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vacy and the community banks' legitimate information sharing needs, that insures our customers have the essential products and services they need. The use of outsourcing in joint agreement with trusted long-term partners is vital to our ability to compete.

The joint agreement business model that we use is the same as the affiliate model for large banks and should be treated the same. Treating these business models differently would be unfairly discriminated against community banks in small communities that they serve, because of their regular size and corporate structure.

Please remember that it was not the community banks who started the discussion on privacy by selling their information.

A consumer opt-in requirement would be detrimental to the community banks and to their customers. Thus far, only 5 percent have opted out of having the information shared with affiliate thirdparty, so it is likely that opt-in rates would be similarly as low.

In conclusion, FCRA and the nation's credit reporting system, helps ensure that customers can easily access complete competitively priced products. The reliability of credit information, in maintaining, by the credit bureaus is critical to this goal.

ICBA strongly urges the committee to support the permanent reauthorization of the uniform national standards that will sunset on January 1, 2004.

Thank you for the opportunity to testify today and I will be glad to answer any questions at the appropriate time.

[The prepared statement of C.R. Cloutier can be found on page 73 in the appendix.]

Chairman BACHUS. I appreciate that, Mr. Cloutier.
And Mr. Loban, if you will testify?


Mr. LOBAN. Thank you, Chairman Bachus, Ranking Member Sanders and members of the committee.

My name is George Loban. I am the co-chairman and president of FSF Financial Corporation and First Federal Bank. We are 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.

I appreciate this opportunity to testify on the role of the Fair Credit Reporting Act and the credit granting process. The FCRA aids uniform national standards allow community banks and others to make prudent credit decisions quickly and inexpensively wherever a customer may reside. They insure that credit reporting information is consistent from State to State, facilitating a national market for credit and risk management. This, however, is scheduled to change if Congress does not, by the end of this year, reauthorize the FCRA's uniform national standards.

Failing to act could result in a patchwork of conflicting State laws and substantially erode the quality and integrity of our credit reporting system.

More importantly, a lapse in reauthorization could drastically impact a wide variety of players in our economy.

For example, my institution serves consumer mortgage customers in over 40 States. Yet, we are by no means, a large business. If we were forced to comply with 40 different State laws, we would be forced to either to hire a team of compliance specialists, or else we would have to turn away out of State customers. The FCRA's uniform national standards allow First Federal to service mortgage customers effectively nationwide, and at a lower cost.

Our story is just one real life example of why Congress must reauthorize this year's FCRA's uniform standards on a permanent basis.

We also urge that laws regulating information sharing practices not discriminate against financial institutions based on size or corporate structure. Čommunity banks often work with third parties affiliated and nonaffiliated to offer our customers new financial products. Where no affiliation exists, there is a contract dictating how and what information may be shared.

The disclosure and opt-out requirements of the Gramm-LeachBliley Act treat certain disclosures of information between financial institutions and a third-party identically. Regardless of whether the two institutions are affiliated, ACB urges that any prospective laws follow suit.

Our system of credit, however, is not without it glitches. The rising number of identity theft cases is creating enormous hardships on victims and community banks. This disturbing trend indicates that something more needs to be done to safeguard information from perspective identity thieves.

ACB urges Congress to pass legislation to increase sentences for identity thief crimes and make it easier for prosecutors to prove identity theft. We also look forward to working with the subcommittee on additional legislation to help combat identity theft.

Finally, improvements should be made to the credit reporting system itself to help protect consumers. During debate on the regulatory release bill, representative Gary Ackerman sponsored an amendment requiring Federally insured depository institutions to notify a customer every time it furnishes negative information to a consumer reporting agency.

This amendment would result in billions of new notices sent to consumers monthly. This would greatly increase cost and paperwork burden of financial institutions and their customers.

ACB and others opposed a similar amendment last year. But while we disagree with Representative Ackerman's proposed solution, we recognize that he may have identified a problem.

The continued integrity of the Federal Credit Reporting System demands that credit reports be as accurate as possible. ACB supports empowering consumers by providing them access to a free annual credit report, and enhancing their ability to correct errors on their credit reports, especially those resulting from incidence of identity theft. While we recognize that these tools do not come without some cost to the industry, we believe these costs can be balance against the benefits provided to consumers.

Again, thank you for this opportunity to testify. I look forward to any questions you may have.

[The prepared statement of George B. Loban can be found on page 132 in the appendix.]

Chairman BACHUS. I appreciate that, Mr. Loban.

Our next panelist, Dr. Robert Manning-Dr. Manning?

STATEMENT OF ROBERT MANNING, PROFESSOR OF HUMANITIES, ROCHESTER INSTITUTE OF TECHNOLOGY Mr. MANNING. Thank you, Chairman Bachus for providing the opportunity to share my views with the committee on this increasingly important topic of credit card industry policies and the protection of consumer rights under the Fair Credit Reporting Act.

Also like to commend Ranking Member Bernie Sanders for his efforts in protecting consumers from deceptive marketing and contract disclosure practices of the credit card industry.

These twin issues of rising consumer debt and shockingly low levels of financial literacy, which includes, a lack of understanding of consumer rights which have grave implications that the continued well-being of the nation, especially as Americans cope with these increasingly perilous economic times.

Today, I would like to direct my focus on the impact of Federal deregulation on banking as it affects consumer lending, specifically, revolving credit. How the enormous profitability of the industry has created institutional pressures to increase its client base, consumer debt levels and especially escalating penalty fees. And then, conclude by examining specific abuses that are facilitated by the FCRA and its implications of statutory reform.

I think what is critical to our understanding is that we have gone from a system of community banks to one of national and global conglomerates where the demand for crossmarketing with affiliates through such merges as Travelers and Citibanks have lead to increasing strain on consumer privacy and the availability of consumer financial information.

In this period of the last 20 years, the best client has been transformed from installment lending contracts with people who had low debt levels, to today, the best client is someone who will never repay their loan, specifically through unsecured or revolving credit. Credit cards have played a pivotal role in the transforming of the structure of the financial services conglomerates, and I show you in chart one, it gives a lot of the empirical background for my presentation, but the key is, since 1977, we have gone from 50 banks controlling about half of the market to today, 10 banks control 80 percent of the credit card market.

And this, I believe, is critical as we look at the rise of the nationally chartered banks that through their process of consolidation it has severely reduced the role that local and State level legislation plays, and that this lack of regulatory control over issues such as, State usury laws, fee caps, mandatory arbitration, meaningful notice of disclosure has really shifted the emphasis now about Federal preemption, and its role now moves increasing to Congress, especially to this committee.

We all know the enormous profitability of the credit card industry today, even during this recession, even though we have heard many complaints that the industry is suffering. In fact, and over the last 10 years, the credit card industry's profitability has more

than doubled, and the banking industry as a whole. And recently, we can look at it terms of the sale of credit card debt, from 18.4 percent premium paid last year, actually risen to 19 percent today. In terms of FCRA, I think what is critical here is that the institutional pressure to recruit new people, and particularly people with the least knowledge of their rights under FCRA, and especially in terms of the terms of their contracts, has lead to a dramatic increase of fee revenue, from $1.7 billion in 1996 to $7.3 billion in 2002.

Who are some of these people that we see now that with some of the amendments of the 1996 FCRA, that are being increasingly solicited? What we have seen is, a tremendous increase in the working-poor, households with less than $10,000; senior citizens and college students. And I refer to the charts that show the dramatic increase in working-poor households where average debt of a recent survey of the University of Michigan's Consumer Finance Survey shows that the biggest increase in credit card debt is among those households with less than $10,000, from less than $600 in 1989 to over $24,000 in 1998.

And in my comments, I included a case to show the abusive contracts that have been offered in this process, where a $400.00 credit limit includes $371.00 in fees. We looked at seniors who, for the first time, are now being aggressively solicited, 65-year-olds, we are seeing that their average credit card debt is more than doubled in this period of time.

And I refer to my most recent survey of college students, which shows now, the shifting of the marketing permitted now. With under the 1996 amendment, that we seen a dramatic shift, not from upper classmen, but to freshmen and even high school students, where the supposed ability of students to pay for their loans neglects the debt component where you will see from the data that more increasingly, three-fourths of college students with student loans are using them to their credit cards. Sixty percent of freshmen are actually using, have maxed out on their credit cards and using one credit card to pay for another.

So I want to conclude with three specific cases that I think are particularly germane to today's discussion. One is the issue of prescreening that enables banks to look at a client's accounts with other banks. When is a fixed loan really a fixed loan over the term of the contract? And I refer to cases where people specifically have had their interest rates raised from 0 percent to 25 percent because of outstanding debt balances on other accounts.

I would like to emphasize also, with my participation in some FCRA litigation, that there needs to be an extension of the period of time for filing litigation. Many consumers clearly do believe that banks and the credit reporting agencies will respond to their requests, and for those who fall through the cracks, we really need to accommodate their special circumstances.

And I want to conclude with a final case that I feel is particularly important to those both that link both issues of credit cards and housing. And that refers to the case of Household Finance versus ACORN, where the screening process was specifically to seek two criterion, people with high credit card debts and people who own homes. And the point of this marketing program was to

upsell, that is to consolidate credit card debt into the home mortgages, and through this process of consolidation, these higher interest rates meant that there could not be a possible home refinance nor could the home be sold, because it had negative equity.

So for these and other reasons, I hope that the committee will carefully examine the impact of FCRA reauthorization, not only for process of fairly granting, but also fairly administering consumer credit accounts.

Thank you.

[The prepared statement of Robert Manning can be found on page 138 in the appendix.]

Chairman BACHUS. Thank you, Dr. Manning.

At this time, I have to go out and make a statement. So I am going to switch chairs with the gentleman from Ohio, Mr. Tiberi who will chair the hearing.

And Mr. Hendricks, we will start with your testimony.


My name is Evan Hendricks, editor and publisher of Privacy Times.

I come today prepared to discuss solutions to some of the problems.

And yes, we have what may be the best credit reporting system in the world, but the great thing about this country is we never stop trying to improve it. I think, more importantly, there is substantial evidence of potentially deep flaws in the system that are harming consumers, and also new evidence that marketing of credit services might be facilitating identity theft. I intend to explore those.

With the advent of the national credit reporting system, we realized we needed a Fair Credit Reporting Act. We enacted one in 1970.

In 1990, problems with inaccuracies in credit reports was the leading cause of complaints to the Federal Trade Commission, so it took 6 years to upgrade the law. It should be no surprise right now that we need to continue to advance consumer protection in this area, and we need a strong national floor, and that the States play a very important role in consumer protection.

The main purpose of the 1996 amendments was to make the correction of mistakes in the credit report, a routine process and to articulate a higher standard of care, to make it so you don't have file a lawsuit to get your credit report corrected.

Unfortunately, that goal has not yet been achieved, as I have seen in too many instances how, that the only way a consumer could get a credit report corrected was by going to court. That is clearly not the policy we want running this country, and when we are trying to cut down on litigation. Yet the practices of some furnishers and some credit reporting agencies actually encourage litigation for those that really care about protecting their good name. Another reason behind the 1996 amendments was inaccuracy. Clearly the CFA study, along with the Federal Reserve Board study, documents serious problems with inaccuracy. And I think

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