Competition remains intense, and everyday at Capital One, our associates work hard to retain our existing customers, acquire customers new to the market and, not surprisingly, to attract the customers of our competitors with better offerings. This competitive environment commenced 30 years ago with the passage of the FCRA and accelerated greatly with the amendments to the Act in 1996. It is no exaggeration to say that we would not have seen this level of competition in the balkanized, localized credit card markets of 30 years ago – markets that featured high, largely undifferentiated pricing combined with an onerous and highly subjective application process. Worse still, availability and access were greatly limited. By and large, you did not lend money to individuals that you did not "know" in a particular community, and virtually all consumer lending occurred through a “bricks and mortar” delivery system which favored location over product choice.

Beginnings of the Modern National Underwriting System

With developments in information technology, the credit granting process began to change. The FCRA was originally passed in 1974 to acknowledge the beginnings of a national consumer credit market. Credit became more widely available on a national basis, as credit bureaus developed large databases that provided lenders with a more holistic and consistent view of a particular consumer's risk characteristics. Pricing was still not highly differentiated, but access had improved significantly over the old balkanized model. Nevertheless, approximately half of the eligible U.S. population could still not qualify for a credit card.

Even as late as 1987, the credit card market was mired in a “one size fits all" approach, characterized by uniform interest rates and annual fees.

The market was ripe for innovation, and companies like Capital One saw an opportunity to utilize the information provided by our national credit reporting system to customize product offerings to customers based on their particular needs, interests and risk profiles. Not coincidentally, the rise of Capital One, and of information based underwriting and marketing in the lending arena, really begins at the time of the 1996 amendments to the FCRA.

Our founders realized that the "one size fits all" approach made little sense in an environment where each consumer possessed vastly different needs and characteristics. While some consumers were risky, many more were not. Without the ability to differentiate one from another, however, lenders were compelled to raise prices to cover the cost of higher credit losses, or to cut back on the granting of credit to reduce the losses themselves. Either way, consumers suffered. The less risky customers were simply paying too much, and for the rest, credit was hard to come by - if available at all.

Capital One was able to utilize information within the legal framework provided by the FCRA to make significant advances in underwriting - better distinguishing the risk characteristics of our customer base. The benefits of greater access to better information went far beyond risk analysis, however. Capital One and other companies were also able to utilize information to create profound innovations in the marketing and design of credit cards. Our company led the charge with new product ideas like balance transfers, where customers could shift balances away from high priced cards to our lower priced offerings, and low introductory rates. The resulting reductions in price and penetration into traditionally underserved markets sparked a consumer revolution known as the "democratization of credit."

By 2003, the moribund competition and flat pricing structure of old was no more. In its place came fierce price competition which has produced billions of dollars in savings for consumers across the country.

Notably, these numbers actually fail to capture the true savings to consumers of increased competition, as they do not take into consideration the widespread availability of low introductory and balance transfer rates.

The last decade also saw significant developments in the pioneering of affinity cards, with benefits for consumers and the organizations they most value; rewards programs which provide consumers with value added benefits ranging from airline miles to college savings plans; and co-branded products, which allow consumer to enjoy discounts and other privileges at their favorite retail outlets.

Capital One has been able to take this market leading approach in reinventing other lending businesses, including auto finance. Through our affiliates, Capital One Auto Finance and PeopleFirst, we have pioneered innovations such as a unique auto refinance product that allows consumers to take advantage of lower rates, like they do when mortgage rates decline. Our on-line loan approval process qualifies individuals for full pre-financing of their auto loans in minutes, at industry leading rates, eliminating the lengthy, unpleasant and often costly trip to the dealer's finance desk.

The power of this heightened competition has not been lost on consumers – in just eight years as an independent company, Capital One has grown its account base from 5 million to 48 million worldwide - all without the once vital "bricks and mortar" network of branches. We can give consumers the best deals no matter where they reside - from midtown Manhattan to the smallest farm community in lowa.

For consumers, the tremendous benefits spurred by the FCRA are self-evident: prices continue to decline and availability to widen - most notably in the traditionally underserved low and moderate income communities.

With this broad overview of the role of the FCRA in the credit granting process, we can now examine the crucial role that key individual provisions of the Act play in ensuring that consumers enjoy the product offerings they deserve.

II. The Role of Specific Provisions of the Fair Credit Reporting Act in the National Credit Granting Process

The interdependent provisions of the FCRA can be arranged generally into three groups: (1) credit data consistency; (2) permitted uses of credit data; and (3) consumer rights.

The FCRA and National Credit Data Consistency

The provisions of the FCRA that ensure national credit data consistency include those related to furnisher responsibility and determinations of what is excluded from and included in consumer reports. The furnisher responsibility provisions strike a sensible balance by providing incentives to voluntarily report information accurately while removing disincentives to such reporting by keeping costs and liability within rational limits. The balance achieved enables companies like Capital One to construct highly accurate credit models on a nationwide basis - one of the key building blocks of a national credit underwriting process. These provisions benefit consumers by increasing the availability and reducing the price of credit, while also improving the convenience and speed of approval.

Voluntary nature of the consumer reporting system

It is worth spending a moment on the voluntary nature of the credit data reporting system. The question has been asked: why don't we just make reporting mandatory for everyone? At first glance, this approach appears logical; but in reality, you risk choking the system with inconsistent, low quality data that has little predictive value. To

illustrate, why compel a small business such as "Bob's Muffler Shop" - which may offer customers a "90 Days Same as Cash" option – to take on the significant burdens and costs of reporting into a system that they do not, in fact, use and, therefore, is irrelevant to their business? Would such a business be properly incented to take the time to report as accurately as those who depend on the system would likely choose to do?

The system works primarily because consumer reporting agencies, and the institutions that provide credit data information, share incentives to ensure that those who use the system also report into the system, and that the data reported is as consistent and accurate as reasonably possible. Our point is not to prevent Bob's Muffler Shop from reporting information into the system if that business sees value in doing so, but there is nothing to. be gained by forcing them to do so.

Based on the voluntary nature of the system, it is an absurd argument that those who use the data as part of their credit granting process do not have a significant stake in the accuracy of the information provided on consumers. Put most simply, at Capital One, our models do not work if the information contained in the bureau reports is not accurate..

Permissible Uses of Credit Data

This group of provisions includes the processes of prescreening and affiliate sharing. Taken together, these provisions enable companies like Capital One to use information to reach potential customers and to make prudent credit decisions that ensure the safety and soundness of the lending institution. In terms of consumer benefits, these provisions, particularly the prescreening process, increase credit availability, reduce prices and speed access. Most significantly, they provide customers with preapproved offers of credit virtually removing the fear of rejection that historically characterized the traditional customer-initiated credit application process.

Some have argued that prescreening and affiliate sharing constitute "marketing" rather than "underwriting" and, therefore, represent less important components of our uniform national system. As the discussion below illustrates, this distinction is inappropriate, and misunderstands the vital interdependencies of the current system as enabled by the FCRA. Stated more plainly, our current system cannot operate effectively without all of its constituent parts.

The Role of Prescreening and Affiliate Sharing in the National Credit Granting Process Prescreening and affiliate sharing enhance the reliability of credit underwriting decisions; help reduce the cost of credit to millions of consumers; and expand the availability of credit, particularly to traditionally underserved populations in urban and rural America. Moreover, affiliate sharing and prescreening are almost certainly the single most important catalysts of the intense competition in today's consumer credit marketplace, particularly in credit cards, but also increasingly in auto finance and other lending arenas.

Prescreening greatly enhances the ability of credit grantors to accurately assess risk and avoid losses

Our experience confirms that losses from customers obtained through prescreened offers of credit are significantly lower than losses from customers obtained through nonprescreened channels (e.g., "invitation to apply" direct mail; in-store "take-one" applications; internet banner advertisements). The reason, at first blush, may appear counter-intuitive - not all customers are good customers. Unlike other retail businesses where money is paid at the time of purchase, lending involves the provision of money in exchange for the promise to pay. Prescreening permits us to obtain the necessary information to properly assess risk, and to mail an offer that best suits the needs and circumstances of particular customers. In doing so, we can make prudent determinations regarding the probability of repayment and the appropriate credit line or loan amount to be offered. Prescreening, therefore, is a vital tool in ensuring the continued safety and soundness of consumer lending institutions.

Prescreening lowers costs both to providers and recipients of credit

Because prescreening is a highly cost-efficient and proven way to identify lower risk customers, both consumers and credit grantors enjoy enormous benefits from this system. Consumers benefit in the form of significantly lower costs for credit; and credit issuers benefit through large reductions in underwriting costs. In testimony before this committee last week, economist Robert Turner of the Information Policy Institute stated that with respect to consumer benefits, his recent study concludes that, since 1997, consumer savings in the cost of credit from the increased competition in the credit card industry - largely enabled by prescreening - is about $30 billion per year.

Prescreening fosters competition

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Prescreening is almost certainly the single most important dynamic driving competition for consumer credit. Because prescreening allows financial services firms to identify the credit characteristics of individuals with whom customer relationships are sought, credit issuers are able to offer their credit products with tailored terms and conditions specifically designed to "beat the competition." The attractiveness of our offers depends on what we know -- if your current card carries a 9.9 percent interest rate, it makes little sense for us to send you an offer for a 10.9 percent product.

As noted above, prescreening also foster innovation. The extraordinary ancillary benefits attached to modern credit card products are largely a function of prescreening. Airline miles, cash rebates, contributions to college savings plans, store discounts, merchandise all of these reward programs have become commonplace to the point of being expected, if not demanded, by consumers. Lest we forget, however, few if any such programs existed just two decades ago – unless you count the ubiquitous free toaster provided by your local bank.

Such programs are naturally dependent on information about consumer preferences, but also depend largely on improved risk analysis to keep losses - and costs - down. The

* Testimony of Michael Turner, The Information Policy Institute before the Subcommittee on Financial Institutions, Committee on Financial Services, U.S. House of Representatives, May 8, 2003.