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THE FAIR CREDIT REPORTING ACT AND ISSUES PRESENTED BY REAUTHORIZATION OF THE EXPIRING PREEMPTION PROVISIONS

TUESDAY, MAY 20, 2003

U.S. SENATE,
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC. The Committee met at 2 p.m., in room SD-538 of the Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY Chairman SHELBY. The Committee will come to order.

I would just like to thank everyone for being here today. At the end of this year, the State law preemption provisions of the Fair Credit Reporting Act expire. This Committee has the responsibility of reviewing these provisions and making a determination as to whether they should be extended, altered, or be allowed to lapse.

The task before us is no small endeavor.

The preemption provisions are a part of a much larger, highly complex law, a law that governs crucial aspects of the consumer credit system. This national system is huge, involving trillions of dollars and millions of people, and is at the heart of the economic well-being of this country.

This system is also fundamentally dependent on the collection and dissemination of data that involves some of our most sensitive personal information.

We do want to point out, however, that balancing these various interests is not a new challenge for Congress. At enactment, when it was significantly amended in 1996, and now, the calculus behind the FCRA has always required consideration of the broad issues relating to the operation of the credit markets and consumer privacy.

The statement of purpose of the Act bears this point out. It highlights the banking system's dependence upon fair and accurate credit reporting, the vital function consumer reporting agencies perform in supplying this information, and the need to ensure that reporting agencies exercise the grave responsibilities with fairness, impartiality, and respect for the consumer's right to privacy.

As we review the expiring preemption provisions of the law, it is my hope that the provisions are considered in the context of the law's purpose.

To this end, we have already held numerous staff briefings covering many of the key topics associated with the Fair Credit Reporting Act. Additionally, and more importantly, while working within the limited timeframe we have available, it is my intention to develop a comprehensive hearing record to inform the Committee's debate.

We are now moving to the hearing phase and are beginning at what I feel is the best point of departure consideration of the fundamental issue implicated in the debate operation of the consumer credit system and the Fair Credit Reporting Act's role in that system.

We do this by first hearing from the Federal Trade Commission, the Agency with the most responsibility for enforcement of the Fair Credit Reporting Act. Our first witness is Howard Beales, Director of the Federal Trade Commission's Division of Consumer Affairs. From Mr. Beales, we should obtain more information about the history, the purpose, and function of this important law. I look forward to his testimony.

As we move forward, I plan to use these hearings to provide content that will enable the Committee to focus its consideration on the discrete issues and particular applications of the law.

It is my hope and intent that, at the end of this process, we will have obtained a full sense of the value of our national system and we will be able to balance the various issues presented by contemporary information use practices.

Our overarching goal should then be to ensure that the law produces the most effective, efficient, balanced and fair system that is achievable. Senator Crapo.

STATEMENT OF SENATOR MIKE CRAPO Senator CRAPO. Thank you very much, Mr. Chairman. I appreciate your comments and share them, and I appreciate the attention you are giving to this critical issue.

As you indicated, we have a short timeframe within which to address the reauthorization of the Fair Credit Reporting Act's preemption authority. And I believe that there is an increasingly strong consensus in terms of that need.

The other issues that surround this issue as well are those which we need to have a solid record developed on and which I appreciate your encouragement and support in developing that record.

I intend to work with you and the other Members who are interested in this issue to prepare solutions to those issues, such as the privacy issues, the identity theft issues, and other related issues that are involved, not only in FCRA, but also in the application of the Gramm-Leach-Bliley legislation and our entire approach to how credit and the information surrounding credit is basically collected and utilized in our society.

We want to make sure that the protections are in place to protect privacy, but at the same time, we want to make sure that our system of credit in the United States, which has been such a strength to our economy and to our people, is not interfered with.

And I think that that task is one that is achievable and I look forward to working with you on it.

Thank you.

Chairman SHELBY. I just want to make an announcement.

Concurrent with this hearing today, when we get a quorum, the Committee will conduct a vote on a lot of nominations: Nicholas Gregory Mankiw, of Massachusetts, to be a Member of the Council of Economic Advisors, the Executive Office of the President; Steven B. Nesmith, of Pennsylvania, to be Assistant Secretary for Congressional and Intergovernmental Relations, U.S. Department of Housing and Urban Development; Jose Teran, of Florida, to be a Member of the Board of Directors, the National Institute of Building Sciences; James Broaddus, of Texas, to be a Member of the Board of Directors, the National Institute of Building Sciences; Lane Carson, of Louisiana, to be a Member of the Board of Directors of the National Institute of Building Sciences; and Morgan Edwards, of North Carolina, to be a Member of the Board of Directors of the National Institute of Building Sciences.

I just wanted to make that announcement at the beginning.

Mr. Beales, we welcome you to the Committee. Your written statement in its entirety has been reviewed and it will be made part of the Senate Banking Committee's record.

You proceed as you wish. As I told you, we are going to get a vote on the floor about 2:20 p.m., or whenever we get it, and I will recess the Committee for the vote at the proper time. You proceed as you wish.

STATEMENT OF J. HOWARD BEALES, III
DIRECTOR, BUREAU OF CONSUMER PROTECTION

U.S. FEDERAL TRADE COMMISSION Mr. BEALES. Thank you very much, Mr. Chairman and Members of the Committee. I am pleased to have this opportunity to provide background on the Fair Credit Reporting Act.

Although the views expressed in the written statement represent the views of the Commission, my oral presentation and my responses to questions are my own and do not necessarily reflect the views of the Commission or any individual Commissioner. The Commission has played a central role in interpreting and enforcing the FCRA since the law was enacted in 1970. I really appreciate the opportunity to discuss the Act and its role in regulating credit report information.

After World War II, the American population grew and became vastly more mobile. A national consumer reporting system developed in response to this new mobility. Since that time, consumer credit outstanding has grown exponentially. Indeed, consumer spending accounts for over two-thirds of U.S. gross domestic product and consumer credit markets drive U.S. economic growth.

Early on, credit reporting was local or regional and, the amount of information collected was limited and not standardized. The credit bureaus, also known as consumer reporting agencies, manually recorded consumer information on index cards, updated the information irregularly, and often retained it indefinitely. Over time, however, small credit bureaus grew to become large repositories of consumer information, relying on sophisticated computer systems to store, process and transit large amounts of data.

Today, the credit reporting system, consists primarily of three nationwide credit bureau repositories, containing data on as many as 1.5 billion credit accounts held by approximately 190 million

individuals. Creditors and other so-called furnishers provide information to credit bureaus voluntarily. There is no direct payment to furnishers for providing this data, but the cooperative database enables credit grantors to make more expeditious and accurate credit decisions. Quick credit decisions are important to many consumers who are in the market for new credit. A recent Federal Reserve Board study found that one in five active credit accounts was opened within the last year.

Because of the national credit reporting system we have, the credit application process has evolved from a relatively time-consuming individualized procedure that relied on loan officers' caseby-case estimates, to a more sophisticated and partial system that relies on consistent assessment of credit history information.

Because of the prevalence of credit reports, consumers today can use the Internet to comparison-shop for a wide array of credit products and get a virtually instantaneous offer. Or they can get a fivefigure loan from a car dealer they have never seen before and drive a car out of the showroom the same day.

Let me briefly review some of the key elements of the FCRA as it stands today, 33 years after its original passage.

It is important to keep in mind that notwithstanding its title, the Fair Credit Reporting Act has always covered more than what are conventionally termed "credit reports.” It applies to any information that is collected and used for the purpose of evaluating consumers' eligibility for products and services they want. Thus, the FCRA has always applied to insurance, employment, and other noncredit consumer transactions. My focus today will be on credit reporting, but the same basic regulatory structure applies to all consumer reports.

The FCRA provides consumer protections in two vital areas-privacy and accuracy. The Act is designed to protect privacy in a number of ways. Primarily, it limits distribution of credit reports to those with specific “permissible purposes.” Generally, reports may be provided for the purposes of making decisions involving credit, insurance, or employment, and certain other consumer-initiated transactions.

Also, Congress has given consumers the right to opt out of the use of their credit information for prescreening and opt out of the sharing of certain information, including credit reports among affiliated companies.

In addition to privacy, credit report accuracy is a core goal of the FCRA. Accurate reports benefit not only consumers, but also credit grantors who need accurate information to make optimal decisions.

The FCRA uses two major avenues to achieve the goal of optimal accuracy. First, it provides that the consumer reporting agencies must follow “reasonable procedures to assure maximum possible accuracy of the information” they report. Second, the FCRA gives consumers the right to know what information the credit bureau maintains on them and the right to dispute errors, facilitated by the Act's adverse action notice requirements. Since 1970, the FCRA has required that when credit is denied based, even in part, on a consumer report, the creditor must notify the consumer of the identity of the credit bureau from which the report was obtained, of the right to obtain a free copy of the report, and the right to dispute the accuracy of the information in the report.

A consumer can initiate a dispute by notifying a credit bureau of incomplete or inaccurate information in his or her credit report. The credit bureau and creditor who furnished the information must reinvestigate the dispute, generally within 30 days, record the current status of the information and delete it if it is found to be inaccurate or unverifiable. The credit bureau must report the results of the investigation to the consumer.

The self-help mechanism embodied in the FCRA's scheme of adverse action notices and the right to dispute is a critical component in the effort to maximize the accuracy of consumer reports, and the Commission has given high priority to assuring compliance with these provisions.

Let me briefly discuss the Commission's efforts to administer and enforce the FCRA since 1970. When Congress first passed the Act, it provided that the Commission would be the principal agency to enforce the statute.

The Commission brought a number of formal actions to enforce the FCRA, including cases to assure compliance with the adverse action notice requirements on the part of creditors and employers, to assure compliance with privacy and accuracy requirements by the major nationwide credit bureaus, and to assure compliance by resellers of consumer reports, which are agencies that purchase consumer reports from the major bureaus and then resell them.

The Commission's enforcement efforts since 1996 have focused on the new requirements added by the amendments in that year. For example, the Commission settled cases against the three major repositories charging that they failed to have adequate personnel available to answer FCRA-mandated toll-free telephone numbers. The Commission has also settled cases against furnishers of information to consumer reporting agencies alleging that they falsely reported delinquency dates, causing adverse information to remain on credit reports past the 7-year limit provided by the Act.

Recently, the Commission settled an action against an Internet mortgage lender that failed to give adverse action notices to consumers who did not qualify for online pre-approval because of information in their credit reports.

The Commission is also engaged in extensive consumer and business education, including the Commission's 1990 commentary on the FCRA. After the 1996 Amendments, our informal guidance expanded to meet the interpretive needs that were prompted by the amendments. We are now focused on a revision of the 1990 commentary which has been rendered partly obsolete by the passage of time and the amendments. The Commission will continue to use a combination of education initiatives and vigorous enforcement to foster compliance with the FCRA.

We see several ongoing developments in the consumer reporting marketplace that may have significant impact on consumers. First, more types of businesses are using credit reports to make decisions in consumer transactions. For example, telephone service providers routinely use consumer reports to make decisions on whether to provide service and what deposit requirements, if any, to impose. Însurance companies are increasingly using the information from

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