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market in the United States would be the success story that it is today without having reliable consumer report information.

Aside from these obvious considerations, we believe the general accuracy of consumer report information has been validated in many ways. For example, TransUnion customers use diverse and usually confidential means fevaluating accuracy and completeness. Effectiveness (in terms of predictive power) of the consumer reports, system access and reliability, and completeness of credit information are all seen as factors. Over the years, our customers continue to affirm the accuracy of our national database in predicting a wide variety of outcomes — including future account delinquency, future bankruptcy, and likelihood of insurance claims.

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The Role of Credit Scoring in the Credit Granting Process

The emergence in the late 1980s of uniform, national credit reporting databases such as TransUnion's enabled development of robust national models developed to predict a variety of outcomes — from account delinquency to insurance losses. As a group, these models provide a level of accuracy and scalability with respect to risk assessment previously unavailable to financial institutions.

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The provisions of FCRA for notice of adverse actions and correction of erroneous information provides consumers with important tools to ensure that a credit score is based on accurate information, including the identification of the principal factors within the model that negatively affected the score. By 2000, the growing use of models -- and notably their adoption by Fannie Mae and Freddie Mac for use in mortgage underwriting -- led to increasing, and understandable, demands for more transparency in their use.

In April 2001, TransUnion announced our intention to provide, upon request, a score disclosure with our consumer file disclosures. Today, we continue to make available upon request for a small fee our proprietary TransRisk® score, which is used by some lenders in making credit granting decisions. Other companies, including the other two national consumer reporting agencies, provide similar disclosures and educational tools.

As this Subcommittee considers issues pertaining to the FCRA, it is likely that credit scores will be debated. I would like to offer the following observations that may be helpful in this regard. Credit scores are simply a numeric representation of any one person's assessment of the risk presented by a consumer. There are hundreds of credit-based scoring models in use, some commercially available directly from the consumer reporting agencies, and many others are proprietary models owned by individual financial institutions. These proprietary models typically leverage the technology available in the models developed by consumer reporting agencies and apply additional, specialized logic unique to that financial institution. Development and maintenance of these models is expensive. Their effective performance is quite properly viewed as critical to the institution's competitive success and soundness. Just as other companies are not required to divulge their trade secrets,

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TransUnion and others should not be required to disclose our proprietary models used 10 evaluate risk.

Free File Disclosures to Consumers

The issue of free file disclosures has been considered and rejected in past Congresses. Our view is that the FCRA already strikes a liberal balance favoring free disclosures in most of the circumstances in which consumers have occasion to interact with the consumer credit reporting system. Moreover, enactment of a federal free annual disclosure standard could, in our view, seriously threaten our economic viability.

The FCRA provides for free file disclosures to consumers if the consumer: (i) is the subject of adverse action; (ii) is unemployed and intends to apply for employment; (iii) is on public welfare assistance; (iv) has reason to believe the file contains inaccurate information due to fraud; or (v) will be a subject to an adverse employment decision. In TransUnion's 33 years of operations under the FCRA, the vast majority of consumer disclosures have been without charge, in compliance with these provisions. For those that do not qualify for the free file disclosures, the price of consumer reports is capped by law at a reasonable cost (currently $9).

Further, security breaches already seriously impact us through the FCRA's fraud exemption. A person who believes there may be fraudulent data in his or her file is entitled to a free disclosure. In the past two years, security breaches at the State of California's employee database and at Tri-West (a Department of Defense subcontractor in Arizona) caused those affected to flood our consumer relations department with requests for file disclosures. In both of these cases, we provided disclosures at no charge. We are very concerned, however, about the harm to consumers and also the cost implications of this trend.

The harm to consumers comes in the form of slowed response time. In the State of California case, there were 186,000 state employee records compromised. All of these individuals received notice of the breach from the state instructing them to contact the consumer reporting agencies. Many did so, flooding our service centers. Consumers with ordinary inquiries, pursuant to an adverse action notice, or proactively anticipating a mortgage loan process, saw their response times suffer as this massive number of inquiries from the breach worked their way through the system.

To the extent the practice of providing affirmative notice on any breach of personal information grows we may be exposed to uncontrollable increases in our costs. In both the California and Tri-West cases, the breaches had nothing to do with credit information, but we are the ones consumers contact to check their information and post a security alert.

We believe that the FCRA ensures that free file disclosures are available for those most in need of reviewing their consumer report. However, entitling 200 million people to our product at no charge is not, in our view, appropriate. We believe that capping the cost of a consumer report is more appropriate than a free file disclosure. Many public sector entities charge a reasonable fee to obtain information that the government maintains about individuals. For example, a consumer seeking to obtain information from the Federal Bureau of Investigation or the local department of motor vehicles will be required to pay a modest fee for the information. The goverment's ability to recoup the cost incurred to provide consumers with this service is appropriate. As a private sector entity, our ability to recover these costs is not only appropriate, it is essential.

Consumer reporting agencies will be forced to recoup the expenses associated with a free file disclosure. These expenses will be shouldered by us as well as our customers - the institutions that rely on consumer report information to grant credit to consumers. The additional costs incurred by creditors and others will likely be passed on to consumers in the form of additional costs for credit.


TransUnion plays a critical role in the credit granting process. Indeed, we are a fundamental component of the most robust credit market in the world. The benefits to consumers are more convenient options for credit at lower costs. For example, our system, which is based on complete, accurate, and up-to-date consumer report information, has helped millions of Americans reach the dream of homeownership.

Critical to the system is the national uniformity that has been established in several key areas governed by the FCRA. A single uniform standard with respect to furnisher obligations, adverse action, reinvestigation timeframes, the contents of consumer reports, prescreening, affiliate sharing, and consumer disclosures has helped foster the success story known as the American credit granting process. We believe these uniform provisions are useful for other reasons, as well, such as for the prevention and resolution of identity theft.

Mr. Chairman, Congressman Sanders, and members of the Subcommittee, I sincerely appreciate your invitation to testify today. At TransUnion, we are deeply concerned about the potential impact of allowing the states to enact a patchwork of inconsistent laws. I am gratified that my schedule allowed me to be here today in order to personally present our views to you, and I would be happy to answer any questions, or provide further information that the Subcommittee may request.

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The nation's largest credit reporting systems' data shows that the majority of consumers who call their toll-free fraud numbers are doing so as a precautionary measure and not as ID Fraud victims, reported the Consumer Data Industry Association. Further, the Federal Trade Commission's own ID Theft Clearinghouse data shows that fully 42 percent of crime victims who contact the FTC leamed of the crime in less than a month.

“This is the data we've all been hoping to see and it shows that our educational efforts are working. Crime victims are taking actions sooner and more consumers are taking the steps necessary to avoid being crime victims in the first place", said D. Barry Connelly, president of CDIA. “We bave to stay the course and continue our educational outreach," he added.

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Connelly went on to applaud Equifax, Experian and TransUnion for their adoption of key ID Fraud victim assistance initiatives. “We didn't need a new law to act as our moral compass,” he noted. CDIA bas had standing task forces on high-tech fraud issues since the early nineties. A specialized ID fraud task force was established in 1998 and on March 16, 2000, CDIA announced its first six-point program for victims. By January 1, 2001, the CDIA's members were already providing nationwide voluntary victim assistance services. These voluntary initiatives pre-date recent Congressional proposals and they include:

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Using fraud alerts on credit reports transmitted to creditors helping them to avoid
opening additional fraudulent accounts.

• Standardizing fraud alerts nationwide so that all creditors can recognize them.

• Expediting the removal of fraudulent data for victims who have police reports.

• Assisting ID fraud victims by notifying creditors and others when the consumer does not

recognize recent credit file inquiries by other lenders.

After receiving a call on the industry toll-free number, fraud center personnel add a security alert 10 the credit file, opt the victim out of prescreened credit offers and send a copy of the credit report to the consumer within three business days.

Maintaining contact with victims for 90 days after the file has been corrected to ensure that no new criminal activity results in fraudulent data.

Connelly also recognized the General Accounting Office for their efforts in trying to quantify the crime of identity fraud. He noted that prior to the GAO's March 7 report, there was no definitive data on the size of the crime. "The GAO put real numbers behind the issue of identity fraud. But even though these numbers are lower than the figures often cited in the media, if you take one of the higher figures cited in the report, 92,000 victims a year is still too many and our industry will continue in its efforts to assist consumers who are victims of this crime," he said

The key to any successful attempt to reduce ID fraud is the role played by law enforcement. Connelly encouraged Congress to approve additional funding to help law enforcement track down and prosecute those who prey on consumers. "The resources in the law enforcement community are already stretched too thin. If we really are serious about attacking the root causes of this crime, then we need to support the police in their efforts. Additional personnel and money directed at this crime will further reduce its numbers", said Connelly.

That brings into question the wisdom of passing additional legislation to address the issue of ID fraud noted Connelly. "Industry initiatives have been launched, consumer education efforts are ongoing, and only a greater emphasis on assisting law enforcement will reduce identity fraud.", Connelly concluded.

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