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importance of lower costs in this context is significant - benefits such as airline miles cost us money. These programs can only remain viable if high credit losses do not undercut their profitability.
The success of prescreening in the credit card arena has also fostered innovation in the auto finance market. Our highly successful auto refinance products, which can save consumers up to 4 percentage points on their loans, is made possible through prescreening. Bureau data allows us to determine which consumers would benefit from a reduction in their APR, and helps to ensure that our offering will, in fact, save them money.
Prescreening makes credit available to traditionally underserved populations.
Prescreening enables credit issuers to find good credit risks among traditionally underserved populations and to extend credit to them in ways that would be difficult or impossible through other credit application channels.
Prescreening reduces identity theft
Because the process of prescreening involves additional confirmation of a consumer's identity, prescreening actually works to reduce identity theft and other forms of fraud in connection with the opening of new or additional accounts. Our data demonstrates that rates of identity theft and other fraud is 5 to 15 times lower for credit generated through prescreening than from credit generated through other channels (e.g., the internet, in-store "take-ones”). Our experience is supported further by testimony from the Information Policy Institute, which concluded that prescreened credit card solicitations are significantly less likely to result in fraud than other forms of account acquisition (prescreening customer-verification procedures identify between 60% and 80% of all fraudulent applications before accounts are opened - a considerably higher rate of prevention than with other application channels). Additional fraud prevention techniques are applied when prescreened applications are accepted."
Affiliate sharing of information enhances the ability of credit grantors to accurately
assess risk and extend credit to traditionally underserved populations
The quality, quantity and timeliness of customer credit information available through affiliate sharing greatly increases the likelihood that a lending institution will make a prudent credit decision. Testifying before this subcommittee, the National Retail Federation put it well: “A lot of people ask what affiliate sharing has to do with the granting of credit. The answer is: a lot.” Capital One uses the data and transaction histories of the customers of its two banking institutions and its auto finance company to ensure the creation of the most accurate file possible. Most importantly, this information supplements the broader information obtained through the credit reporting system to create more reliable internal credit scores and models that help determine a consumer's eligibility for credit.
Because affiliate sharing permits providers of consumer credit to reduce their
overall risk of loss, the cost of credit to tbeir customers is also reduced
Like prescreening, affiliate sharing greatly enhances the safety and soundness of our lending institutions by improving our predicative capabilities and reducing losses. The savings generated by our ability to reduce losses are passed on to our customers. If the ability of lending institutions to share information among affiliates is eliminated or reduced, the cost of credit to their customers will increase.
Affiliate sharing allows financial services companies to provide to offer their customer of wider array
of products and services to their customers on a customized basis
In the absence of affiliate-sharing, financial services companies would know decidedly less about their customers financial and other needs than they currently do, making it far more difficult to address those needs on an individualized basis. Capital One has created significant value for its card customers by offering reduced rates on auto loans through its affiliated auto finance company. These reduced rates are a direct by-product of our ability to assess the payment history and other credit characteristics of our customers and to reward our customers for their strong performance.
Affiliate sharing is beneficial in combating identity theft and other fraud
Because the exchange of information among affiliates permits financial services companies to monitor customer activities on a company-wide basis, the likelihood of detecting identity theft and other fraud activity is greatly increased.
Affiliate sharing enhances efficiencies and allows lenders to reduce the
Affiliate sharing also helps companies to achieve operational efficiencies which further reduce costs and customer hassle. Such sharing allows for the creation of centralized databases to minimize account-management and administrative burdens, including customer service centers capable of handling calls relating to multiple entities and product lines.
The FCRA and Consumer Rights
To ensure healthy competition, the FCRA enacted a number of important consumer protections, including adverse action notice, dispute resolution and consumer disclosure requirements. These protections provided a carefully crafted balance to ensure an efficient and uniform national credit reporting system, while preserving significant consumer rights regardless of where they or the credit grantor is located. An orderly uniform process promotes speed of notice and resolution for consumers.
Balkanized requirements in this area would result in variations in the number of institutions reporting and erosions in credit file quality, with dire consequences for such advances as automated underwriting. If many creditors stop reporting in a jurisdiction or the time frames for resolution are unreasonably compressed to the point where creditors
have to drop any challenged information, then the effectiveness of the national system is degraded or harmed irreparably. Ultimately, the losers in this equation will be the consumers, who will pay the price of higher credit costs, reduced availability and less attractive products.
Our credit system is the envy of the world. Consistent national credit data is the foundation of this system, ensuring that Americans have more access to credit at lower prices than their counterparts around the globe. It is difficult for many of us to remember what the loan process was like 30, 20 or even 10 years ago. For those lucky enough to get credit cards, you would be guaranteed a flat rate of 19.8 percent and a $20 annual fee. Your card offered no airline miles or other rewards, no affinity programs to benefit your alma mater or favorite charitable organization, no cobranding arrangements to provide you discounts at the retail outlets you visit most often. In the auto world, once you completed the grueling process of negotiating a “fair price” on your new car, you were left to experience the joys of a visit to the dealer's finance desk to negotiate a "fair price” on your loan. In many cases, the dealer was able to recoup his concessions to you on the sale price of the car through a higher APR or hidden fees.
Today, our best credit card customers can enjoy a fixed rate as low as 6.9 percent with no annual fee. The variety of programs and rewards simply boggle the mind. Our auto finance company, PeopleFirst, provides rates as low as 3.89 percent - among the lowest in the nation - online and literally in minutes. The result? Our customers can walk into a dealership fully pre-approved and pre-financed. The dollars you save in your negotiation of the price of your car are yours to keep, and the hours spent waiting (and hoping) for loan approval is a relic of the past.
These tremendous innovations have saved borrowers billions, and Capital One is proud to have played a role in our nation's consumer revolution. Without a doubt, none of these extraordinary developments would have been possible without the FCRA. The FCRA is a vital instrument in preserving the vitality of our credit granting system, and, equally, a vital instrument in preserving the vitality of our modem economy. We urge you to reauthorize these provisions and to extend permanently our national uniform system of credit reporting.
Mr. Chairman, Ranking Member Sanders and Members of the Subcommittee, thank you again for the opportunity to testify before you. I would be happy to answer any questions you may have.
America's Community Bankers
The Fair Credit Reporting Act
Subcommittee on Financial Institutions & Consumer Credit
Committee on Financial Services
U.S. House of Representatives
June 12, 2003
George B. Loban
Co-Chairman and President
Chairman Bachus, Ranking Member Sanders, and members of the Subcommittee, my name is George Loban. I am co-chairman and president of FSF Financial Corporation and First Federal Bank, a $560 million stock institution based in Hutchinson, Minnesota. I am testifying today on behalf of America's Community Bankers, where I serve on the Board of Directors and as chairman of the Privacy Issues Subcommittee.
Thank you for this opportunity to testify on the role of the Fair Credit Reporting Act' (FCRA) in the credit granting process. The uniform national standards embodied in the FCRA allow community banks and others to make prudent credit decisions quickly and inexpensively wherever a customer may reside or have conducted business. Reauthorizing these standards on a permanent basis is critical to ACB members, our customers, and the economy as a whole.
My testimony will focus on how community banks use credit report information and how the national credit reporting system established by the FCRA promotes a healthy competitive consumer credit marketplace, while protecting consumer information.
America's Community Bankers strongly supports the uniform national standards embodied in Section 624 of the Fair Credit Reporting Act. We urge Congress to reauthorize this year these uniform standards on a permanent basis. ACB also urges that laws regulating information sharing practices not discriminate against financial institutions based on size or corporate structure.
ACB and its members urge Congress to pass legislation to help community banks and their customers combat identity theft, including new laws to strengthen sentencing standards for identity theft crimes and help prosecutors prove identity theft in courts.
ACB believes consumers should have access to a free annual credit report and enhanced ability to correct errors on their credit reports.
The Fair Credit Reporting Act
The FCRA establishes the legal framework for the collection, use, and maintenance of credit reporting data. It is the foundation for the most effective credit reporting system in the world that enables low-cost and rapid access to consumer credit for today's increasingly mobile society. Initially enacted in 1970, the law was significantly amended in 1996. Among the more significant provisions introduced in 1996, Congress preempted the states from enacting any laws or regulations relating to seven key areas until January 1, 2004. The preempted provisions preclude states from enacting any laws or regulations relating to: