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STATEMENT OF HARRY GAMBILL
BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
“THE ROLE OF THE FCRA IN THE CREDIT GRANTING PROCESS"
JUNE 12, 2003
Good morning Chairman Bachus, Congressman Sanders, and Members of the Subcommittee. My name is Harry Gambill and I am the Chief Executive Officer of TransUnion LLC. TransUnion is a leading global provider of consumer report information supported by more than 4,100 employees, in more than 24 countries worldwide. I appreciate the opportunity to appear before you today to discuss the role of TransUnion and the Fair Credit Reporting Act ("FCRA”) in the credit granting process.
The Role of TransUnion in the Credit Granting Process
Consumer spending makes up approximately two-thirds of the U.S. gross domestic product. A critical component of this economic driver is the availability of consumer credit. Creditworthy consumers in the United States have access to a wide variety of credit from a number of sources at extremely competitive prices. Consumers rely on the availability of credit for a variety of purposes, such as the purchase of homes, cars, education, and daily needs. In fact, there is approximately $7 trillion in outstanding mortgages and other consumer loans in the United States. There is no question that our economy would suffer if consumers could not access credit as they do today.
It is my pleasure to explain how TransUnion plays a critical role in the economic engine of credit underwriting. In sum, we provide the information necessary for lenders to make credit available to consumers. In order for a lender to extend a loan to a consumer, the lender needs to evaluate the risks inherent in lending to that consumer. The proper evaluation of the consumer's risks allows the lender to determine whether to provide credit to the consumer and at what price. We believe that the most accurate and predictive piece of information a lender can use in evaluating a consumer's credit risk is a consumer report (also commonly called a credit report). TransUnion is in the business of providing lenders with this critical information.
The Credit Reporting Process
In order to more fully understand TransUnion's role in the credit granting process, it is important to understand the credit reporting process itself. TransUnion is a consumer reporting agency, or a credit bureau. We act as a nationwide repository of consumer report information with files on approximately 192 million individuals in the United States. The information in our files generally consists of: (i) identification information; (ii) credit history; (iii) public records (e.g. tax liens, judgments, etc.); and (iv) a list of entities that have received the consumer's credit report. It is also important to clarify what is not in a credit report. A TransUnion credit report does not include checking or savings account information, medical histories, purchases paid in full with cash or check, business accounts (unless the consumer is personally liable for the debt), criminal histories, or race, gender, religion, or national origin.
Most of the information in our files is provided to us voluntarily by a variety of sources. Although the FCRA does not require anyone to furnish information to credit bureaus, the law does establish certain important guidelines for those who voluntarily do so. For example, furnishers must meet certain accuracy standards when providing information to credit bureaus. Furnishers must also meet requirements ensuring that the information the furnishers have reported to credit bureaus remains complete and accurate. Despite these legal obligations and potential legal liabilities imposed on data furnishers, lenders and others participate in the credit reporting process due to the recognized value of complete and up-todate credit reporting. In essence, if lenders want accurate, complete, and up-to-date information on which they are to base credit decisions, they must ensure a continuing supply of such data to credit bureaus.
We take great pride in our ability to collect and disseminate credit report information. In fact, TransUnion receives and processes approximately 2 billion updates to consumers' credit files each month. However, we do not distribute credit reports to just anyone. Under the FCRA, we may not provide a credit report to anyone who does not have a permissible purpose for such information. This limitation in the FCRA serves to limit the distribution of credit reports while allowing those with a need for such information (e.g. granting credit) to obtain important information.
Case Study: The Role of TransUnion in Assisting Consumers
As I have discussed, TransUnion assembles consumer information and provides it, in the form of a credit report, to those who are permitted by law to obtain such information. One such permissible purpose is mortgage lending. I would like to take a moment and use a typical mortgage transaction to illustrate TransUnion's involvement in the credit granting process, the importance of the FCRA, and how consumers benefit.
Picking just the right home is obviously a fundamental part of becoming a homeowner. However, because most consumers cannot afford to purchase a home using cash, it is also important for the consumer to be able to finance the house. I can recall the days when obtaining a mortgage meant going to the local banker and enduring a lengthy application process. But today a consumer has the ability to pick from a plethora of mortgage lenders, regardless of where the consumer lives. In fact, lenders across the country are willing to extend mortgage credit to consumers they have never even met. Lenders are able to compete for consumers in this manner because the lenders can rely on companies such as TransUnion to provide the information necessary to evaluate the creditworthiness of the applicant, even if the lender and applicant have never laid eyes on one another.
The credit reporting process means more than allowing mortgage lenders to compete for consumers (which obviously lowers costs). For most consumers, the existence of three national credit reporting databases means quicker loan decisions by the mortgage underwriter, and the consequent ability to close on the house more quickly. The automated underwriting systems that have been adopted by the industry are enabled by the existence of the national credit reporting databases. For those consumers whose credit histories contain adverse information, or for those with "thinner” histories, the operation of the dispute procedures in Section 611 of the FCRA, together with the verification work done by the so called "reseller" consumer reporting agencies (one of whom testified before this Subcommittee last week), combine to allow all consumers the opportunity to ensure that the credit information on which the mortgage decision, and the mortgage interest rate, are based is accurate and complete.
This system delivers to consumers quick decisions, increased competition, and lower rates. In many other countries, consumers, regardless of their credit profiles, do not have access to long-term mortgages or must pay interest rates of more than 20% on their loans. This is a direct result of the lack of a comprehensive and uniform credit reporting system. It is caused by the absence of credible information being available to all lenders. Unlike consumers in the United States, consumers in those countries do not have many options. They are generally tied to one institution their bank for all their financial needs.
The Importance of Nationally Uniform FCRA Provisions to the Credit Granting Process
I have just explained in general terms TransUnion's and the FCRA's role in the credit granting process. Like other consumer reporting agencies, TransUnion obviously plays a pivotal role in the credit granting process in the United States. This credit granting process, which relies heavily on the information and activities regulated by the FCRA, has resulted in more choice and convenience to consumers at lower costs. The following explores some of these benefits and the importance of the FCRA's national standards in fostering such a competitive and diverse credit market.
Predictive Power of Consumer Reports
A consumer report represents a complete, accurate, and up-to-date snapshot of a consumer's financial history. This is important to a lender assessing a consumer's credit risk for several reasons. First, the lender can evaluate the information provided in a consumer report and make a credit decision accordingly. Just as importantly, a lender reviewing a consumer report has a high degree of confidence that the consumer report includes a complete picture of the consumer's financial history. In other words, the lender knows that he or she has a complete understanding of the consumer's financial history and that there is not any material information about the consumer's creditworthiness being hidden. The fact that the consumer report is complete, accurate, and up-to-date allows the lender to make an accurate assessment of the consumer's credit risk.
The ability of a lender to rely on a consumer report when making credit decisions is preserved, at least in part, through several provisions that establish the FCRA as the national, uniform standard. For example, as I noted above, furnishing information to credit bureaus is completely voluntary. Creditors and others are willing to provide information to credit bureaus because they understand the value of, and benefit from, a robust credit reporting system. Despite the obvious interest most furnishers have to report only accurate and complete information, in 1996 Congress determined that those who furnish information to credit bureaus must have some legal obligations with respect to the accuracy and completeness of information provided to credit bureaus. However, in imposing these obligations, Congress recognized that the data provided to credit bureaus was the lifeblood of the credit reporting and underwriting processes. Therefore, the furnisher obligations represent a careful balancing of the need for accuracy with the need to ensure an uninterrupted flow of information to credit bureaus. The compromise reached in the 1996 amendments, imposing accuracy and completeness obligations on furnishers, enforceable by state and federal agencies, establishes a national standard under the FCRA.
If states were permitted to impose additional obligations or liabilities on furnishers, the viability of the credit reporting process could be threatened. We believe that various state laws with respect to furnisher obligations may discourage entities from providing
information to credit bureaus. Indeed, depending on the state law, it may be prudent for furnishers not to provide such information if it would subject the furnisher to unnecessary litigation, including class action liability. If this were to happen, consumer reports would contain less information and become less reliable. In effect, lenders would no longer have confidence that a consumer report represents a complete, accurate, and up-to-date snapshot of the consumer's financial history. In order to compensate for this uncertainty when evaluating the consumer's creditworthiness, lenders may be less willing to provide credit to the consumer, or may do so only at an increased cost.
Contents of Consumer Reports
Just as lenders know that a consumer report is complete because a large number of furnishers provide significant amounts of information, they also know that a consumer report is complete as a result of the uniformity established under the FCRA. The FCRA generally does not allow a consumer reporting agency to report "obsolete” information as part of a consumer report. Obsolete information includes most negative information that is more than seven years old, and bankruptcies that are more than ten years old. The FCRA preempts state law with respect to the contents of consumer reports.
Lenders would have less confidence in consumer reports if a state were permitted to limit the information contained in a consumer report. For example, if a consumer report could only include negative information that is less than four years old, it would be less predictive of a consumer's credit risk than a consumer report that had information dating back to seven years. Furthermore, if a state were permitted to restrict the types of information included in a consumer report (e.g. prohibiting the reporting of 30-day payment delinquencies), a lender could be denied important information necessary to evaluate the consumer's credit risk. Again, creditors would respond to this uncertainty either by making less credit available to consumers, or by increasing the cost of credit.
Among the many rights provided to consumers under the FCRA is the right to challenge the accuracy of consumer report information. We believe this is an important consumer right and it can be useful in making our files more accurate. The FCRA establishes a 30-day timeframe under which a consumer reporting agency must reinvestigate a consumer dispute. If the consumer reporting agency finds that the information is inaccurate, or cannot verify its accuracy within the 30-day period, the information must be deleted. This timeframe is uniform throughout the country. This uniformity is important if consumer report information is to maintain its current level of reliability. If states were permitted to establish differing reinvestigation timeframes, consumer reporting agencies may not have sufficient time to investigate consumer disputes, and national data furnishers would be overwhelmed in complying with the differing reinvestigation turnaround times creating another incentive to withdraw from full-file voluntary reporting.
Technology offers one solution to speeding reinvestigation times. The 1996 amendments required the national consumer reporting agencies to adopt an automated system for communicating consumer disputes to data furnishers and to the other national agencies.