 
on accuracy and predictability, there seems to be quite a bit 
of effort going on behind the scenes to prevent consumers for 
seeing things as they really were.
    Americans do not know where these scores are coming from 
and how they are created. I have strong reservations about 
allowing the use of credit reports to determine employability 
and insurance fees.
    For example, 22 percent of Latinos in America have ``thin 
files'' and are given a worse rate for loans and insurance and 
can even lead to them being rejected for a loan.
    At a time when Americans are dealing with 10 percent 
unemployment rates, which is in fact higher in many communities 
across America, I do not believe that our constituents should 
have to worry about whether or not their credit report is 
entirely accurate or even worry about it when they should be 
focused on finding a new way to pay their rent and feed their 
kids.
    We should not allow the secrecy of our current system to 
affect consumers' livelihoods without their knowing the rules 
of the game and what they can do about it before it is too 
late.
    Consumers should know that a medical debt that they already 
paid off will affect their credit for 7 years to come, or that 
being away on military service in Iraq, in Afghanistan, 
protecting this country, might not be much of a mitigating 
factor for the credit bureaus and institutional consumers of 
credit scores and reports, or recent immigrants' 
creditworthiness is often lower than the general population, 
regardless of how good their credit history was in their home 
country.
    These are just some of the concerns that make it clear that 
the current system has not reached acceptable levels of 
fairness or transparency.
    Finally, I have concerns that with banks and others taking 
credit away from consumers due to the bank's own problems, not 
those of the consumer, your formulas are not accurately 
predicting a consumer's true likelihood of default.
    Just because some bank is consolidating their credit lines 
they have out there for all their consumers, it does not mean 
that every single one of them is a greater credit risk.
    There are many legislative proposals circulating right now 
on credit scores and reports, some I have co-sponsored and some 
I plan to introduce myself.
    We will be holding further hearings on these proposals 
after we give a harder look at credit-based insurance scores in 
the near future.
    Many of these concerns that I have are with institutional 
consumers of credit scores and reports, so I can assure you 
that we will be inviting them to sit down and have their own 
discussion with our subcommittee about this as well.
    I guess basically I do not know if I am a good driver of a 
car, but I check the locks on my house every night. I make sure 
the electricity is up-to-date, the gas is working right, I have 
my roof. Why I should pay more for my insurance on my house?
    I go 55-miles-per-hour in a 55 zone. I do not go through 
red lights. I put my turn signals on when I am supposed to, and 
I am a good driver. I do not think I should pay more for car 
insurance.
    Yet because people are using credit scores, if I am one of 
those 40 million Americans without health care insurance or the 
tens of millions of Americans without any job, and I become 
ill, for 7 years, that illness--I was just thinking before I 
came up here, when I was in school, I used to be able to go to 
the teacher and say, ``I was out for 2 weeks, I was sick.'' She 
gave me time to make up so I could study, so there could be a 
true reflection of who I was and what grade I should receive.
    In America, if you get sick, you just cannot take a sick 
card or a note from your doctor to the credit bureaus and say, 
``By the way, do not tell everybody I am a bad credit risk, I 
was sick.''
    If that is the way we dealt with employment, at the end of 
the year, I know that if I had an employee and they were sick 
in the hospital, I mean sick, they were gone for a couple of 
months, I do not think I would evaluate them on their absence 
during those 2 months.
    Yet credit scores are routinely used if people get sick 
because for 7 years, it takes. Some say oh, well, they did not 
pay it. Well, they were out of a job. They were sick. It was 
something beyond their control. They were ill.
    In America, I just think a credit score should not be used 
for that, especially when it is going to determine how much you 
pay for other products, not for a job.
    If you are in a job interview, you might be able to 
explain, but you do not know because someone somewhere is using 
that.
    With that, I am going to close my opening statement, and 
yield to Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. I cannot help but 
notice the television camera that is facing us. Hopefully, 
there will be a number of insurance companies in the market who 
know you are such a good customer and there will be more 
competition for your business and you will get a better rate.
    I would hope that indeed you and other members of your 
party would support legislation to make these markets more 
competitive instead of less competitive.
    I believe I heard you correctly in your statement saying 
that you were fearful that consumers are ending up in a system 
where it is impossible for consumers to opt out. To some of us, 
it sounds a little bit like the health care bill that was 
passed on Sunday. It will be very difficult for consumers to 
opt out indeed.
    Nonetheless, I appreciate you calling this hearing, Mr. 
Chairman. I think it is very important that we talk about the 
role that credit scores and resources play in our economy. 
Clearly, when there is information that is accurate, credit 
scores have done a lot to help consumers throughout our 
economy. They have proven to be doors of opportunity for all 
demographics and geographies.
    When you think about it, through a simple number, there are 
people throughout America--consumers are empowered by a simple 
number, with the opportunity to borrow from a lender that they 
never met, and in order to buy a house, a car or any number of 
items that in past years, they would have had to save for 
weeks, months, or years before they could purchase that 
particular item.
    I think that the modern credit score has certainly helped 
democratize credit throughout our society and I think all and 
all, this is a very good thing.
    If we allow the data companies to process the scores 
properly and reporting agencies are able to compare people with 
similar characteristics or borrowers that might hail from 
different backgrounds, yes, you do have a democratization of 
credit.
    The retired school teacher and grandmother of three in 
Mesquite, Texas, whom I am able and privileged to represent in 
Congress, is able to access credit as well as maybe the union 
construction worker from your district, Mr. Chairman. Their 
creditworthiness is now determined through an impartial 
formula.
    The linchpin of the system that goes into determining the 
credit score has to be complete. It has to be accurate. 
Otherwise, the outcome is going to be misleading, and frankly, 
I think ultimately that hurts the consumer.
    A lot of work has been done. I know we were both on this 
committee as the FACT Act was passed in 2003. I look forward to 
hearing the testimony, listening to your witnesses on their 
reaction to that Act, any suggestions they may have.
    I am still somewhat fearful that this hearing may be 
leading to a movement to somehow make credit files thinner. I 
am not sure that is going to be helpful. Number one, to me, the 
thicker the file, the more it gives lenders a complete picture 
of the customer, and they are more willing to lend.
    Ultimately, I think that brings down the costs of credit 
and I think it makes the availability of credit even greater. 
At least my research into history shows that before the advent 
and wide use throughout our economy of credit scores, again, 
that is exactly what we saw, less credit.
    If we go down the road of thinner files, several things are 
going to happen. Number one, some people are going to be denied 
access to credit that they could otherwise access through the 
market.
    Some will have to pay more for credit. Others, as we get 
away from any kind of risk-based pricing, we will have yet 
another bailout foisted upon us by the United States Congress 
for those with good credit scores ending up to bail out those 
with bad credit scores. I certainly do not see the merit in 
that.
    Finally, I really question the wisdom and propriety of the 
United States Congress essentially gagging those who wish to 
exercise their right to offer opinions about the 
creditworthiness of their fellow citizens.
    We should tread very lightly before we trample upon 
commercial free speech. I think we need to look very, very 
carefully before we go through that.
    Again, if we just look to the recent credit card 
legislation where some of us said, if you end up passing this 
thing, it is going to lead to higher interest rates, more fees, 
and less credit. Sure enough, the law was passed, and that is 
exactly what happened.
    I know there are many instances that adversely impact 
certain individuals, as the chairman described. I am not sure 
that the congressionally mandated law that says all of a sudden 
a for-profit company has to engage in a charitable business 
that they may not want to engage in.
    I would think the answer would be to help the individual 
involved and put it on budget. This is a nation going bankrupt 
as is, doubling the national debt in 5 years, tripling it in 10 
years.
    If we are going to do this, we ought to at least put it on 
budget and start making decisions on priorities.
    Mr. Chairman, I appreciate you calling the hearing and I 
look forward to hearing from the witnesses. I yield back.
    Chairman Gutierrez. Mr. Garrett is recognized.
    Mr. Garrett. I thank the Chair. I thank all the witnesses. 
I will be brief. Before I begin, I will just say I, too, as the 
gentleman from Texas, was taken aback by the chairman's comment 
with regard to the private market and democratization, the idea 
that we should have the ability to opt out of this segment of a 
market.
    As the gentleman from Texas said, just 3 days ago we said, 
if you were born in this country, you are a citizen of this 
country, you cannot opt out of what was just passed for the 
first time in U.S. history, the requirement that you buy a 
particular product approved by the Federal Government over 
which you have absolutely no direct control as to whether you 
want to or not, as the price of citizenship.
    Would be that is true, that the chairman continued his 
reasoning to the health care bill to allow Americans to opt out 
of that plan or allow the States to opt out of that program, 
and when the chairman speaks of secrecy versus transparency, my 
gosh, I do not think there is anyone back at home or in 
Congress who actually knows the faceless bureaucrats who will 
not be imposing the citizenry of this country the requirements 
of their health policies and their health care going forward.
    Perhaps we should set priorities and say let's have 
transparency and openness and the ability to opt out in 
something even more personal and intimate as our health care as 
opposed to getting into regulating the credit markets.
    With that said, I can just say I was here about 6 years ago 
when I first came into Congress, my first year was 2003. At 
that time, Spencer Bachus was the Chair of the Financial 
Institutions Subcommittee, and that is when we passed the Fair 
and Accurate Credit Transaction Act, the FACT Act. That law 
made a number of important changes, as you know, to the 
reporting laws. It allowed consumers to have easier access to 
credit information as well as what we are looking for, and that 
is improve the accuracy of that information.
    During that time, credit scores had become an essential and 
valuable tool in allowing creditors basically to more 
accurately price for risk. That is really what it is all about.
    Unfortunately, many of my colleagues on the other side of 
the aisle do not agree with the idea of risk-based pricing, 
whether it is the FHA loans or credit cards.
    If you do not allow a company to price for risk, you know 
what the end result is going to be. It is going to be one of 
two things: either you will decrease credit availability for 
some folks; or you will increase the cost of credit for other 
people.
    I believe that this committee should work closely and 
examine closely and be careful in our deliberations before we 
take any actions that could lead to less accurate credit scores 
and higher costs or less credit for consumers.
    Finally, the use of accurate credit scoring basically 
allows consumers to do what I think most of them want to do, 
and that is to manage their financial affairs and provide 
better control, not less, to the consumers.
    Credit scoring is a useful function of the markets and 
therefore, it should remain free of unnecessary government 
regulation. When you get right down to it, the very best way to 
ensure consumers have access to credit and to the financial 
freedom that they need is to develop policies here in Congress 
that will focus on economic growth and job creation as well.
    With that, I yield back.
    Chairman Gutierrez. The gentleman yields back. We have the 
first panel here: Mr. Evan Hendricks, editor and publisher of 
Privacy Times; Mr. Stuart K. Pratt, president and CEO, Consumer 
Data Industry Association; Mr. Tom Quinn, vice president, 
Global Scoring Solutions, FICO; Mr. Barrett Burns, president 
and CEO, VantageScore Solutions; Mr. Chet D. Wiermanski, global 
chief scientist, Analytic Decision Services, TransUnion; Mr. 
Stan Oliai, senior vice president, Decision Sciences, Experian 
Decision Analytics, Experian; Ms. Myra K. Hart, Ph.D., senior 
vice president, Analytics Services, Equifax; and Ms. Anne P. 
Fortney, partner, Hudson Cook LLP.
    We will begin with Mr. Evan Hendricks for 5 minutes, 
please.

  STATEMENT OF EVAN HENDRICKS, EDITOR/PUBLISHER, PRIVACY TIMES

    Mr. Hendricks. Thank you, Mr. Chairman, and Ranking Member 
Hensarling for the privilege to appear before the subcommittee. 
I would like to run through about a dozen points in my 5 
minutes.
    First, on credit scores. The Congress did pass a really 
good law in 2003, the FACT Act, the amendments to the Fair 
Credit Reporting Act. They have been very helpful to consumers 
and I think it makes for a better industry.
    I think one of the great things it did is it made consumers 
eligible for one free credit report per year, which is 
something that millions of people have taken advantage of, and 
for commerce, the credit bureaus have sold twice as many credit 
reports as they have given away, when you include monitoring 
services.
    I think we need to take the next step. Consumers should be 
entitled to one free credit score per year. That credit score 
should be one that is used by lenders, not a so-called 
``educational score,'' which the chairman cited.
    In our free marketplace, companies are going to continue to 
sell educational scores, which sometimes we call ``knock-off 
scores'' or since they are not real FICO scores, we call them 
``FAKO'' scores.
    If they are doing that, they should have to disclose that 
they are selling a score that is not used--first, to say are 
they used by any lenders. If they are not used by any lenders 
or are they even used by a significant number or a majority of 
lenders.
    The last thing on credit scores, this is not in my prepared 
statement, so I apologize and I will submit something, there 
are two important fixes that I think this committee could 
achieve and actually, a lot of people would agree on.
    The problem is Fannie Mae. Fannie Mae has adopted a policy 
that if someone has a disputed account on their credit report, 
they are holding up loans and really making it hard for 
consumers to get loans. I have written about this and Ken 
Harney has written about it in his syndicated column.
    I think Fannie Mae should be made to justify that policy 
because I do not think there is a basis for it and it is 
hurting consumers and it is stopping loans from going through 
to creditworthy people.
    The other thing is that FICO scores took off in the 1990's 
because Fannie adopted one of the early versions of FICO 
scores. Now, there is a much better version called ``FICO 8.''
    If Fannie would move forward and adopt that, that would be 
something that would really improve, because there are many 
things which Mr. Quinn maybe could talk about as to why that is 
a better score.
    In terms of accuracy, there are two important standards in 
the Fair Credit Reporting Act. One is you have reasonable 
procedures for maximum possible accuracy. The problem there is 
we still have the same sort of inaccuracy problems that we saw 
20 years ago.
    I think it goes to a fundamental issue. Our three major 
credit reporting agencies often like to think of themselves as 
libraries and simply passively taking information from 
creditors and then just passing it on, when in fact the law 
sets a standard that they have a grave responsibility to ensure 
accuracy. I do not think they live up to that on very important 
occasions, especially with mixed files and identity theft, 
causes of serious inaccuracies that are harmful to consumers.
    Possibly even a bigger problem is the dispute process. 
Naturally, companies want to automate, but the credit bureaus 
have automated to the extent that a consumer makes a dispute 
and there is a computerized exchange of messages, and the law 
requires a re-investigation, but the way they do this 
computerized exchange of messages, it does not amount to a real 
re-investigation. This is something that is playing out in the 
courts over and over again.
    Therefore, inaccuracy continues to be a major problem. The 
Federal Trade Commission is supposed to be getting ready to do 
a major accuracy study. So far, they have not done a good job 
with their pilots.
    I think it is worth noting that independent groups have 
done studies, but the credit bureaus themselves have never done 
an accuracy study, at least in the last 15 years, and they are 
the ones sitting on all the data.
    We have another issue because of technology and because of 
entrepreneurship, that we have a lot of medium- and small-sized 
consumer reporting agencies popping up, but a lot of times 
consumers do not know they are there and they do not know what 
they do, and sometimes they get ambushed by them.
    I think that considering the proliferation of all these 
little consumer reporting agencies, we should have a 
registration requirement. If you are subject to the Fair Credit 
Reporting Act, we need to have a comprehensive list of who is 
gathering data on us so people can exercise their rights of 
access and correction.
    One example of this that I uncovered recently is called the 
National Consumer Telecom and Utilities Exchange. This is an 
exchange run by the utility companies where they are keeping 
records on people who have not paid their utility bills, and 
then they are screening new applicants against this, but it was 
not clear to the extent that consumers were getting adverse 
action notices and finding out, as required by the Fair Credit 
Reporting Act, if this was a basis for them being denied.
    I would like to see some transparency there. Originally, 
they would not answer a lot of the questions I had for them.
    Employment background screening, I will just say this, 
there are a lot of sort of start-up companies that will do a 
background check on someone based on simply a name and a date 
of birth.
    That means there are times where I have seen someone like 
Deborah Adams apply for a job but lose the job because they 
found another Deborah Adams with a felony record. She never had 
a felony. Someone else like Thomas Payne was another person 
that I saw.
    Chairman Gutierrez. The gentleman's time has expired.
    Mr. Hendricks. Okay. Thank you.
    Chairman Gutierrez. Thank you.
    [The prepared statement of Mr. Hendricks can be found on 
page 124 of the appendix.]
    Chairman Gutierrez. I want to mention that in the interest 
of time, and as agreed by all parties, Mr. Pratt will testify 
on behalf of his association and the three credit bureaus, but 
they have all submitted written testimony and are here to 
answer questions.
    Mr. Pratt, you are recognized for 5 minutes.

STATEMENT OF STUART K. PRATT, PRESIDENT AND CEO, CONSUMER DATA 
   INDUSTRY ASSOCIATION, ACCOMPANIED BY MYRA K. HART, PH.D., 
SENIOR VICE PRESIDENT, ANALYTICAL SERVICES, EQUIFAX INC.; CHET 
   D. WIERMANSKI, GLOBAL CHIEF SCIENTIST, ANALYTIC DECISION 
 SERVICES, TRANSUNION LLC; STAN OLIAI, SENIOR VICE PRESIDENT, 
                  EXPERIAN DECISION ANALYTICS

    Mr. Pratt. Mr. Chairman, and members of the subcommittee, 
thank you very much for this opportunity to appear before you 
today. I would like to just focus on a few key issues in my 
oral remarks, and let's start with the importance of preserving 
and expanding data for risk decisions.
    Our members' databases preserve an invaluable history of 
how we manage our finances: 18,000 data sources update 3 
billion data elements every month.
    This Congress, by enacting new laws, calling for creditors 
to do even more to assess a consumer's ability to repay a loan 
has recognized the value of these data systems.
    While it might be tempting to eliminate certain data due to 
the severity of the recession, it is vitally important to 
preserve the totality of every consumer's credit history. In 
fact, to prohibit data sources from furnishing data, to require 
furnishers to delay the furnishing of data, or to prohibit a 
user from analyzing certain data, all are wrong choices.
    We now know that we must expand data resources which tell 
the consumer's story. For example, we must ensure that we can 
verify a consumer's income. We must report on utility and 
telecom payments. Lenders should know whether a consumer owns 
his or her home outright.
    Turning to scores, no nation has such a competitive and 
innovative market for the development of credit scores. This 
industry is a U.S. core competency. It is no mere feat to build 
a credit scoring system; years of research and development and 
millions of dollars go into this. The resulting software is 
intellectual property protected by the USPTO.
    Credit scores are designed to estimate the relative risk of 
my likelihood of repaying a loan or to predict some other 
credit behavior. Use of credit scores benefits all of us. 
Credit scores help lenders lower prices and they help remove 
even unintentional biases in the marketplace.
    It is the precision and objectivity which the score brings 
to the table which makes it such an integral part of our 
Nation's lending process.
    With this basic information about scores in mind, let's now 
turn to the consumer perspective. Behind every credit score is 
a credit report. As we all know, in December 2004, our members 
went live with a free credit report delivery system, and as of 
now, more than 150 million credit file disclosures have been 
issued.
    In addition to the incredible number of consumers who have 
reviewed their credit reports, consumers also know more today 
about their scores than at any point in history.
    Whenever a consumer assesses a score, it is a teachable 
moment. The reason for score disclosure is educational. 
Consumers learn about how scores work and most importantly, 
what matters most in their credit report.
    Some have expressed concern about which scores are 
disclosed. We think they have missed the mark for a number of 
reasons. There is not just one score used by all lenders. It is 
wrong to leave consumers with that false impression. Various 
lenders use various scores.
    Scores are not the final word in a lending decision. In 
previous testimony, one lender said ``We use external credit 
scores and scores developed internally based on our own lending 
experience.''
    Further, all scores our members disclose are production 
scores used by real lenders. In the end, consumers should 
understand that the data in their credit report is the one 
constant. Every lender is going to use this data to make a 
lending decision regardless of the score used.
    Some have also suggested that nationwide consumer credit 
reporting agencies should provide consumers with scores free of 
charge. We do not agree. A consumer pays a fee to have an 
appraiser assess the value of his or her home. Consumers will 
pay for a software program to produce a tax filing. No one is 
suggesting these services be offered for free.
    Congress, in enacting the FACT Act, recognized the 
difference between giving consumers free access to their credit 
report disclosure and giving them access to scores at a 
reasonable fee.
    This same Congress recognized that it could be beneficial 
for consumers to have access to the score used by a lender in a 
given transaction and require score disclosure with all 
mortgage loans.
    Further, as a result of the newly finalized FACT Act risk-
based pricing notice rule, consumers will now have an 
opportunity to see the score used by the lender for any type of 
loan. This expansion of the credit score disclosure by a lender 
is a positive result for consumers.
    It is our view that there is no need to create new score 
disclosure requirements. Consumers have clearly benefitted from 
their right to free credit file disclosures. Consumers have 
benefitted from the use of scores by lenders, which ensures 
fairness and lowers prices. Consumers have benefitted from the 
extensive choices of access they have in the marketplace today.
    Mr. Chairman, we thank you for this opportunity to testify 
and I look forward to answering your questions.
    [The prepared statement of Mr. Pratt can be found on page 
150 of the appendix. The prepared statement of Mr. Wiermanski 
can be found on page 193 of the appendix. The prepared 
statement of Mr. Oliai can be found on page 139 of the 
appendix. The prepared statement of Ms. Hart can be found on 
page 118 of the appendix.]
    Chairman Gutierrez. Thank you so much. We will have a 
second panel with witnesses from the Federal Reserve Board and 
the Federal Trade Commission. We will now hear from Mr. Tom 
Quinn for FICO.
    Mr. Quinn, you are recognized for 5 minutes.

   STATEMENT OF THOMAS J. QUINN, VICE PRESIDENT, SCORES, FICO

    Mr. Quinn. Thank you. Mr. Chairman, and members of the 
subcommittee, my name is Tom Quinn. I am vice president in the 
SCORES Division of FICO, formerly Fair Issac Corporation, 
responsible for the management and delivery of the company's 
global scoring products and services.
    Thank you for the opportunity to testify before you today 
on this important topic.
    FICO is the leading provider of analytics and decision 
management technology. Although we offer a wide array of market 
leading products and services, our company brand remains most 
closely tied to the FICO score, which was first introduced in 
1989.
    Today, FICO scores are the most widely used credit bureau 
risk score in the world, powering over 10 billion credit 
decisions.
    In the context of today's hearing, we hope it is clear that 
FICO is a developer of credit scoring models. We are not a 
credit bureau and we are not in the business of compiling 
consumer credit reports.
    Our analytic scientists develop FICO credit scoring models 
in the form of a mathematical formula called ``algorithms.'' 
These algorithms are housed at each of the three credit bureau 
repositories.
    When a lender requests a FICO score, the credit bureau 
feeds the consumer credit report information into the 
algorithm, the score is generated, and then output to the 
lender for decisioning.
    While my written testimony goes into greater detail, I 
wanted to highlight a few key areas related to the FICO score.
    The FICO score is a 3 digit number ranging from 300 to 850. 
The score rank orders consumers by the likelihood that they 
will become seriously delinquent, meaning 90 days past due or 
greater in the next 24 months on credit obligations. The higher 
the score, the lower the risk.
    FICO scores are used by businesses across a range of 
industries to help assess a consumer's creditworthiness. When a 
consumer applies for a car loan, a mortgage or a credit card, 
the lender may check the consumer's FICO score to help 
determine if they are going to approve or decline and what 
terms they may set with the loans, such as pricing and credit 
line.
    However, FICO scores are usually only one of several key 
factors considered by lenders. Traditionally, responsible 
lenders use other information considered as the three ``Cs:'' 
creditworthiness; capacity to pay; and collateral. The FICO 
score addresses the first of those, creditworthiness.
    FICO scores are objective and data-driven. Our analytic 
scientists study large representative national de-personalized 
samples of credit data from each of the credit reporting 
agencies to isolate and prioritize factors that consistently 
predict credit account performance.
    Those factors found to be most powerful and consistent in 
predicting credit performance, both individually and in 
combination, form the basis of the complex mathematical 
algorithms which become the FICO scores.
    The FICO credit risk score is not static. It undergoes 
continuous innovation. FICO regularly studies credit bureau 
data samples to test the predictive value of the factors 
considered by the FICO score.
    Through empirical analysis of the data, FICO has 
consistently updated its algorithm resulting in a more 
predictive scoring model. In fact, our latest scoring model, 
FICO 8, which was referenced by Mr. Hendricks, generates the 
most predictive FICO score to date.
    At FICO, we understand and we appreciate the importance of 
an educated consumer. As a result, we have demonstrated a 
strong commitment to providing freely accessible educational 
resources related to credit scores and credit related topics.
    On our MyFICO.com Web site, you can not only purchase your 
FICO score for a modest fee, but you can also gain access to a 
wealth of credit information about how credit works, in 
addition to a detailed explanation of how your FICO score is 
derived and a program that helps consumers determine whether 
they qualify for government-sponsored mortgage relief.
    Also, we supported the creation of an active online 
consumer forum in which a community of 340,000 registered users 
gather online to discuss credit scoring topics and to help each 
other understand what they can do to improve their FICO scores 
over time.
    In addition to our Web presence, FICO staff work with a 
wide range of Government officials and consumer nonprofit 
agencies and groups providing education and training related to 
credit scoring topics and matters.
    All of this is consistent with our long-held commitment in 
empowering consumers to manage their credit health.
    Credit scores are not static. They are constantly changing 
based on consumer credit behavior. There are no shortcuts to 
rapidly raising a low score, but smart practices like 
consistently paying bills on time, keeping your credit balances 
low, and only applying for credit when needed will help to lift 
your score over time.
    Consumers who commit themselves to healthy credit habits 
and sound financial management practices are likely to see 
their credit scores improve over time.
    I appreciate the opportunity to testify before you today. 
Thank you.
    [The prepared statement of Mr. Quinn can be found on page 
169 of the appendix.]
    Chairman Gutierrez. You are very, very welcome.
    Now we have Mr. Barrett Burns, president and CEO of 
VantageScore Solutions. You are recognized for 5 minutes, sir.

  STATEMENT OF BARRETT BURNS, PRESIDENT AND CEO, VANTAGESCORE 
                         SOLUTIONS, LLC

    Mr. Burns. Good afternoon. My name is Barrett Burns, and I 
am president and CEO of VantageScore Solutions. Thank you for 
the opportunity to testify at today's hearing.
    VantageScore Solutions is a joint venture of the three 
credit bureaus: Equifax; Experian; and TransUnion. We were 
formed in 2006 to offer choice and competition in the credit 
score marketplace by providing a highly predictive credit score 
based on the latest analytic methodologies.
    Each of the bureaus devoted their top scientists and 
analytic leaders to the development of our algorithm armed with 
a deep understanding of consumer risk modeling and the 
respective bureaus' database design. Team members spent several 
months building a new consumer credit score from the ground up.
    Fifteen million anonymous consumer files served as the 
basis for development and testing of the new model. Innovative 
approaches in the model's development included advance 
segmentation techniques that provide more score cards than many 
traditional models, including segmentation cards for full file 
and thin file consumers.
    Our algorithm rank orders consumers in the likelihood of 
becoming 90 days or more past due on a credit obligation based 
on many consumer behaviors and factors grouped into the 
following six buckets, which approximate these weightings: 
payment history, 32 percent; utilization, 23 percent; current 
balances, 15 percent; debt to credit, 13 percent; recent 
credit, 10 percent; and, available credit, 7 percent.
    Additionally, medical debt when identified as a medical 
debt on a credit file, is excluded from the algorithm. The 
VantageScore scale ranges from 501 to 999. The higher a 
consumer's score, the less probability or likelihood of 
becoming 90 days or more past due.
    The score range approximates the academic ratings scale 
familiar to most consumers, so in addition to receiving their 
numerical score, consumers also get the letter grade that 
corresponds with the three digit score. For example, a score 
between 900 and 999 is an ``A''; between 800 and 899, ``B;'' 
and so forth.
    VantageScore's algorithm is unique. We use a single 
algorithm across the three bureaus and we use a new modeling 
approach that looks differently and more deeply into consumer 
behaviors allowing us to score many individuals who would 
otherwise not be able to obtain a score.
    VantageScore identifies three categories of consumers who 
face difficulties obtaining mainstream credit because they are 
unable to obtain a score. First, thin file consumers who have 
fewer than three accounts on their credit file. Between 35 and 
50 million adults in the United States, or about 18 to 25 
percent of the adult population, may be considered thin file 
and, therefore, are often underserved.
    Second, infrequent credit users who may not be eligible for 
a score because there has not been any new activity on a credit 
account for 6 months. And third, new entrants who are just 
establishing credit relationships and have not had credit open 
for more than the 6 months required by some traditional scoring 
models.
    VantageScore scores new entrants and reaches back deeper 
into an infrequent credit user's history, assisting millions 
more to obtain sustainable credit.
    A comparison of VantageScore with a traditional CRC scoring 
model that used a random sample of mortgage customers saw an 
overall increase in scored consumers with VantageScore of 8 
percent, or approximately 10 million consumers.
    Additionally, 2.5 million consumers from the study were 
more accurately identified as higher credit quality than 
subprime.
    We would like to commend Congressman Green for authoring 
the provision under the Housing and Economic Recovery Act of 
2008 directing the Department of Housing and Urban Development 
to undertake a pilot program establishing an automated process 
to determine the creditworthiness of borrowers with 
insufficient credit histories.
    Credit scores offer a uniform nonjudgmental mechanism that 
can be quickly deployed systemwide within an institution to 
respond to changing credit conditions. Although we believe that 
credit scores should be part of any decision process for credit 
approval, they should not be the sole criterion.
    Approving large loans without also verifying other critical 
information needed to assess a consumer's ability to repay the 
loan is simply not prudent.
    Risk has increased across all areas of the credit spectrum. 
VantageScore performs an annual re-validation to test the 
continued performance of our model. Our most recent re-
validation demonstrates that VantageScore continues to rank 
order effectively and is capturing the increased risk present 
in this environment.
    This allows lenders to understand the change in risk 
present to their portfolios from systemic shifts and adjust 
their business strategies to reflect that change.
    Even though the performance of our scoring remains highly 
predictive under these stressful economic conditions, the 
conditions may require a shift in lender standards.
    Thank you for the opportunity to contribute to this 
important discussion. I hope the information I have shared is 
beneficial to the subcommittee, and I would be pleased to 
answer any questions you might have, and to work with the 
members on scoring issues in the future.
    [The prepared statement of Mr. Burns can be found on page 
71 of the appendix.]
    Chairman Gutierrez. Thank you so much.
    Last, we have Ms. Anne P. Fortney, partner at Hudson Cook. 
You are recognized for 5 minutes.

    STATEMENT OF ANNE P. FORTNEY, PARTNER, HUDSON COOK, LLP

    Ms. Fortney. Thank you. Good afternoon. I am Anne Fortney, 
a partner in the Washington, D.C., office of the Hudson Cook 
law firm.
    I appreciate the opportunity to appear before you today. I 
have almost 35 years experience in the consumer financial 
services field, including service as Associate Director for 
Credit Practices at the Federal Trade Commission. I have also 
worked as in-house counsel at a consumer credit card issuer.
    Currently, in addition to counseling clients, I sometimes 
serve as a consultant and expert witness in litigation.
    My experience in credit scoring is described in my written 
statement. Based on my experience, I believe that credit 
scoring is a very effective tool that ensures objective credit 
underwriting decisions.
    Credit scoring systems eliminate the potential biases, 
illegal or even benign, that may exist in judgmental credit 
underwriting systems. They ensure that each consumer will be 
evaluated only according to attributes that are facially 
neutral and they facilitate fair lending compliance.
    Ironically, it is the fact that credit scoring focuses only 
on objective factors that has engendered criticism. For 
example, some complained that credit scores may reflect 
circumstances beyond a consumer's control, such as a natural 
disaster. These kinds of events, however, are not dissimilar to 
other uncontrolled events that historically have been 
associated with payment default, such as job loss or illness.
    Regardless of a consumer's personal control over events 
leading to default, credit underwriting systems necessarily 
focus on default when that is the risk they evaluate.
    If characteristics such as payment histories or credit 
limits in credit scoring models were eliminated or restricted, 
regardless of their predictive value, the models would 
necessarily be less predictive. Less predictive credit scoring 
models would impair creditors' ability to make sound 
underwriting credit decisions or to price according to risk.
    The inevitable result would be less credit availability at 
higher prices or at prices where good credit risk subsidizes 
the higher credit risk, and none of those results would be more 
fair than the present systems.
    It is neither efficient nor fair to focus on individual 
circumstances in an underwriting system that is designed to 
predict risk for an entire population.
    Some have complained that credit scoring models may 
penalize consumers who are conservative in their use of credit 
or who because of age or other circumstances may have limited 
credit histories.
    If this allegation is true, the obvious solution is to 
increase the amount of information available for credit score 
developers. Without credit histories and similar empirical 
information, creditors are unable to assess the relative risk 
of a consumer's default.
    By analogy, a 16-year-old has a perfect driving record when 
she obtains her first driver's permit. Despite the demonstrated 
value of credit scoring, there continue to be anecdotal reports 
regarding its accuracy.
    I believe these reports are based on a misunderstanding of 
how credit scoring works. They also overlook the fact that 
credit score users have a vested interest in making these 
models work.
    Credit scoring models are continually re-evaluated and 
updated. Credit score developers and users of credit scores are 
in the best position to evaluate the accuracy and 
predictability of credit scores because of their impact on the 
bottom line.
    Credit scoring has also been criticized for an adverse 
impact on minorities and other protected groups. However, 
studies by the Federal Reserve Board and the Federal Trade 
Commission found these systems are not proxies for prohibitive 
factors.
    Characteristics that correlate to lower credit scores may 
also correlate to race, ethnicity, and other protected 
characteristics. This phenomenon is reflected in credit 
underwriting in general. The solution is to increase 
educational and employment opportunities and outreach for 
underserved populations, and to provide for alternative sources 
of data that may predict creditworthiness, such as rent, 
utility, and telecom payments.
    I believe many concerns about credit scoring can be 
attributed to a lack of understanding about the factors applied 
in credit scoring. These concerns can be addressed through the 
implementation of new notices such as the risk-based pricing 
notice, and also increased education and awareness of the 
process.
    Based on my experience at the FTC, I firmly believe that 
consumer education plays a large role in consumers' ability to 
protect themselves and secure their financial futures.
    At the same time, I do not believe any providers of credit 
scores should be required to give away their product for free. 
Proponents of this view share a fundamental misunderstanding 
with those who criticize the educational credit scores 
available on various Web sites.
    They persist in the mistaken belief that there is only one 
credit score and only one provider of that score. In fact, 
there are many credit scores provided by many different 
sources.
    Moreover, it would be fundamentally unfair to require any 
credit score provider to give away its product. This is 
especially true because the educational materials available 
through the FTC and online provide adequate instruction for 
consumers.
    Thank you for the opportunity to testify. I would be glad 
to answer your questions.
    [The prepared statement of Ms. Fortney can be found on page 
101 of the appendix.]
    Chairman Gutierrez. Thank you so much for your testimony.
    One of the most notorious examples of misleading 
advertisement are the ads of freecreditreport.com, run by 
Experian. This site does not provide free credit reports. The 
FTC has taken a number of steps to address this, and will 
testify about those actions in the second panel.
    I wanted to show an ad that the FTC produced in its attempt 
to counteract misleading ads and educate consumers about their 
right to a truly free credit report through the official Web 
site, annualcreditreport.com, where people should go get it 
free. I went there and it was free. It did not cost me 
anything.
    The FTC does not have the budget to run this ad on TV, but 
let's show the FTC ad.
    [Playing of advertisement.]
    Chairman Gutierrez. That is actually a free credit report 
that you can get.
    I just have to say for the record, I really did enjoy the 
commercials. They were very well produced. It kind of reminds 
me--I always seem to get the secondhand stuff. I did not have 
the cool phone, the cool car. I will not talk about not getting 
the date I wanted to get because ultimately I got her.
    I really liked the commercials. I thought they were well 
produced, but the fact is, think about it. The FTC took the 
time to produce this commercial. I know there are those who 
have stated we are trying to muzzle Corporate America, their 
free speech. They have all the money in the world to run those 
deceptive ads.
    It shows you what we need to do. When was the last time you 
saw the government actually produce an ad to counteract an ad 
that was put out there by Corporate America?
    They do not have the money to run the ad, so I thought we 
should put that up just to start our conversation here today, 
and those cute little ads that are run by Experian. The FTC 
said they are so faulty, they even ran a parity on their own 
commercial.
    Let me start by asking some questions. I want to ask Mr. 
Evan Hendricks, in your testimony, you sounded an alarm on the 
``shadowy operations of a little known database of customers 
called the National Consumer Telecom and Utilities Exchange,'' 
run with the help of Equifax, used by several major utilities 
and telecom companies to secretly screen prospective consumer 
applications in order to reject applications or charge higher 
deposits on non-paying customers.
    In essence, your description of this practice makes it 
sound like almost a ``Blackwater'' of credit reporting, a 
secretive company that works hard to maintain its secrecy and 
may under cover be evading the application of relevant laws 
that affects many unsuspecting people who do not know of its 
existence.
    Do consumers know the negative repercussions that they face 
when their late payments are sent to the agency and do they 
have a way to appeal the negative information in their files?
    Mr. Hendricks. When I first did the story in October, I 
could not get any of those questions answered. I also wanted to 
know what utilities were members so we could maybe check up and 
see what was happening.
    Since that story has run, I was pointed to their Web site 
this morning to show that they now have some contact 
information for consumers to order their reports from the 
database, and their communication said they are subject to the 
Fair Credit Reporting Act.
    Again, they did not tell me that when I first asked them in 
October.
    Chairman Gutierrez. Do they report all the information or 
just negative information?
    Mr. Hendricks. We think it is mainly negative but we do not 
know because we do not have any power to audit and really find 
out what they do.
    Clearly, it is a situation where consumers can get denied 
or charged a higher deposit for the utilities--
    Chairman Gutierrez. Let me just ask you something. Let's 
say there was negative information and I was charged a higher 
rate for my utilities or a higher deposit, do I get a note in 
the mail? Let's say I was denied a credit card or a mortgage. I 
get something that says here is what information was used to 
deny this creditworthiness.
    Do we get that when this happens?
    Mr. Hendricks. Under the law, you are supposed to get it, 
but they would not answer whether it was given to consumers, so 
I am concerned it is not.
    Chairman Gutierrez. We have a representative here, so maybe 
we will be able to get an answer from them today.
    Mr. Hendricks. This is why sunshine is the best 
disinfectant.
    Chairman Gutierrez. I agree. My time has expired. I have 
about 5 seconds. Let's see if Mr. Hensarling can get his 5 
minutes in. We will be having a vote pretty soon.
    Mr. Hensarling, you are recognized for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. It was a cute ad. 
I frankly do not know the facts dealing with 
freecreditreport.com. My understanding is certainly the Federal 
Trade Commission has the opportunity to issue cease and desist 
orders. I do not know if they have. I do not know if the facts 
are still being adjudicated or not.
    I know, Mr. Chairman, you said unfortunately, the FTC did 
not have sufficient funds to run the ad. Perhaps had the House 
not passed on Sunday evening the $2.3 trillion takeover of our 
health care system bill and instead replaced it with something 
that would make health care affordable and maintain the high 
quality, maybe there would have been a few extra dollars to run 
that ad, but unfortunately, the President signed the 
legislation, so there goes the cute ad.
    There are a lot of different--we continue to study all the 
different ``but for'' causes of the economic turmoil that we 
have in our economy today. Most people would point to the fact 
of all the no doc/low doc loans that took place in the 
residential mortgage market. If not the contributing factor, it 
is certainly one of the most significant contributing factors.
    I am just curious about a parallel here. Again, I seem to 
see the prevailing winds from Congress trying to make credit 
files more thin but somehow let lenders have less information.
    When I see that applied to residential real estate, what I 
see is great economic turmoil and human misery. It seems to me 
if anything, we would want to be pushing in the opposite 
direction of having more information about credit decisions as 
opposed to less.
    Perhaps, I guess, it is the next panel who might have our 
professional economists, but if anybody cares to jump in on 
that one, I would be glad to hear an opinion on the matter.
    Mr. Pratt, you seem to be the first one reaching for the 
button.
    Mr. Pratt. There are two things we should think about when 
we think about the kind of risk data, a credit report is not 
just a point in time story of what I did most recently. I think 
one of the reasons we feel so strongly about preserving the 
entirety of the credit report history is that it sets into 
context both the good that we have done and also maybe the 
difficult experiences we have had at any given time.
    Lenders want to do with business with consumers. Lenders 
want a complete picture of the possible risk. Lenders do not 
like saying no. Lenders will look, I suspect, even in this 
period of our recession, even at the struggles that many 
consumers have had, and they are going to see that in the 
context of a credit report where you may have a consumer who 
historically has done exceptionally well. That is the key to 
the credit report.
    The credit report is not just a snapshot of some immediate 
missed payment, but it is about what happened over my lifetime 
of managing credit.
    With regard to negative information, negative information 
does come off the file off a period of time. It is also 
important to know that lenders look at negative information 
differently over time. An immediate incident is probably 
considered to be more risky for a lender, but a lender who 
has--if you are looking at a 6-year-old event, it is not the 
same. A lender wants to do business with you.
    That is really important in terms of context.
    Mr. Hensarling. Mr. Pratt, along the same line of 
questioning, one of the most common phrases we heard applied to 
what was going on in the residential real estate market was 
``predatory lending.'' I, myself, have concluded, yes, there 
was a lot of predatory lending going on. I have also concluded 
there was also a lot of predatory borrowing going on.
    Again, predatory lending to some extent, lending money to 
people who cannot afford to pay it back, if we have 
congressionally mandated thinner credit files, is there going 
to be a greater probability of loaning money to people who 
cannot afford to pay it back? Yes or no?
    Mr. Pratt. Our view is you have to have all the data on the 
table in order to ensure safe and sound lending decisions, and 
also fair lending decisions.
    Again, for all of us who know we are just emerging, just 
struggling to get out of a deep, deep recession, we know there 
are going to be some consumers who will have a credit report 
that is not as perfect as it once was, but it is a history, Mr. 
Hensarling.
    Mr. Hensarling. Mr. Pratt, I see my time is starting to run 
out. You used the term ``fairness.'' I want to go to you, Ms. 
Fortney. I think you said that the credit scoring models we 
have today ``help eliminate bias,'' and I may be paraphrasing, 
that the on the spot individual judgment would otherwise 
interject that bias into the system.
    Could you elaborate a little bit on what you mean by that?
    Ms. Fortney. Yes.
    Mr. Hensarling. Apparently, no.
    Chairman Gutierrez. I have already been accused of shutting 
down Corporate America's freedom of speech. I would never allow 
the one minority witness we have here--please give your answer.
    Mr. Hensarling. Thank you, Mr. Chairman. You listen well.
    Ms. Fortney. I appreciate the opportunity. There are two 
aspects of this. As I said, I have been practicing for many 
years and I saw what the world was like before credit scoring. 
It was not as efficient and there were even benign biases that 
made the system less efficient when you had credit managers 
trying to draw on their imperfect memories and also the 
comparisons of how this applicant compared to others.
    The other thing I know from my time at the Federal Trade 
Commission is that credit scoring has really facilitated law 
enforcement and compliance. If you look at the cases that have 
been brought by the Federal Trade Commission and by the Civil 
Rights Division of the Justice Department in the last 30 years, 
they have not involved credit scoring.
    They have involved situations of what is called 
``discretionary pricing,'' by and large.
    Chairman Gutierrez. Thank you, Ms. Fortney.
    We just got a bell. We have 10 minutes. Maybe we will take 
questions on each side and then we will recess.
    Mr. Moore is recognized for 5 minutes.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. Some have 
proposed mandating a free credit score be given to consumers 
every year. As an alternative, I would look at something we did 
in drafting the FACT Act a few years ago.
    That law requires under certain circumstances a credit 
score used by a lender for a loan application be provided 
directly to the applicant.
    Instead of a mandatory free annual credit score, what if we 
required credit scores to be provided to the borrower and every 
application where a credit score is used?
    The credit bureau already provides the information, so I do 
not believe it would be an additional burden on them. The 
information is specifically derived from the borrower's credit 
history, so they should have a right to see it regardless of 
whether their application is approved or not.
    It could also help protect against lenders unfairly 
discriminating against loan applicants and empower consumers to 
better monitor their credit score and credit history.
    Any reaction? Mr. Pratt, do you have any reaction?
    Mr. Pratt. My first reaction is the same fact that did just 
this year bring to the Floor a new notice that I think many 
lenders will be delivering, in order words, the risk-based 
pricing notice. One of the options for complying with the risk-
based pricing notice rule is for a lender to deliver to the 
consumer a credit score disclosure with every application that 
is made.
    I think it is very likely by the end of this year, you will 
see an enormous increase in the number of score disclosures 
where you actually see a nexus between the lender who is using 
the score and the consumer who made the application.
    We are going to see how consumers react to that. We are 
going to see what consumers learn from that. I really think 
that is the next step in this evolution of connecting consumers 
with scores and with data.
    Mr. Moore of Kansas. Very good. Mr. Burns, any comments, 
sir?
    Mr. Burns. I have nothing to add. Thank you.
    Mr. Moore of Kansas. Do any other panel members wish to add 
to that or respond? Yes, sir? Mr. Hendricks?
    Mr. Hendricks. Thank you, Congressman Moore. I think it 
would still advance the educational purpose of the Fair Credit 
Reporting Act if we put in a free score requirement, and also 
make sure it is a score that is used by lenders. That would 
help people tie the information in their credit report to what 
does it mean in terms of the credit score.
    There was one credit card company, Providian, that opened a 
service for its card members, and this was a nice market 
response, I thought, because they are buying the credit score, 
a true credit score every month to evaluate their credit 
cardholders.
    What they did is they made it so their customers could 
access the credit score they were buying, and that was an 
alternative that made it so you could actually get access to a 
free real credit score.
    Mr. Moore of Kansas. Very good. Last question, in our 
modern society with our use of the Internet and online banking 
and shopping, one unfortunate reality is the increase in 
identity theft and how it can harm a responsible consumer's 
credit score.
    As it relates to credit scores being damaged by those who 
steal another's identity and credit information, where do 
things stand now on identity theft and what steps can our 
government take to ensure that those who are victims of 
identity theft have their credit scores and credit history 
repaired quickly?
    Do any of you have comments on that? Mr. Pratt?
    Mr. Pratt. I think a couple of things in the FACT Act have 
been effective. For example, the FACT Act empowered all of us 
as consumers to obtain an identity theft report and in doing 
that, I can go to my lender and I can ask them to stop 
reporting data. I can go to my lender and I can get access to 
original application data in order to be more proactive in 
investigating a crime against me, myself. I can go to the 
credit bureau and ask them to remove data that was a result of 
the fraud.
    I think the remedial powers that I have under the FCRA were 
great ideas then. They are good ideas now. I think they are 
workable in the marketplace.
    If there is one challenge, it continues to be obtaining an 
identity theft report in order to do those things and some law 
enforcement agencies may or may not be able to give access to 
one.
    Mr. Moore of Kansas. Very good. Mr. Hendricks, do you have 
a comment, sir?
    Mr. Hendricks. The FACT Act had great advances for consumer 
protection. I like the idea of having consumers plugged into 
their own information. One of the things that makes that 
possible is the monitoring services that all of these companies 
offer.
    In the old days before we allowed for a free credit report, 
the Federal law capped the price of the credit report at $8. I 
am in favor of exploring the idea of capping the price of 
credit monitoring to encourage more people to take advantage of 
it. I think it would be a win-win situation because you will 
get more volume of people using it when you lower the price and 
it will bring more people plugged into their own reports.
    Mr. Moore of Kansas. Thank you, Mr. Hendricks.
    Mr. Chairman, I yield back to you the balance of my time.
    Chairman Gutierrez. Thank you so much. I try not to be thin 
skinned here. I just feel personally kind of attacked, that I 
would be accused of shutting down free speech--it is a 
constitutional thing, you know, the basis of our democracy--of 
Corporate America.
    I just wanted to let everyone know, we in the Majority set 
up these hearings. We invite the witnesses. We did have Mr. 
Hendricks here for the consumers. Representing Corporate 
America is seven. Come on. Cut the Democrats a break here. That 
is seven corporate America representatives.
    Mr. Hendricks. Plus, I am an S-corporation, too.
    Chairman Gutierrez. With that, we are going to get Mr. 
Marchant in for his 5 minutes, and then we are going to recess 
after Mr. Marchant's 5 minutes. Mr. Marchant, you are 
recognized for 5 minutes.
    Mr. Marchant. Thank you, Mr. Chairman. I would like to 
explore some of the methods that some institutions use as far 
as coming up with approval ratings. For instance, FHA, and I do 
not know if it is a written policy, but there is a policy that 
says they are to disregard medical information in some of their 
approval processes, yet when you get a score, then the score 
reflects any past due medical bills.
    Are there customers who have such a relationship with a 
credit score company or a credit reporting company where they 
could say to them, I would like to have the credit score of 
this person if you do not take a certain debt into 
consideration?
    Are any of the programs that customized where a customer 
could find that information out or are the reports and the 
scores just given across-the-board?
    Mr. Wiermanski. At TransUnion, we do not include medical 
debt in the calculation of the score. That is in the current 
versions of our generic products. When developing customized 
solutions, as you are describing, it is up to the customer, 
where they may want certain data elements excluded from a model 
development process.
    In those situations, the information would be excluded and 
the model would be engineered without that data made available 
to it.
    Mr. Marchant. Each customer can decide. I guess you would 
have to be a very large customer?
    Mr. Wiermanski. Not necessarily. We service customers from 
several hundred member credit unions to the very large lenders. 
That is where I would say the art of developing credit scores 
come in. It is both an art and a science.
    It is up to the outcome that we are trying to model and the 
business objectives of that institution, that when we create 
the credit characteristics that feed into the modeling process, 
that we take those types of things into consideration.
    Mr. Marchant. Mr. Hendricks?
    Mr. Hendricks. Thank you. These gentlemen will correct me 
if I am wrong, but I think the most widely used credit scores 
are the FICO models from the 1990's. They do allow a medical 
collection to really damage your score.
    You did not know about the co-pay and it comes as a $48 
collection on your credit score. If it is something that just 
happened in the most recent months, it can drag down a score 
dramatically and really send you tail spinning to not be 
eligible for the credit.
    It is a big problem now. My understanding also is that the 
modern version of FICO, FICO 8, excludes medical debts under 
$100. I think Mr. Burns talked about trying to exclude medical 
debts in the VantageScore as well.
    Medical debt is a big problem and unfairly hurts consumers. 
I recommended if Fannie would move toward models like FICO 8 as 
a standard, that would help address this problem without even 
passing legislation.
    Mr. Marchant. One of the concerns that I have had for the 
last 2 years is that it appears that since we are going to have 
a record number of foreclosures in the United States in 
history, and certainly a record number of late payments, and 
where we have numerous government programs that I fear lead 
people to believe that it is okay to be late, later, and latest 
on your payments, that we are creating an entire generation of 
subprime borrowers that we will experience problems with for 
the next 20 years.
    I think many businesses are struggling with how to properly 
rate their scores and their credit reports.
    I think in the future, you may have lenders and people who 
are wanting to extend credit who will say, we want to exclude a 
late payment, 60 days or less, and really customize it.
    To me, this is one of the big looming problems we have in 
the recovery and in our economy coming back. That is a 
commentary. Yes, sir?
    Mr. Burns. If I may, I think you make a great point, and 
that is the difference between a credit score and credit 
criteria.
    The credit score needs to be very objective. However, the 
credit criteria of a lender can decide what to exclude, for 
example, in their underwriting criteria.
    Chairman Gutierrez. The time of the gentleman has expired. 
We are going to recess for about 45 minutes. We have a series 
of votes. I have been informed that is about how long it is 
going to take.
    We are going to reconvene and finish with this panel. We 
are going to allow the other members who are here to ask you 
questions in 45 minutes.
    We thank you for your testimony thus far. We ask you to 
stick around. We have some more questions for you, and then we 
will go to the second panel.
    Thank you so much. The meeting is in recess until we get 
back, around 4:00. Thank you.
    [recess]
    Chairman Gutierrez. The subcommittee will come to order. 
Mr. Sherman, you are recognized for 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman.
    Is it free if you have to pay money for it? You are dealing 
with financial issues all the time. Is $14.95 free?
    Mr. Oliai. It does not sound free to me, but I personally 
do not pay for it.
    Mr. Sherman. Mr. Hendricks, has the FTC adequately cleaned 
up the freecreditreport.com ad by saying well, you can keep the 
commercial and just put something illegible down at the bottom 
that tells the people it is not free?
    Mr. Hendricks. No. I would like to see use of the word 
``free.'' I like plain language. I would like ``free'' to truly 
mean ``free.'' The FTC has tightened up the rules on the ad, 
and Congress passed protections recently which is also going to 
help us in this kind of nonsense.
    It has been very confusing for consumers. I am hoping those 
days are behind us.
    Mr. Sherman. Mr. Quinn, we all like our free credit reports 
once a year, but nobody seems to care very much about my credit 
report, they just care about my FICO score. Can I get a free 
FICO score once a year?
    Mr. Quinn. Fair Issac does have programs that we are 
orchestrating with lenders. It is called Score View, where the 
lender who pulls the FICO score for use in account review 
decision processes can also disclose that score as a secondary 
use--
    Mr. Sherman. ``Can.''
    Mr. Quinn. To the consumer.
    Mr. Sherman. What if I want to know my FICO score before I 
start applying for a loan so I know whether to apply for the 
good ones or the bad ones or even know whether to go shopping 
for a good house or a bad house? How do I get my free FICO 
score?
    Mr. Quinn. Today, either it is through Score View or if you 
have applied for a mortgage, as part of the FACT Act.
    Mr. Sherman. Let's say I want to know what my FICO score is 
before I apply for a loan. How much is it going to cost me to 
find out?
    Mr. Quinn. It will cost $15.95.
    Mr. Sherman. At least you do not have ads that say 
``freeFICOscore.com'' and then charge me $15.95.
    Mr. Quinn. No.
    Mr. Sherman. I yield back.
    Chairman Gutierrez. Mr. Paulsen of Minnesota, you are 
recognized for 5 minutes.
    Mr. Paulsen. Thank you, Mr. Chairman.
    I have some concerns about what may happen. We may have 
gone over some of this in the testimony. What can happen if we 
should start preventing certain types of information being 
allowed as part of a credit score computation.
    For example, if I have a score of 650, and then we pass 
legislation banning certain information from being used, this 
would arguably cause those people who had lower scores to now 
have a higher score, in essence.
    That is the intent of some of the legislation that is out 
there, but my score still will remain at 650, and at the end of 
the day, what does that mean for me as an individual?
    Will 650 no longer be as soon as it once was in the past? 
Does that mean it is going to be now harder for me to get 
credit?
    Mr. Quinn, maybe you can comment on that, potentially.
    Mr. Quinn. Sure. If information is required to be 
suppressed from the score calculation and it causes the score 
to be inflated artificially from what it would be if that 
information were considered, then a lender would look at the 
score in their decision process and say I am used to a 650 
equating to potentially, let's say, a 2 percent bad rate.
    If the score is now inflated, they will have to potentially 
change their cutoff to accommodate for the inflation of the 
score driven by the suppression of certain data elements coming 
into the score calculation.
    Mr. Paulsen. Along those same lines, what would be the 
impact on predictability of credit scores if Congress mandated 
that certain data elements or trade lines be enmassed?
    Mr. Quinn. We would have to do analysis to understand what 
the exact impact is, depending on what information is being 
suppressed. What we have seen through our data analysis is that 
more information provides for a more robust score, and if you 
start to take information out of the availability to be 
included in the score, it will usually result in a lost of 
predictive power in the model.
    Mr. Paulsen. Can you talk just a little bit about the 
intellectual property that is embedded within a credit score?
    Mr. Quinn. Sure. FICO scores have been around since 1989, 
so that is over 20 years, and through that 20-year time period, 
we have learned a lot about credit scoring and how to get the 
most out of the bureau data from a predictive perspective.
    However, from our perspective, the fundamental factors that 
drive the score calculation are very transparent. It is 
consumers who pay their bills on time, who keep their debt 
levels reasonably low, who only seek credit when they need 
credit, they are generally going to result in a more favorable 
score.
    The fundamental practices of good credit behavior are 
pretty transparent, but that has been enmassed through 20-plus 
years of model development experience.
    Mr. Burns. If I may add to that, our intellectual property 
also includes a technique that minimizes the inconsistency 
between the bureaus, because we only have one algorithm between 
the bureaus. That is another intellectual property differential 
in our model.
    Mr. Paulsen. Ms. Hart, do you have anything to add or 
follow up on?
    Ms. Hart. Sure. I guess I would like to say we also have 
about 20 years of looking at our data and building generic 
scores and working with customers to build custom models for 
their business purposes.
    We like to feel we have done a great job of mining our 
data, identifying those characteristics that very specifically 
are predictive of risk in a particular customer application.
    Just to add to what Tom Quinn said, the factors really that 
go into these credit scores are very transparent to consumers. 
They are very basic, I would say very easy to understand.
    What we are all doing is tweaking a little bit the 
attributes, tweaking a little bit the weights that are applied 
to those attributes to help the models be more predictive for a 
particular business need.
    Generally, it should just be very clear to consumers, that 
they understand their credit report and how they are managing 
their credit overall. It should be clear to them the things 
that generally make their scores higher or lower relative to 
other scores.
    Mr. Paulsen. Thank you, Mr. Chairman. I yield back.
    Chairman Gutierrez. Mr. Perlmutter from Colorado, you are 
recognized for 5 minutes.
    Mr. Perlmutter. Thank you, Mr. Chairman. I apologize, I 
have been bouncing back and forth among a number of different 
committees.
    My question is, I do this thing called ``Government at the 
Grocery.'' Every other Saturday, we set up a congressional 
office in a different grocery store in my district.
    A week ago Saturday, a woman came up, said she had two 
credit cards, and of course, in the last 6 months, 8 months, I 
do not know if any of you have experienced it, but many 
Americans have experienced the credit card rates going up, even 
though they have been paying on time and all that sort of 
stuff.
    They closed their credit cards. She closed the credit 
cards. Then they find out their credit score had dropped 
because they closed their credit cards because they did not 
want to pay higher rates. They were just done.
    Somebody explain to me how that happens.
    Mr. Quinn. Sure. When you say ``they closed it,'' meaning 
the consumer?
    Mr. Perlmutter. The consumer closed the credit cards 
because their rates had been jacked up.
    Mr. Quinn. Okay. The way that can happen is in the credit 
scoring model, at least with FICO scores, we do not have any 
characteristics that are looking at just available credit in 
isolation. There would be no points lost because of that.
    However, we do look at what is called the ``utilization 
calculation,'' so using a hypothetical example, if a consumer 
had 2 credit cards and they had $10,000 available to them as 
credit and a $5,000 balance, the $5,000 divided by the $10,000 
is a 50 percent utilization calculation.
    The data shows that the consumers who have been carrying 
higher utilization patterns are higher risk.
    If a consumer in your situation closed down one of those 
credit cards and now let's say that had a line of $5,000, their 
utilization now looks at $5,000 divided by $5,000, which makes 
it 100 percent. Then that ends up potentially costing them 
points on their credit score because of that action.
    Mr. Hendricks. Also, there is a second category that gets 
dinged in. First of all, what Mr. Quinn is talking about is 
each credit score is scored one at a time, and then they are 
scored again collectively, but the other category is your 
length of credit history.
    If you close a credit card, then you can lose credit for 
how long you have had that credit card, which is 15 percent of 
your score.
    Mr. Perlmutter. These people had these credit cards a long 
time, so then they close them, all of a sudden, the length of 
time they had the credit card no longer goes to their benefit.
    Did anybody, in your algorithms, in your computations, in 
your calculations, and I understand it is all proprietary and I 
do not care about knowing the ins and outs--part of what we 
have been dealing with in this Congress are credit card 
practices that in many ways were very sharp practices.
    Double-billing cycles, a whole variety of things, then we 
take steps to try to deal with that. People then face higher 
rates for whatever reason, some of the credit card companies 
did that, and then because they close and choose not to 
maintain that credit, then they lose points on their credit 
score, so if they want to go buy a house, they are going to pay 
that much more money in interest.
    Did anybody take any of this into consideration?
    Mr. Burns. If I may offer an opinion, the value of giving 
somebody credit for having a long history of a credit card or a 
mortgage or an auto loan is it shows they behaved well over 
that long period of time.
    Mr. Perlmutter. Right.
    Mr. Burns. The other side of that coin is if they close the 
account, they lose that history. Our advice is just do not use 
the credit card any more and do not close your oldest accounts, 
because you should be given credit for behaving well over those 
years.
    Mr. Hendricks. The trouble is that sometimes it is very 
counterintuitive. It seems responsible to close a credit card 
that you are paying through the nose for, but from a credit 
scoring point of view, it can ding you. You have to know the 
inside baseball to really protect yourself. I think that puts 
quite a burden on consumers.
    Mr. Perlmutter. Right. I found it sort of counterintuitive. 
You said all right, I have had my credit card, the 6 percent 
was wonderful, now it is 16 percent, I do not need it any more, 
I do not want it any more, I am done.
    Then all of a sudden, you get hammered over on the house 
borrowing side of this thing because your credit score is less.
    I would just ask all of you to take another look at that. I 
appreciate sort of the philosophy behind it, but there are more 
questions to be asked.
    I do not know if it was you, Mr. Pratt, or it might have 
been Mr. Quinn, who said well, it is not just a snapshot. We 
are looking at the long run. All of a sudden, you are not 
looking at the long run. You are looking at the snapshot.
    Mr. Pratt. It is a point-in-time snapshot of the history, 
but it is the history. It is not just the one.
    Mr. Perlmutter. Unless you close the account.
    Mr. Pratt. You make a good point about closed accounts and 
then the history is no longer there. The counterintuitive part 
is just like looking at a consumer who is 21 years old who 
enters the marketplace, has a credit card for a year and maybe 
another consumer has literally the same credit profile but has 
been in the market for 25 years.
    You can make a better estimation of how I have done if I 
have been in the marketplace for 25 years. That is all.
    Chairman Gutierrez. The gentleman's time has expired.
    Mr. Pratt. It may be a little counterintuitive, but there 
is a logic to it in terms of how that works.
    Mr. Perlmutter. I thank the chairman and the panel.
    Chairman Gutierrez. Mr. Campbell, you are recognized for 5 
minutes, sir.
    Mr. Campbell. Thank you, Mr. Chairman.
    I have a couple of questions. The first one is, is there 
any difference between the scores that a lender is going to use 
to evaluate someone's credit and the score that is disclosed to 
a consumer whether they paid it or not?
    I will direct the question first to Mr. Oliai, because you 
are from a constituent company. Welcome, I am glad to have you 
here. The question is for all of you actually.
    Mr. Oliai. I guess there are a couple of parts to that 
answer. There really is no one score that fits every bill. 
There are many scores, as you have heard in some of the 
testimony prior to now.
    When we talk about educational scores, typically we talk 
about those scores that have a lot of packaged material around 
them that say what are those elements that most positively 
influence your score, what are those elements that most 
negatively detract from your score, and they are designed with 
the sole purpose of educating the consumer about credit 
management, and those elements on the credit report that most 
influence a score.
    The educational score is much like scores that lenders use 
in underwriting. They move in the same direction. They are 
predictive of risk. They are based off the same credit bureau 
data.
    It is just the audience and the intent of the score is 
different. It is not the score itself that makes the 
educational score special, per se, it is more all of the 
material that goes with it and all that education that goes 
with it to educate the consumers on those elements that most 
influence the score.
    Mr. Campbell. Let me understand. There are different--for 
just the lender, they can request a different score because 
they want to weight something differently?
    Mr. Oliai. Absolutely. There are a multitude of scores, 
both that we would call in our nomenclature ``generic scores,'' 
that predict slightly different outcomes when we are looking at 
credit risk. Most lenders rely heavily on custom scores to make 
their underwriting decisions. Those scores that are custom to 
their prior lending experience.
    Mr. Campbell. What the consumer will get, which you call 
``educational,'' is basically a ``generic score,'' but a 
lender, because maybe it is a long-term loan or short-term 
loan, whatever, may have their own custom thing that they are 
getting that could be different?
    Mr. Oliai. That is correct. A lender may use multiple 
scores for the same credit underwriting decision.
    Mr. Campbell. Thank you. Mr. Pratt and Mr. Hendricks are 
both chomping at the bit here. Go ahead, Mr. Pratt.
    Mr. Pratt. It is really important--I think our world view 
is that every time a consumer acquires a score, they are 
obviously more than likely getting a credit report at the same 
time, and it is always educational, meaning because there is no 
one score, because a single lender could use different scores 
for different products, because a lender could take an external 
score and fold it into an internal underwriting decision, it is 
a mistaken assumption to think we are going to be able to get a 
consumer's knowledge to the point where they know exactly how 
bank number one is going to say yes or no and at what price, 
and then similarly bank number two and bank number three.
    That is what we worry about with some of these ideas where 
you get into there must be some score that is definitively the 
only one that is going to tell me the whole truth.
    There are scores that tell me--I think Ms. Hart and others 
have referenced it--in fact, it has been in the testimonies of 
some of our score developers here at the table, what is 
important about my credit management.
    Have I paid my bills on time? How much credit do I have 
outstanding? And so on. That is really the core of what we do 
when we get a score. We learn about how lenders look at us and 
how they analyze us and we learn a little bit about how to 
structure our financial management more effectively.
    Mr. Hendricks. From a consumer's point of view, the FICO 
score, according to the numbers, is used by 75 percent of the 
lenders. When a consumer goes to MyFICO.com and buys the FICO 
score, you know that is a score that is used by lenders.
    When you go to TransUnion and buy your true credit score, 
that is based on the TransUnion model. That is not used by 
lenders. If you go to Experian or freecreditreport.com and buy 
your score, that again is not used by lenders.
    The VantageScore is used by lenders, but I am not sure we 
have good data yet on how far it has penetrated the market.
    That is the kind of confusion. The problem is sometimes 
consumers will buy a knock-off score and think it is a real 
score and find out when they apply for a loan, they get a 
different score.
    Mr. Campbell. It sounds like--I did not know this and that 
is why I asked the question--if the scores are kind of 
customized by the lender for whatever, there is no ``the'' 
score. Is it not important that the consumer understand that, 
that even though your score is 600, you could be something else 
if a lender weights something differently?
    Mr. Hendricks. Right. Anybody who sells the score should 
also tell the consumer is it used by lenders, any lenders, and 
is it used by a majority or some segment of lenders.
    Mr. Campbell. Thank you, Mr. Chairman.
    Chairman Gutierrez. Mr. Green of Texas, you are recognized 
for 5 minutes, sir.
    Mr. Green. Thank you, Mr. Chairman. I thank the witnesses 
for appearing. I am pleased that I got here to hear that 
exchange. There are many consumers who are confused and who are 
of the opinion that if I take advantage of this offer to get my 
credit score by way of some entity that is offering it to me, I 
will have the ``the'' credit score. What you are saying is it 
may be ``a'' credit score but not necessarily ``the'' credit 
score.
    Is that a fair statement?
    Mr. Hendricks. Yes.
    Mr. Green. Does someone differ? By the way, this is not the 
line of questioning I intend to pursue, but I think it is 
worthy of consideration.
    Mr. Wiermanski. First, I would like to correct a statement 
made by Mr. Hendricks. The scores that TransUnion makes 
available to consumers are used for hundreds of millions of 
credit decisions, so they are not what people call a ``FAKO 
score.'' They are production-ready, commercially-made-available 
scores. I wanted to clarify that.
    There are many different scores that are made available to 
our customers that are used for decisioning purposes, and there 
is not one score that is used. At TransUnion, for instance, we 
have 12 different versions of a FICO score that is made 
available that are different algorithms used for different 
purposes.
    There is not one FICO score. The only one score that I know 
of that exists out there is the one offered by VantageScore 
where it is the same algorithm across all three credit bureaus.
    Mr. Green. Thank you very much. Thank you for that new term 
for my vocabulary. ``FAKO.'' Is that what you said? ``FAKO 
score?''
    Mr. Wiermanski. That is a term that I picked up the last 
time I testified.
    Mr. Quinn. If I may say something, I work for FICO, and of 
the top 100 lenders that use FICO scores in their decisioning, 
as Mr. Hendricks indicated, 75 percent of the credit decisions 
are made with FICO scores; it is the predominant score.
    As Mr. Wiermanski indicated, there are multiple versions of 
FICO, but the design blueprint and the underlying data 
parameters that drive the score are the same, so from FICO's 
perspective, the consumer benefits most greatly from getting 
access to the score that lenders use, which in our position is 
FICO scores.
    Mr. Green. Thank you. Is there a difference in opinion? Go 
right ahead, sir.
    Mr. Oliai. Thank you. When I hear the term ``FAKO score,'' 
it is something that I find personally insulting and motivating 
at the same time. I have been in this business working with 
Experian since 1993 building these models.
    We do have widespread usage across and good penetration 
across both custom and generic models, much like the other 
leading companies here on the panel.
    I would contend there is no universal score. You heard Mr. 
Wiermanski talk about 12 different versions. There are at least 
eight at Experian, not to mention all the Experian-developed 
scores that we have done in a proprietary fashion over the 
years.
    Mr. Green. All right. Thank you very much. Let me move onto 
another area. I appreciate your comments.
    Alternative credit scoring, for those of you who do scores, 
can you give me some intelligence on how this will impact you? 
There is a possibility that HUD may introduce alternative 
credit scoring. There are people who can afford to pay for a 
given item but they do not have what we call ``traditional 
credit.'' They pay light, gas, water, phone, but these things 
are not always scored. In fact, there is a good likelihood that 
they will not be scored.
    How will alternative credit scoring impact you? Yes, sir.
    Mr. Burns. Those payments, if they are reported to the 
credit file, are picked up by VantageScore and that is one 
reason we can score millions more other people. It is recorded. 
It should be recorded. It is highly predictive. We do use that 
data in our model calculation.
    Mr. Green. Mr. Pratt? Go right ahead, sir.
    Mr. Pratt. Just to set up this circumstance, the real 
challenge we have with alternative data are laws and I guess 
lack of guidance as to whether or not this data can be used.
    In other words, many consumers have a cellular phone and in 
fact, it may be the only phone they have. Telecom companies are 
not clear on whether or not they can report that data to a data 
exchange database or to a credit reporting database.
    One of the great impediments that is impinging on the 
progress towards, I guess, a more fulsome look at a consumer 
who may otherwise have a somewhat thin file, is this inability 
in the data industry of us to be able to get that data into a 
database to do the full and complete analytics and to really 
deploy better analytical tools that include more consumers in 
the marketplace. That is our biggest challenge.
    Mr. Green. Yes, sir. Mr. Quinn?
    Mr. Quinn. Just so everybody knows, in 2004, Fair Issac 
developed and released a score called the ``FICO expansion 
score.'' What this score does is it takes in alternative credit 
information that is not reported to the big three.
    For example, both positive and negative information on how 
you manage your checking account, how you manage credit 
membership relationships, if utility information is provided 
and verified, the model will consider that as well.
    We built that in response to lender questions about wanting 
to be able to more confidently extend credit to the underserved 
population, so this is an alternative they can use when there 
is not a traditional credit file on the consumer. They can come 
and get the FICO expansion score.
    Mr. Green. Thank you, sir. My time has expired. Thank you, 
Mr. Chairman. You have been very generous.
    Chairman Gutierrez. Mr. Royce of California, you are 
recognized for 5 minutes.
    Mr. Royce. Thank you very much, Mr. Chairman. I was going 
to ask Mr. Pratt, as you know, this committee has marked up and 
the House has passed its consumer financial protection agency 
legislation. That is now in the Senate.
    What would happen if this agency, armed with broad 
unchecked authority, began cracking down on what goes into a 
credit file? What would be the consequences of that?
    Mr. Pratt. I suppose whether it is law or an agency that is 
involved in, as you say, the crackdown, the concern for us is 
first of all, there is no science necessarily behind the 
decisions that would be made. That would be one risk.
    I really would turn to all these partners, all these 
competitors at the table, they are the brilliant folks who are 
going to help us make a better decision. If data should be in, 
they are going to tell us where it should be in, how it should 
be weighted, why it should be weighted. That is the beauty of 
this industry.
    To make an arbitrary decision to exclude a set of data 
without understanding consequence is part of this story. The 
other part is the death by 1,000 cuts. You could run data. You 
could run a score and say what about this piece. If it is not 
in, how consequential is that.
    My concern is the cumulative effect of removing 
progressively this piece and that piece and this piece, and you 
ultimately get to a point where you have harmed the system and 
you have a less effective system. That would be a shame.
    We have the best credit reporting system in the world, bar 
none, period.
    Mr. Royce. What would the result be? What would creditors 
do? Would they begin to question the integrity of an 
individual's credit file? What impact would that have on the 
general appetite for risk among those creditors out there, in 
your opinion?
    Mr. Pratt. It is all suppositional. I am assuming that 
creditors would have wider bands for risk. They might not be 
able to allocate risk as effectively. They might not be able to 
allocate risk at all to certain segments, so you might have 
less credit in the marketplace. You might have more expensive 
credit for more consumers. That is inevitably the consequence 
of removing data from the credit bureau system.
    Mr. Royce. Less extension of credit on the lower end of the 
credit spectrum probably, and when you cannot accurately price 
credit, the cost usually goes up for everybody.
    Mr. Pratt. Yes, sir.
    Mr. Royce. Let me ask a second question. Maybe I will ask 
this of Mr. Oliai. Can you explain how insurance companies use 
credit information to assist them in underwriting automobile 
and homeowners' insurance? What is the thumbnail sketch process 
there?
    Mr. Oliai. It is really not 100 percent my area of 
expertise, but in what involvement I have had with using credit 
information for insurance, the credit data is put into those 
scoring models with other information that the insurance 
companies have, and is deemed predictive of whatever negative 
outcome the insurance company is modeling, things like false 
claims, excessive claims, those sorts of things.
    The role of the credit data, much like in financial 
services, is an input to an underwriting decision.
    Mr. Royce. We have seen studies here and had testimony in 
the past that confirmed a very strong correlation between 
credit scores and risk. Is it fair to say that the use of 
credit-based insurance scores allows insurers then to more 
accurately price their policies for the risks they are 
covering?
    Mr. Oliai. I believe that to be a fair statement; yes.
    Mr. Royce. On the same CFPA question, I was going to ask 
Ms. Fortney, you were at the FTC, what would you think if the 
CFPA got the authority over this credit scoring process? What 
would be your observations on that based on your experience?
    Ms. Fortney. As Mr. Pratt said, I believe the difficulty 
would be if either by law or by regulation the government 
attempted to exclude certain characteristics that could be 
considered, the result would be a less predictive system, and 
that less predictive system would result in either fewer people 
getting credit or insurance or also paying higher prices.
    Mr. Royce. Mr. Chairman, I want to thank the witnesses for 
coming out and testifying today. I appreciate it very much.
    Chairman Gutierrez. I echo those sentiments. Congresswoman 
Jackie Speier of California, you are recognized for 5 minutes.
    Ms. Speier. Thank you, Mr. Chairman. I really appreciate 
you holding this hearing today. This issue to me is one of the 
most important consumer protection issues that we could be 
addressing, and frankly, I do not think we are doing anything.
    In fact, as I have listened to the testimony today, it 
reminds me a great deal of our discussion of credit rating 
agencies. The credit rating agencies came under a great deal of 
criticism this year because one, they have garbage in, so 
garbage came out. There was no due diligence required by any of 
the credit rating agencies when they rated these various 
instruments.
    Two, they were responsive to the issuer, not to the 
consumer who was evaluating whether or not to purchase that 
particular instrument; and three, they were not subject to the 
full disclosure by the SEC.
    I see similar things going on here. What I would like to 
focus on is the error rate that continues to exist in credit 
reports and the due diligence that none of you really do in 
order to respond to them.
    A recent U.S. Public Interest Research Group and Consumers 
Union study found that errors in 25 percent of the credit 
reports are serious enough to cause a denial of credit. That is 
serious, when you are denied credit.
    The FCRA has been around for 40 years, and for 40 years, 
the credit reporting agencies were required to do a level of 
re-investigation. I want to just read now from a report called 
``Automated Injustice.''
    Mr. Chairman, I would like this submitted for the record.
    Chairman Gutierrez. Without objection, it is so ordered.
    Ms. Speier. In this particular Consumer Law Center report, 
they speak to this whole issue of the re-investigation. The 
question was asked what goes on with these re-investigations. 
This was a deposition taken of the vice president of Equifax 
for global consumer services.
    ``Did your employee have telephones on their desks?''
    ``I do not believe so.''
    ``As part of their compliance with Equifax's procedures, 
did the employee telephone the consumer as part of conducting a 
re-investigation?''
    ``They did not.''
    ``Did they telephone creditors, the furnishers, as part of 
conducting the re-investigation?''
    ``They did not.''
    ``Did they telephone anybody from outside DDC or Equifax as 
part of conducting the re-investigation?''
    ``They did not.''
    ``What about e-mailing any of those?''
    As you can see, they did not do anything. What they do, the 
only human contact in the re-investigation from what I 
understand is someone reviewing what the furnisher has provided 
and then giving a two or three digit code.
    My question, first to all of the credit reporting agencies, 
is do you outsource this function to other countries?
    Mr. Pratt. I am actually probably the only credit bureau 
person here at the table since these folks are all actually the 
heads of the decision sciences' side of these businesses, so 
they do not actually deal with and manage the credit bureaus.
    My response is this. First of all, I am going to push back 
on the study that you have quoted because it is not a 
statistically valid study. It does not study a sample that 
comes anywhere close to the size of a database which includes 
200 million consumers.
    The GAO looked at this and they came to that conclusion, so 
Congresswoman, it was not me who came to that conclusion. It 
was the Government Accountability Office that came to that 
conclusion, and we are grateful that they did. This was just a 
polling, and in some cases, just employees of a company.
    That really is not indicative--
    Ms. Speier. I guess my question is, and I would like to ask 
it of you again, do you outsource that function?
    Mr. Pratt. I think our members make different decisions 
about where they locate their business.
    Ms. Speier. It is a ``yes'' or ``no'' answer. Do you 
outsource?
    Mr. Pratt. I do not think it is a ``yes'' or ``no.'' I 
think it is more than that.
    Ms. Speier. You either outsource or you do not outsource. 
Do you outsource?
    Mr. Pratt. Outsource here in the United States?
    Ms. Speier. No, outsource in other countries.
    Mr. Pratt. I will tell you what, I will go back to our 
companies and see if we cannot get you a better answer.
    Ms. Speier. Was I fairly accurate in terms of the way your 
credit reporting agency operates in terms of the re-
investigation?
    Mr. Pratt. No, actually, first of all, using a deposition 
as an indication of how a process works just does not work 
because a lawyer is trained to ask certain questions in a 
certain way in order to end up in an accusatory situation.
    That is exactly what a deposition is, to try to pin you 
into a corner. No, I do not think that report reflects 
accurately at all--
    Ms. Speier. Mr. Pratt, I asked you a simple question. What 
re-investigation procedure do you follow?
    Mr. Pratt. All of our members follow the Fair Credit 
Reporting Act. All of our members provide consumers with toll-
free access to live personnel after they have received their 
credit report. All of our members take full and complete 
information from consumers, and all of our members provide an 
accurate reflection of that dispute to the lender, and all of 
our members then ask lenders to re-investigate because they 
ultimately--
    Ms. Speier. Actually, my time has expired.
    Chairman Gutierrez. I do not want to be accused of stopping 
Corporate America from speaking, but the time has expired.
    Mr. Ellison, you are recognized for 5 minutes.
    Mr. Ellison. Mr. Chairman, thank you for convening this 
hearing. Let me thank all of the members of the panel.
    My first question is for Mr. Pratt. There is no ``Spratt'' 
on the panel, is there?
    Mr. Pratt. No, that must be me.
    Mr. Ellison. On page 18 of your written testimony, you 
state, ``Credit scores remove social bias and provide fair 
treatment for consumers.'' Do you recall that?
    Mr. Pratt. Yes, sir.
    Mr. Ellison. This is somewhat puzzling to me because in Mr. 
Vladeck's written statement on behalf of the FTC, on page 14, 
he references a 2007 FTC study on automobile insurance, and I 
will quote from that study.
    It says, ``The FTC found that credit-based insurance scores 
are distributed differently among racial and ethnic groups and 
therefore likely have an effect on the insurance premiums that 
those groups pay, on average, with non-Hispanic White and 
Asian-American consumers paying less and African-American and 
Hispanic consumers paying more.''
    Can you offer any insight into why there might be a 
discrepancy between your observation and that of the FTC 
representative?
    Mr. Pratt. Thank you for asking the question. It is 
important to get these points straight so that we have a good 
record for all of you as members who are ultimately going to 
have to think through these issues further.
    Our point is that a credit score is blind. It does not know 
my race. It does not know my age. All it does is look at 
empirical data, data on a credit report, and ultimately, as Mr. 
Quinn's testimony indicated, a number is scored, a scoring 
system then generates a number.
    Because of that, we remove the kind of lending biases that 
we saw in this country and that individuals experienced in this 
country at one time.
    Scores, because they are blind to these triggers, these 
ECOA triggers, have removed the risks of those triggers, gender 
or race, for example, from being included somehow in the 
thinking of the lender who otherwise might say yes.
    With regard to the study, the key is to make sure that a 
score accurately scores risk. It may be that certain 
communities have average lower scores than others but the key 
would be if I walk in, if two different people of two different 
races walk in--
    Mr. Ellison. Mr. Pratt, I appreciate your answer, and I do 
not want to suppress you in any way, but they only give me 5 
minutes.
    Mr. Quinn, if you would help me with this question. On page 
9 of Mr. Hendricks' written testimony, he states, ``It is 
important to understand that even if a consumer buys his FICO 
score, it could differ significantly from the FICO score pulled 
by the lender.''
    Do you agree with that statement, and if you do, can you 
explain the rationale for why there might be two different 
scores?
    Mr. Quinn. Sure. If a consumer were to get their FICO today 
on MyFICO.com and then apply for a loan a month from now, that 
time period could cause new information to be reported on the 
credit report.
    Mr. Ellison. Excuse me, Mr. Quinn. Are you saying the 
scores are the same but they change over time quickly? Are you 
essentially refuting what he is saying by saying they are the 
same but time may cause scores to change?
    Mr. Quinn. Right. The algorithm that calculates the score 
stays the same potentially but the information that gets fed 
into the model can change because new information is updated 
every second on the credit reporting databases, and that can 
cause the score to change if new information hits the file.
    Mr. Ellison. Mr. Hendricks, what do you say to that?
    Mr. Hendricks. There are other differences that could be 
caused by, for example, the lenders using the FICO model for 
credit cards or for auto loans. There are some differences 
there that can cause those differences.
    I just think between you and Congresswoman Speier and the 
members, you are asking really good questions. I think it 
points to the fact that we do not have great data to answer 
these questions, and to get the great data, we have to kind of 
look at our enforcement infrastructure.
    I think what these credit bureaus do is so important that 
we should look at them more as public utilities in that kind 
of--
    Mr. Ellison. Let me ask you this question. What is the 
market share? Has there ever been a lawsuit? I understand there 
was an antitrust lawsuit. What was the outcome of that?
    Do you foresee a level of market concentration such that 
the market is so concentrated by a few players, that even if 
they colluded in an undeliberate way, if you understand what I 
am trying to say, that we end up with sort of a group that ends 
up excluding people.
    Do you have any views on this subject?
    Mr. Hendricks. Yes. For the foreseeable future, what you 
see is what you get. We have the big three and they play an 
incredibly important role in people's lives.
    Mr. Ellison. Are the big three 100 percent?
    Mr. Hendricks. Yes, they control--there are the three 
nationwide databases.
    Mr. Ellison. There was a lawsuit, an antitrust lawsuit. 
What happened with that?
    Mr. Hendricks. As far as I know, it was dismissed.
    Mr. Quinn. The lawsuit is still pending.
    Mr. Burns. If I could clarify that--
    Mr. Ellison. Unanimous consent for 30 seconds.
    Chairman Gutierrez. An additional 15 seconds for the 
gentleman.
    Mr. Burns. If I can clarify that, the lawsuit went to trial 
and was dismissed at a trial and it is apparently under appeal 
now. The lawsuit was won by us.
    Mr. Ellison. I have many more questions. Thank you, 
gentlemen and ladies.
    Chairman Gutierrez. Thank you. I ask unanimous consent that 
Ms. Kilroy of Ohio, a member of the full Financial Services 
Committee, be allowed to sit on this panel and ask questions 
for 5 minutes. Hearing no objection, it is so ordered.
    The gentlelady is recognized for 5 minutes.
    Ms. Kilroy. Thank you very much, Mr. Chairman. I thank all 
the witnesses for their appearance here today.
    Mr. Quinn, I understand that FICO is the most widely used 
system by credit reporting agencies; is that correct?
    Mr. Quinn. We position it as the most widely-used credit 
score used by lenders.
    Ms. Kilroy. By lenders. To these lenders and any other 
entity that may use these credit scores, they are putting them 
to really important uses in the economy, both for the lender 
and for a consumer who is attempting to obtain a loan to buy a 
car or to buy a house; is that correct?
    Mr. Quinn. Yes. The lenders will use the score in addition 
to other information to determine if the consumer can be 
approved for credit and to set terms for that credit.
    Ms. Kilroy. Those terms can mean that one consumer with a 
certain score would pay over the course of a loan considerably 
less than another consumer might pay?
    Mr. Quinn. Potentially; yes.
    Ms. Kilroy. It is a pretty heavy impact on the lives of 
individual consumers?
    Mr. Quinn. Potentially; yes.
    Ms. Kilroy. For those scores to be useful for the lender to 
make the right decisions and to be fair to the consumers, since 
they have significant financial repercussions, it is important 
for those credit scores to be validly predictive of consumer 
behavior in terms of handling their finances; correct?
    Mr. Quinn. Yes, the lenders only want to use credit scores 
that they feel comfortable to rank order risk and predict risk.
    Ms. Kilroy. Data that has not been proven to be predictive 
should not be included in the credit score?
    Mr. Quinn. Data that has not been proven to be predictive 
should not be in the credit score. I would agree.
    Ms. Kilroy. What you want to do is predict how that person 
handles his or her finances, whether or not they can live 
within their means; correct?
    Mr. Quinn. The model is designed to rank order risk so it 
is predicting their ability to handle future credit 
obligations.
    Ms. Kilroy. You might have heard a little bit maybe this 
week or even before this week that Americans around this 
country are having huge issues with health insurance, and in 
fact, 72 million Americans are affected by medical bill 
problems or accrued medical debt. Do you agree with that?
    Mr. Quinn. I am not an expert in that area. I cannot 
comment ``yes'' or ``no.''
    Ms. Kilroy. When you are looking at credit scoring, would 
medical debt be one of the areas that is included in your 
credit scores?
    Mr. Quinn. We do not consider any medical debt information 
in the score. We do consider medical collection information.
    Ms. Kilroy. A person who may have had a perfectly wonderful 
credit score but got hit by a bus or received a number of 
statements that say this is not a bill, and a confusing array 
of post-emergency room visits or have issues with their 
insurance company about paying those medical bills, that person 
with that good credit score could be hit with a collection 
issue with respect to medical debt; correct?
    That medical debt would in one way or another end up 
adversely affecting their credit score.
    Mr. Quinn. The medical collection item that gets reported 
to the bureau could impact their score; that is correct.
    Ms. Kilroy. If a person takes some time to do it, but 
actually pays or resolves that medical debt or medical 
collection issue, would you say that is predictive of how they 
handled their finances?
    Mr. Quinn. What the data shows us when we analyze medical 
collection information is the fact that the medical collection 
item occurred is predictive of future risk, and that is why the 
model considers that information.
    Ms. Kilroy. If a person makes those efforts and pays off 
their medical debt, that derogatory information, if it had gone 
to collection, that stays on their credit record for years; 
isn't that correct?
    Mr. Quinn. My understanding is that the collection 
information can stay on the credit report for up to 7 years.
    Ms. Kilroy. You would argue that someone who paid off their 
medical debt and resolved that issue has the same kind of 
predictive value as somebody who runs up their credit cards 
buying big screen TVs or stereos or other consumer goods?
    Mr. Quinn. What the data shows us is that the presence of 
medical collection information on the consumer's report is 
predictive of future risk, but it is important to understand 
that the model is not looking just at that component, so it is 
looking at the overall picture of the consumer's credit report.
    It is the total picture that is driving the score, not just 
one data element.
    Ms. Kilroy. Craig Watts is a spokesperson for your company; 
is that correct?
    Mr. Quinn. Craig Watts works in our Public Relations 
Department; yes.
    Ms. Kilroy. Did he not make a statement that paid medical 
debt was not indicative of somebody's ability to pay, 
predictive of how they are going to handle their debt?
    Mr. Green. [presiding] If I may, I am going to ask that you 
give your answer in writing. We have had a call for a vote. 
What we would like to do is dismiss this panel and try to get 
through the next so as not to have them come back and have us 
come back.
    If you would, give your answer in writing. The time has 
expired. Thank you.
    I would like to thank this panel. Of course, we may submit 
to you additional questions in writing. Members will have the 
opportunity to do so within the next 30 days.
    Thank you very much. You are dismissed.
    If I may, I will have quick introductions and we will move 
right to your statements. If you could summarize as best you 
can, it will help us and help you. We are trying not to hold 
you longer than we have to, which means you will not have to 
come back after a series of votes.
    We have Ms. Sandra Braunstein, and she is the Director of 
Consumer and Community Affairs with the Federal Reserve Board 
of Directors.
    Mr. David Vladeck. Mr. Vladeck is the Bureau of Consumer 
Protection Director, Federal Trade Commission.
    We thank both of you and we will move immediately to Ms. 
Braunstein for your statement, and if you can summarize, it 
would be helpful.

   STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF 
   CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE 
                     FEDERAL RESERVE SYSTEM

    Ms. Braunstein. Good afternoon, Mr. Chairman, Ranking 
Member Hensarling, and members of the subcommittee. Thank you 
for this opportunity to address the role of the Federal Reserve 
Board in ensuring that lenders use credit scoring systems 
appropriately to evaluate consumers' credit risks.
    The three roles that the Board plays in this regard are as 
a rule writer, a supervisor, and a research institution.
    As a rule writer, the Board has sole rule writing authority 
for Regulation B, which implements the Equal Credit Opportunity 
Act or ECOA. The Board has shared rulemaking authority with 
other regulatory agencies under the Fair and Accurate Credit 
Transactions Act of 2003, the FACT Act.
    In January, the Board and the FTC issued final rules to 
implement the risk-based pricing provisions of the FACT Act. 
Creditors that engage in risk-based pricing generally offer 
more favorable terms to consumers with good credit histories 
and less favorable terms to consumers with imperfect credit 
histories.
    The risk-based pricing provisions give consumers who were 
granted credit on less favorable terms protections similar to 
those afforded to consumers who are denied credit. Denied 
consumers receive an adverse action notice.
    Under the new rules, a creditor who uses credit reports can 
provide a risk-based pricing notice to those consumers who 
receive credit on terms that are not as favorable as the terms 
the creditor has provided to other customers.
    Those consumers can contact the credit bureau to obtain a 
free copy of their credit report.
    As an alternative, creditors can provide a credit score 
disclosure instead of a risk-based pricing notice. Under the 
credit score disclosure alternative, consumers who apply for 
credit automatically receive a free credit score and 
information about their score in the notice.
    I expect that many creditors will use the credit score 
alternative, which will give consumers access to their credit 
scores without charge.
    As a supervisor of financial institutions, the Board 
conducts fair lending examinations to ensure that financial 
institutions are using credit score models that comply with 
ECOA.
    ECOA generally prohibits creditors from discriminating 
against an applicant in a credit transaction on the basis of 
race, national origin, age, marital status or sex. Examiners 
ensure the prohibited bases are not used in a credit scoring 
system. Examiners also ensure the creditors are not using 
credit scoring systems in a way that has a disparate impact on 
protected groups.
    Properly constructed credit scoring systems may help 
lenders facilitate consistency and limit lender discretion in 
the credit evaluation process which promotes fair lending.
    As a research institution, the Federal Reserve studies 
significant trends in credit markets, publishes their research, 
and encourages research by other parties.
    As directed by Congress, the Board prepared a report on 
credit scoring including how it has affected the availability 
and affordability of credit, the relationship between credit 
scores and other factors, and whether the use of credit scoring 
systems has fair lending implications under ECOA.
    The Board's report is the first comprehensive study of its 
kind. It describes original research conducted by Board staff. 
For this research, Board staff developed a unique database that 
links credit records and personal demographic information.
    The findings of the Board's report are significant. Major 
findings include one, credit scoring has increased the 
availability and affordability of credit. Credit scoring has 
increased the consistency and objectivity of credit 
evaluations, and has reduced some of the discretion that could 
lead to discrimination.
    Two, different populations on average have substantially 
different scores based on differences in their credit 
histories.
    Three, for every population group considered, credit scores 
consistently predict the credit risk of individuals. Thus, 
regardless of race, ethnicity, sex or age, persons with higher 
or better credit scores consistently performed better than 
persons with lower scores.
    The study found that for all population groups, interest 
rates and average estimated denial rates consistently declined 
as credit scores increased.
    I will be happy to answer any questions.
    [The prepared statement of Ms. Braunstein can be found on 
page 51 of the appendix.]
    Mr. Green. Thank you very much.
    We will now move to Mr. Vladeck for his 5 minutes, and if 
you can be a little bit briefer than 5 minutes, it would be 
appreciated.

   STATEMENT OF DAVID VLADECK, DIRECTOR, BUREAU OF CONSUMER 
              PROTECTION, FEDERAL TRADE COMMISSION

    Mr. Vladeck. I will try.
    Mr. Chairman, Ranking Member Hensarling, members of the 
subcommittee, my name is David Vladeck. I am the Director of 
the Bureau of Consumer Protection at the Federal Trade 
Commission.
    The views expressed in our written testimony were approved 
by the Commission. The views that I may state here, those are 
my own and should not be ascribed to either the Commission or 
any member.
    I will leave to you our written testimony which describes 
in detail the 30 FACT Act projects that the Commission has 
completed, including rulemakings, studies, and educational 
campaigns.
    I would like to take a few minutes just to highlight our 
responses to some of the issues raised in our invitation 
letter.
    First, in addition to the 2007 study that we did on the use 
of credit scores and credit-based insurance scores in the 
automobile market, we are currently working on a follow-up 
report analyzing the effects of credit-based insurance scores 
used for homeowners' insurance. The report will use extensive 
insurance policy data collected through the use of compulsory 
process from the nine largest insurance firms.
    Second, we have talked a lot today about the issue of 
accuracy of credit reports. Ensuring the accuracy of credit 
reports is crucial for consumers for reasons that go to their 
very livelihood.
    If information in their credit report is inaccurate, 
consumers could suffer devastating economic consequences. They 
could be wrongfully denied credit, insurance, housing or 
employment.
    We are trying to improve the accuracy of consumer reports 
in several ways. First, we have recently issued amendments to 
the free credit report rule to address deceptive advertising in 
the advertising of free credit reports. With the new 
disclosures we are requiring, we believe we have strengthened 
the ability of consumers to obtain no-strings-attached, free 
credit reports.
    Additionally, we have worked with other agencies, including 
the Federal Reserve, to issue the furnisher rules, which call 
on furnishers to improve the accuracy of information they 
provide to the credit reporting agencies and give consumers the 
right to dispute errors in their reports directly with the 
furnishers of the information as well as to making disputes 
with the consumer reporting agencies.
    Finally, let me turn to the transparency issue that we have 
talked about already. Credit scores are used widely by 
creditors. They affect whether a consumer can obtain a loan and 
how much the consumer will have to pay for it.
    We have long been advocates for access to credit scores and 
information about what those scores mean, and how they are 
using them.
    The FACT Act gave consumers the right to purchase a credit 
score from credit reporting agencies and required certain 
mortgage lenders to provide free credit scores to home loan 
applicants.
    As a result, consumers have had better access to credit 
scores over the last couple of years, but we have taken 
additional steps to improve that.
    As I mentioned, the FTC along with the Federal Reserve 
Board issued its risk-based pricing rule, which requires 
certain companies to provide consumers with notice when their 
report information has been used to provide them less favorable 
loan terms than other consumers, but the rule also gives 
companies the option to provide all of their customers with a 
free credit score along with information about that score.
    We are hoping that companies will take this option to 
provide consumers at no charge to the consumer their credit 
scores.
    We have also engaged in research and a great deal of public 
education on the issue of credit scores.
    We look forward to working with this subcommittee on these 
and other consumer protection issues. We will be glad to answer 
any questions you might have in writing. I understand the time 
pressures.
    [The prepared statement of Mr. Vladeck can be found on page 
176 of the appendix.]
    Mr. Green. Thank you very much for your understanding. I am 
going to ask my questions in writing. The ranking member has 
concurred.
    If the members who are here, Ms. Speier, if you can ask one 
question, perhaps we can get one answer to that one question, 
and Ms. Kilroy, we will extend to you a similar courtesy, if 
the question can be as terse as possible, please.
    Ms. Speier. Thank you, Mr. Chairman. To you, Mr. Vladeck, I 
do not think there is any teeth in the re-investigation 
requirements under the FACT Act or the original Act. Do you 
concur in that and if you do, what should we do to make sure 
re-investigation does take place?
    Mr. Vladeck. I think there are two answers, and I will try 
to be as brief as I can. I would like to amplify this answer in 
writing, if I may.
    First, the furnisher rule takes effect in July. We think 
this is going to have a substantial impact on the ability of 
consumers to dispute information in their credit files and get 
an answer. That, coupled with the accuracy parts and the 
dispute parts of the rules, we think, will go some way to do 
it.
    I would also say we are doing this through our enforcement. 
We are now requiring collection agencies, when there are 
disputes, to go back when there is a consumer dispute to rely 
on more than simply the one page that they get from the debt 
buying agencies.
    We are trying to attack the accuracy issue in a number of 
ways. Most critically, we are engaged in a massive study on the 
accuracy to get a better sense of what causes these errors and 
how we can better fix them. The accuracy studies are an ongoing 
process, but we hope to be able to provide answers to the 
questions about accuracy within the next year to 18 months.
    Mr. Green. Thank you, sir. If I may, I am going to ask if 
you would respond in writing, and we will go on to Ms. Kilroy 
with a terse question, if at all possible, please.
    Ms. Kilroy. Thank you. When you take a look at the scoring 
systems that the various credit reporting agencies use in order 
to determine whether or not they are using a proxy that would 
have a discriminatory impact, have you taken a look at such 
issues as whether or not everyone in a particular Census track 
is penalized with their credit scores based on the number of 
foreclosures in the area, or looked at other kind of micro-
targeting issues that a credit scoring company might utilize as 
many direct mail and other kind of marketers do? Even 
politicians use micro-targeting these days.
    Mr. Green. Thank you. We will ask, if you would, to submit 
your answers in writing. We are beyond the time for the vote. 
We are beyond zero. Some of the members are going to have to 
rush over for this vote.
    At this time, I would like to indicate that the Chair notes 
that some members may have additional questions for the 
witnesses which they may wish to submit in writing, and I will 
be one of them. Therefore, without objection, the hearing 
record will remain open for 30 days for members to submit their 
written questions to the witnesses and to place their responses 
in the record.
    The subcommittee hearing is now adjourned. Thank you so 
much.
    [Whereupon, at 5:00 p.m., the hearing was adjourned.]





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                             March 24, 2010


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